Uncertainty over rent reform affecting investment

With demand for rental housing likely to continue to rise in the UK, the British government has committed itself to supporting “innovation and investment” in the private rented sector.

In Ireland, as the Government puts forward measures to freeze rents and increase investment in the rented accommodation sector, it is an opportune moment to undertake wider policy reform to attract investment in Irish rental property.

A recent report for the Centre for London has recognised that while small portfolio landlords have an important role in the market rented sector, “it is reasonable to hope that greater institutional investment could lead to the development of new products that better meet the needs of many London renters, and might also help to improve standards sector-wide.”

There has been a lot of debate in Ireland recently about the scarcity and standard of rental accommodation.

Better products

If the Centre for London is correct and new institutional investment leads to better products, more suitable accommodation and higher standards, what can the Irish Government do to implement this learning here?

In 2004, the homeless charity Threshold produced a report entitled Opportunity Knocks? Institutional Investment in the Private Rented Sector in Ireland.

It set out a number of barriers that were holding back the type of institutional investment that is seen in the UK or other more mature rental markets.

First, it identified that many property investors prefer to invest in commercial rather than residential property, as they see inadequate revenue income due to the greater service obligations associated with managing residential compared to renting commercial property.

Second, there were few opportunities for reducing management costs because residential purchase opportunities were generally modest in size, and investors were limited to purchasing only individual apartments rather than apartment blocks.

Third, at the time of the report, buy-to-let mortgages were available to enable individuals to invest in the private rented sector, but no financial products have been devised to support investment by institutions/

Finally, Ireland had a relatively poor legislative framework for governance of the private rented residential sector.

Barriers

In 2015, many of those barriers still exist. Government has an opportunity with the new apartment design standards to examine and eliminate unnecessary ongoing management cost through increasing the permitted number of apartments per floor, so that service costs are shared amongst a larger number of tenants.

The tax base of residential property investment should be reviewed so that financial models can exist to complement the REIT model, which has been so popular in the commercial property sector.

This would attract new investment in purpose-built rental accommodation.

The uncertainty about the introduction of legislation to reform rents has severely undermined investment into the Irish rental sector.

Confidence

Institutional investors need confidence to know that the legislative basis on which their investment has taken place will be constituent throughout the time their investment lasts.

Just as tenants have been looking for rent certainty, so investors look for policy certainty and legislative certainty.

Rents are now effectively frozen in Ireland until 2017, and then again until 2019. This provides a perfect opportunity to remove any remaining barriers to the type of professional institutional investment that is being sought in London and to put in place a strategy for investment so that when rents are unfrozen in 2019, tenants are protected by having a genuine choice of quality accommodation.

Peter Stafford is director of Property Industry Ireland