Fresh strategy needed for private rented sector as development grinds to a halt

The fundamentals of the multifamily/private rented sector are grounded in the demographic need for housing and the need for the State to meet the requirements of Ireland which continues to expand at rates that were not forecast in the country’s strategic plan, Project Ireland 2040. Based on the recently released Census 2022 results, for the first time in 171 years, Ireland’s population exceeded the five million threshold and it showed an 8 per cent or 387,274 person increase since April 2016 — which equates to a net increase of 176 people per day.

While the Government’s Housing for All strategy for the State has many positives, the private rental sector is being left behind — the sector hasn’t had a clear strategy since a previous government’s Rebuilding Ireland was published in December 2016; this is being reflected in transactions in 2023 and soon to be seen in completions and letting market availability, as new development for the sector grinds to a halt. Already, there are only 1,233 listings for residential rental properties across Dublin, Kildare, Meath and Wicklow combined, which is a fraction of the demand. Decreasing supply inevitably leads to greater competition and higher prices and rents.

The funding being provided by the Government to the Land Development Agency (LDA), local authorities and approved housing bodies to assist in delivering subsidised social and affordable housing is vitally important but private rental sector housing needs a similar level of support and the conditions to be created to allow for funds to flow around and into the country to foster new supply. Collaborative efforts between the public and private sectors are crucial to navigating challenges and ensuring a bright future for Ireland and the country’s young people who need accommodation.

The increased interest rates, higher inflation and challenges in the wider real estate and banking sectors being experienced across Europe and the US, combined with the Irish Government introducing a rental increase cap of 2 per cent per annum in November 2021, have created the current environment where many investors are cautious to spend funds they have available and they are finding it more difficult to raise new capital. The increased costs of delivery and outward yield adjustments mean that it is no longer viable to build apartments for the private rented sector in Ireland. Unless there is some form of Government subsidy this will remain the case for the foreseeable future.

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The increased rent regulation policy goes counter to the advice of practitioners in the industry and the International Monetary Fund which recently advised that the 2 per cent rent cap is stifling the supply of rental accommodation for the private sector. Thousands of smaller landlords are already leaving the sector. A proposal to have a rent freeze, if it ever happened, would be the final nail in the coffin for the supply of rental stock for the private rental market.

There is a recognition that the standard of new housing that is being designed and built in Ireland and what has been built over the last eight years is very high in terms of quality and sustainability characteristics. The two stand-out residential investment transactions in 2023 are excellent examples of this. In the largest transaction this year, Carysfort Capital/Angelo Gordon sold Opus, Grand Canal Dock, Dublin 2, comprising 120 apartments, which were completed by Cairn Homes plc in 2019, to Pontegadea for €101 million which represented about a 4.3 per cent net yield; and second, the forward sale of the 148 apartment scheme by Richmond Homes at Eglinton Place, Donnybrook, Dublin 4 to M&G for €99.5 million, at an approximate 4 per cent net yield. Both of these sales were achieved in the first quarter of the year with activity dwindling sharply for the subsequent quarters of 2023. Notably, both of these transactions were among the four largest Irish investment transactions in 2023.

The multifamily/private rented sector investment transaction spend in the greater Dublin area in quarters 1-3 of 2023 was just €275 million — remarkably, there were no such transactions reported in quarter 3. The €275 million, which is not expected to increase substantially in quarter 4, represents 23 per cent of the €1.2 billion total spend for the asset class in 2022; and 13 per cent of the €2.09 billion of transactions in 2021. This is a significant reduction in activity in a sector that had been contributing strongly to the supply of homes in the private rental market.

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There were 445 multifamily properties sold in the greater Dublin area in 2023, totalling €275 million, 60 per cent of these were new build (270 units/€164 million) and 40 per cent (147 units/€121 million) was standing stock. Investors in the sector are placing increased emphasis on greener, more sustainability-compliant accommodation, and older properties are being reviewed to see how they could become more compliant.

There was a decrease in overall investment transactions in quarters 1-3 during 2023, with a total spend in the greater Dublin area of only €1.345 billion, compared to €4 billion in 2022 and €5 billion in 2021; 21 per cent of the first 3 quarters of 2023, €275 million, was on multifamily properties, 22.5 per cent, €303.2 million, on offices, 18.5 per cent, €251 million, on industrial and 13 per cent, €174.5 million, on retail.

In the last eight years funding for the supply of more than 17,000 new rental homes, largely in Dublin, has been facilitated by institutional investors and pension funds. These entities have provided invaluable assistance to the State and economy and can do so again with favourable conditions and the right incentives. To build the required 50,000-60,000 new homes per annum in Ireland, the country requires an annual capital investment of more than €18 billion according to Irish Institutional Property. The State is only in a position to fund a limited portion of this, thus the need for private funding for the balance from either domestic or international investment. The sooner the Government acts to address this the better position Ireland will be in in terms of supplying homes for its citizens, young and old