Corporate investors not the cause of high rents, report claims

Study by Davy suggests big funds may be key to unlocking supply and cooling rents

The Davy study suggests  house-price inflation has slowed as a result of the Central Bank’s mortgage-lending rules but that demand pressure in the market has transferred to the rental sector. Photograph: Bryan O’Brien

The Davy study suggests house-price inflation has slowed as a result of the Central Bank’s mortgage-lending rules but that demand pressure in the market has transferred to the rental sector. Photograph: Bryan O’Brien

 

Institutional investors or so-called “cuckoo funds” are not the prime drivers of high rents in Ireland and may be key to unlocking further housing supply and actually reducing rents, a new report by stockbroker Davy has claimed.

The study, which contradicts much of the current commentary around the impact of these funds, suggests that house-price inflation has slowed as a result of the Central Bank of Ireland’s mortgage-lending rules but that demand pressure in the market has transferred to the rental sector, as evidenced by the 7 per cent rise in rents last year.

Institutional investment in the Irish private rented sector (PRS) has grown in response – there were €1.1 billion of transactions last year, up from €200 million in 2017 – but is still in its infancy, the report noted. This accounted for 30 per cent of total property investment here last year.

The report notes that the bulk of investment has been concentrated in Dublin, where the top 25 transactions accounted for 2,370 units, or €954 million in 2018.

Market expectations are for more growth in 2019, with 1,015 units already sold or sale agreed, with 11 launches of assets (comprising 798 units) for about €229 million, the report said.

“People have, however, confused the chicken with the egg,” Davy analyst Conall Mac Coille said. “Institutional investors have been attracted here by high rents, and are now providing equity funding for the development of new apartment blocks, which is part of the natural supply response to cool off rents.”

‘New dynamic’

In the report, he highlighted a “new dynamic” in the Irish housing market with institutional investors slowly replacing the traditional, small-time, buy-to-let investors, who are still hamstrung by legacy debt and unable to access bank funding.

The bigger corporate players – fuelled the European Central Bank’s accommodating monetary policy, low interest rates and the “search for yield” – have greater access to funding and are therefore in a better position to build the large-scale, standalone apartment blocks necessary to unlock further supply, particular in urban areas. the report said.

“Because institutional investment in the PRS market is typically financed through equity rather than bank funding...this reduces the risks to financial stability and potentially dampens residential property cycles,” it said.

Institutional buyers

The report’s conclusions chime with an AIB report, published last week, which suggested the presence of institutional buyers was the primary reason why large apartment blocks were being built.

“We believe strong flows of institutional capital into Ireland’s PRS will continue and be a long-run trend, reflecting a structural shift in asset allocation into European residential property,” Mr Mac Coille said.

“The point is that the home-building sector – builders, buy-to-let investors – have been short of equity, and institutional investors are providing it with scale to help apartment building get off the ground.”