Key locations can still deliver for buy-to-let investors

There are some crumbs of comfort for landlords as supply of rental accommodation falls - but rents are still likely to drop by  another 10 per cent, writes GRETCHEN FRIEMANN:

TEN YEARS ago renting in Dublin was a tricky business. Back then you had to be quick. Take any longer than 24 hours to enquire after an advertised property and you were likely to be left out in the cold.

It may seem like the distant past now, but in those days, when the surging economy was luring emigrants back to the homeland, queues outside letting agents were not uncommon.

Unemployment levels were dropping like a stone and the property market was overrun by newly arrived workers desperate for accommodation.

David Butler, a novelist and lecturer at Carlow College in Carlow town, recalls battling past 22 other prospective tenants in November 1999 for a moss-ridden, basement bedsit in Rathmines. “I had been away for 12 years so it was a bit of a shock to the system to be queuing for hours for a dingy flat. I remember my father advising me not to spend more than 20 per cent of my income on the rent. At £600 a month, it ended up being closer to 40 per cent.”

Fast-forward a decade and it’s a very different story. After the mother of all property binges, many investors have learnt the hard way that the market is not a one-way bet. The bad news is all too familiar. Rents are down 25 per cent from their peak and economists predict another 10 per cent drop is needed to reach rock-bottom.

Hardest hit by the carnage are the buy-to-let investors; particularly those who hopped on the property bandwagon from 2004 onwards. According to the Irish Property Owners’ Association, most are now in negative equity and are unable to sell their asset because its value has sunk below the amount borrowed.

Yet in this era of frugality, there are still some crumbs of comfort for landlords.

The sharp reversal in rents has led to a reduction in the supply of available accommodation in the capital and other major cities around the country. Economist Ronan Lyons says the nation’s volume of rentable housing stock is “15 to 20 per cent lower than where it was at the start of last summer” and he anticipates the turnaround, when it arrives, “will happen first in Dublin” as the capital’s broad market means supply and demand corrections occur more rapidly.

Anyone holding out for a speedy return to the glory days may need to think again. Lyons likens the Irish property sector to “somebody who has eaten too much and has a bad case of indigestion. You can’t rush this. Between 2002 and 2008, 12 years’ worth of housing stock was built”, and he calculates it will take four years before the market absorbs the property glut.

“Forecasting is a dangerous sport these days, but I think rents will have to drop by 35 per cent before we begin to see a levelling out,” Lyons argues.

So how widespread is this collapse in rents? Does it affect all areas of Dublin equally? As ever, estate agents espouse radically different views on the market’s health. According to Caroline McArdle in Lisney’s Dún Laoghaire lettings office “there is no recession past Blackrock”.

She claims demand from corporate and professional tenants has remained buoyant, because tenants want to be “by the Dart line” as well as remain “within a short driving distance of top schools” like St Andrew’s and the southside’s popular international school, Castle Park in Dalkey.

She concedes values have fallen but maintains that four and five-bedroom houses in the affluent seaside suburbs of Blackrock, Sandycove, Dalkey and Killiney can still command rents of €6,000 to €6,500 a month. At the peak of the boom, these properties would have gone for €7,500 a month.

This is a 20 per cent drop but “hardly a disaster”, McArdle says. Even in the lower echelons of the market, prices are comparatively robust. She claims her agency is letting one-bed apartments for €1,000 to €1,200 a month, whereas a recent Daft report shows the average rent is now €775 a month.

McArdle’s upbeat assessment is matched by an equally rosy outlook from Hooke MacDonald’s Ken MacDonald. He claims the market is “stabilising” and says there is “strong demand for two-bedroom apartments” in the city centre, particularly in the docklands, as employees of companies such as Google and Facebook want to be “within easy access of work”.

He acknowledges there has been a 25 per cent slump in rents but argues this price decline has encouraged “young professionals” to snap up city centre bargains rather than stick it out in the suburbs. Supply, he says, “has diminished considerably in recent months”, adding that “we are flat out in our lettings team”. MacDonald also maintains that rents in the docklands remain above average with two-bed apartments making €1,100 to €1,200 a month compared to €1,600 in the boom.

Smaller agents, however, paint a bleaker picture. Justin Kinsella of Justin Kinsella Associates in Rathfarnham describes lengthy waiting periods for those properties not in “top-notch condition”. His company refuses to accept sub-standard properties on its books as “it’s impossible to shift them. Landlords know what they have to do to rent a property. It’s no longer good enough to have mouldy carpets or run-down kitchens.”

Yet even well-maintained accommodation takes four to six weeks to rent these days, when a few years ago, Kinsella claims, they “were gone within 48 hours”. And it’s “not unusual for some properties to take months” before a deal is negotiated, he says.

Then there is the increasing incidence of former professionals having to seek rental allowance from the Eastern Health Board.

According to Kinsella, one of the distressing features of the recession has been a rise in the number of tenants who have had to renegotiate leases after suffering job losses. He is sceptical of overly sanguine market readings and points to the 6,000-plus properties posted every day on Daft.ie’s letting pages for the Dublin region alone as evidence that conditions are still rough. “You have to ask, in all reality, whether there is a market out there for that much accommodation.”

John Hern of Apple Estates in Malahide takes a more direct approach: “Fundamentally, the market has collapsed.” He argues there is “no point in talking the market up. It didn’t get us anywhere before and it won’t solve our problems now. People need to know the reality.”

According to Hern, corporate rents are “on the floor” and the slump in this sector, which he identifies as a key driver of growth, has been catastrophic to the market.

In the well-heeled suburbs of Clontarf, Sutton, Howth and Malahide, owners of “lavish houses” looking for “big rents” have had to drastically alter their expectations in the past 18 months. Corporate tenants are thin on the ground – Hern has dealt with three so far this year – and those that are around demand lean prices.

One senior executive with a UK bank told Hern his employers weren’t prepared to “pay more than €2,750 for any house” yet three years ago corporate-style properties in the area could command well over €7,000.

But while landlords with pricey mortgages are losing out, families that are renting, and are content to sit out the hard times before trading up to a larger home, are reaping the benefits.

“Families are taking the houses that once used to go to corporate clients,” Hern says, “and they are playing hardball. They are sitting on the fence waiting for house prices to drop further and they are prepared to rent for at least two years knowing they have a decent amount of money in the bank which they can put to work when the market picks up.”

The growth of this savvy new breed of renters – technically upsizers who sold property before the crash – has corresponded to a drop in demand for second-hand homes in the area, says Hern.

So with upsizers and first-time buyers playing the rental market, will the Irish eventually become like their European neighbours and lose the appetite for owning property? Hern dismisses the idea, pointing out that the cultural ties to land ownership in Ireland stretch back to “the days of Captain Boycott”.

Moss-ridden bedsits may also have been permanently consigned to the history books.

Legislation governing standards in rented accommodation together with the establishment of the Private Residential Tenancies Board in 2003 are a legacy of the Celtic Tiger years that few regret.