Institutional investors have been instrumental in enabling and funding the construction of nearly 5,500 new apartments and houses in Dublin since 2016. Also, 10 per cent of each new scheme is being delivered as Part V social units; both of these factors have helped boost supply, particularly in the rental market. The majority of these properties would not have been built without institutional forward purchase/funding.
According to the Residential Tenancies Board (RTB), over 92 per cent of Irish residential landlords have three tenancies or less; there were only 11 landlords with 300-plus units in 2019. This illustrates the imbalance in the market and the opportunity and need for institutional-type investors to expand.
There is now increasing interest from institutional investors in funding and purchasing social housing developments as well as private sector ones as this also generates secure guaranteed long-term income. The investors get the benefit of secure income with more limited day-to-day management, repair or maintenance issues while assisting the State in the delivery of its housing programme.
Leasing models with a variety of different characteristics are presently being looked at such as standard leases (at 85 per cent of market rent) and the enhanced lease (at 95 per cent of market rent but with more responsibilities).
Investors are showing increased interest in providing multiple social housing units on long-term leases to local authorities and approved housing bodies which receive Government funds, despite the fact that the rents offered by the Government are below market rents. Instead the investors are looking to the attraction of the 25-year long-term income stream as well as the linkage of rent increases to inflation as measured by the consumer price index.
Leasing has accounted for as many as 3,250 of the social housing units supplied by Government-backed agencies in the period from 2016 to the end of September 2019. These include social housing units leased by developers to local authorities as part of their Part V obligation to provide social housing in new developments. These Part V-related leases generally arise when the developments are build-to-rent schemes.
Having private investment in housing reduces the burden on the State to deli ver housing. In the last decade considerable demands have been placed on the State at both a national and local level to address housing shortages. Private investment increases supply and assists in modernising the housing stock and moderating the cost of accommodation in the market.
The attitude of some people towards domestic and international funders of housing is surprising when one takes account of the massive housing shortage and the need for investment in all parts of the sector and for all categories of people in both the sale and rental markets. Any investment which increases supply should be welcomed wholeheartedly. Most countries would be envious of the position Ireland finds itself in where it has the prospect of housing being funded and supplied by both the public and private sector for a number of years to come.
The suggestion that investors are pushing out first-time buyers is flawed as in most cases apartments that have been purchased or funded in the last five years would not have been built if it wasn’t for larger-scale domestic and international funders making them feasible; this situation will continue unless the Government can make apartment development viable at lower cost levels.
Many of the larger investors have investment time horizons of 10, 20 or 30 years and are investing for long-term returns, for example to fund pension disbursements. Most are not here to turn quick profits and move on.
Ireland deficient in supply of apartments
The Eurostat Housing Survey highlights how far behind Ireland is in comparison to the rest of Europe with regard to the share of the housing stock that are apartments. Ireland has the lowest rate of dwellings by a significant amount, with only 12 per cent being apartments. The closest other state is Malta (state population 441,000) at 22 per cent and most countries have over 40 per cent. Britain has approximately 47 per cent of its stock as apartments.
Analysis of comparable EU cities also shows a large disparity. Dublin has approximately 26 per cent of housing stock as apartments; whereas most other cities, which in many cases Dublin competes with for investment, have between 60 per cent and 90 per cent of the housing stock as apartments. Dublin needs to balance out the housing composition over the coming years through substantial apartment development if we are to meet the demographic requirements of the one-, two- and three-person households that make up the majority of the population and current household formation trends.
Historic composition of buyers
There has been considerable misinformation generated about the composition of the purchasers of new homes. It is beneficial, therefore, to delve more deeply into the figures, based mainly on data from the CSO and Eurostat. In the first place it is worth reflecting on the historic composition of purchasers in the apartment market.
Based on Hooke & MacDonald’s experience of selling apartments in Ireland over the last 40 years, investors have been a critical part of the market for a large proportion of new developments. While owner-occupiers have played a role in demand for apartments, the presence of investors, who are supplying accommodation into the rental market, was critical in the development of large volumes of apartments in the period from 1980 through to 2008. These performed a crucial role in modernising the stock of rental accommodation which up to that point had been dominated by substandard bedsit-type accommodation.
Hooke & MacDonald has carried out a review of a sample of 20 Dublin developments that the company brought to the market for sale in the period 1998 – 2008. Of the 2,627 units sold in these 20 developments above, 2,014 or 77 per cent, were sold to investors, and 23 per cent (613) to owner occupiers. Included in the owner-occupiers columns are units provided for Part V social or affordable housing.
This research illustrates that purchases of apartments in new developments by investors averaged between 75 per cent and 80 per cent between 1990 and 2008. These were predominantly by small investors buying one unit and in some cases two or three units, often for pension purposes. Just as is the case today, many of these developments would not have been built were it not for the presence of investors in the marketplace.
There was a significant shortage of good quality modern rental accommodation on the market in the 1980s, 1990s and early 2000s, just as there is now, and the purchases by investors was hugely important in supplying stock into the rental market and helping to moderate rents. Without the presence of these investors, a large proportion of these historic apartment schemes would never have been developed.
In today’s market investors are not buying 77 per cent of new stock, nor even 10 per cent of it and yet some parties object to it. The profile of today’s investors is totally changed. The small investors are fleeing the market due to their unfavourable tax treatment. They are gradually being replaced, but not at a quick enough pace, by pension funds and institutions who are generally offering a very professional service to tenants along with a host of internal and external resident amenities.
A review of the composition of the purchasers of new housing stock over the last five years based on CSO and Eurostat statistics, shows a very interesting picture.
In 2019, 8,675 or 66.16 per cent of purchasers of new homes were household, with 33.49 per cent of these being first-time buyers and 28.94 per cent being other owner occupiers.
Over the five years from 2015-2019 first-time buyers made up 32.51 per cent of purchasers, 26.36 per cent in in 2015, 28.51 per cent in 2016, 34.19 per cent in 2017 and 33.49 per cent in 2019 – in fact a very encouraging and consistent picture. This shows that first-time buyers are not being crowded out of the market by investment entities.
Other owner-occupiers made up 33.87 per cent of new homes purchased in the five years 2015-1019, with 34.45 per cent purchased in 2015, 38.78 per cent in 2016, 37.24 per cent in 2017, 34.34 per cent in 2018 and 28.94 per cent in 2019 – again a very consistent picture except for 2019 when the Central Bank lending restrictions for first- and second-time buyers kicked in.
Purchases or contracts to buy new homes by local authorities, approved housing bodies, charities and social housing entities shows a very interesting trend, rising from 5.67 per cent in 2015 to 6.6 per cent in 2016, 8.01 per cent in 2017, 14.76 per cent in 2018 and 19.80 per cent in 2019. This is very positive reflecting as it does the success of the government and public sector in increasing the availability of housing for the non-private sector. It is likely to rise to a quarter of all new home transactions in 2021.
Pension funds and institutions accounted for an average of 8.51 per cent of new homes purchased over the past five years, 3.62 per cent in 2015, 8.65 per cent in 2016, 12.57 per cent in 2017, 9.31 per cent in 2018 and 10.82 per cent in 2019. This shows clearly that the role of the pension funds and institutional investors, at less than 10 per cent of the total, is much less significant than is often portrayed and exaggerated in debate on the matter. If viability of apartment construction was not such an issue this percentage could be increased which would be beneficial for increasing the overall housing stock and moderating rental costs.
The increase in non-household purchases of new housing stock is often mistakenly portrayed as a negative factor when in fact it should be lauded as a positive because it is clear that it indicates an improvement in the supply of housing for those people relying on the state for social housing for sale or rental purposes.
It is misleading that non-household purchases are sometimes indicated as being pitted against household purchases as if one was impacting negatively on the other when this is not the case. They are two different components of the same market with a need for both to expand and prosper. It is also wrong to include institutional purchases or funding, which are a relatively-small part of the market, in with the public housing purchases which is a much bigger and expanding part of the market.
Both are also important in terms of the employment they maintain and create in the construction industry and related sectors.
Ken MacDonald is managing director at Hooke & MacDonald