Rent controls predicted to dampen supply of new rental stock

Lisney says construction cost inflation likely to become more significant issue in 2017

Construction cost inflation: “Brexit could cause significant issues in the supply chain in Ireland.” Photograph: Chris Ratcliffe/Bloomberg

Construction cost inflation: “Brexit could cause significant issues in the supply chain in Ireland.” Photograph: Chris Ratcliffe/Bloomberg

 

Recently introduced controls on residential rents will have consequences for the investment market and, more worryingly, for the supply of new rental stock.

This is according to Lisney’s review of 2016 and outlook for 2017. It believes the rent controls, which limit rental increases to 4 per cent a year or 12 per cent over three years in designated “rent pressure zones”, are a positive step from a tenant’s point of view but may act as a deterrent for landlords seeking to enter the market.

The controls “may also persuade existing landlords to exit the market, thus reducing the already low level of supply of rental properties”.

Lisney suggests that capital values of multi-family residential investments will continue to rise in 2017, reflecting growing rents and income security of this sector. “There are some new entrants looking to build scale in this area so that they can drive efficiency and keep net incomes as close to gross rent as possible,” it says.

Funding

However, the agent notes that construction cost inflation started to cause “some problems” for the forward funding of deals in late 2016. This issue is likely to grow in significance in 2017, it says, as many schemes with planning permission are now being repriced at tender or pre-tender stage and viability is under threat.

“Cost inflation is running dramatically ahead of normal levels (more than 6 per cent annually), which is largely due to capacity constraints,” says Duncan Lyster, managing director of Lisney.

“With many materials originating in the UK, a weaker sterling will soften the blow for a while but Brexit could cause significant issues in the supply chain in Ireland when it actually occurs.”

Dublin plan

On the new Dublin city development plan, Lisney believes a failure to permit tall buildings and the desire to preserve Dublin as an overall low-rise city is no longer viable.

“ The construction of high-quality tall apartment buildings will be a large part of the solution to the current housing crisis. Ireland has lagged in relation to embracing high-rise living but, in our experience, young professionals and international FDI staff want to live in the city and especially in the docklands,” it says.

“It is very positive to see that the docklands area is identified for high-rise (50-metre plus development). Given the width of the river Liffey and the size of the area, greater heights could have been adopted.”

Mr Lyster believes there are still “good opportunities” for investors in major Irish towns and cities at prices well below replacement cost. He also maintains that, as brand awareness and driving internet sales are key retail trends, internet retailing will continue to gain ground throughout 2017.