Ireland’s biggest landlord: ‘I feel bad for the Irish people’

It’s just a brief comment, but a telling one.

"Be kind," says David Ehrlich, chief executive of Ires Reit, in parting.

Yes, investors in the residential property investment company may be pleased with progress – but the double-edged sword of greater returns is greater rents.

And there is a tension in running Ireland's largest landlord at a time when rents are rocketing past Celtic Tiger highs and having a "disastrous" effect on society, as Daft.ie put it recently.

There is also the negative perception of being lumped in with so-called vulture funds, who come in, buy, and sell when values recover – something he takes umbrage with.

“We’re the opposite of a vulture – we’re here for the long-term,” he says.

We’re talking at the fund’s offices, deep in the heart of Dublin’s shiny new docklands – a place where Googlers and Facebookers can rent a two-bedroom apartment in the nearby Marker residence, owned and managed by Ires Reit, for the not insignificant sum of €2,813 a month.

Running Ireland’s largest residential landlord in such a climate must be an enviable position; residential rents have rocketed in recent years, and supply is such that filling apartments is done with ease.

“It’s a great market,” Ehrlich agrees. “We’ve never seen rental increases like this in any jurisdiction that we’re aware of.”

Soaring

Indeed, such is demand that the fund is already getting calls from people looking to put a deposit down on its new development of 68 apartments in Beacon South Quarter in Sandyford, south Dublin.

And The Maple, as it’s called, which is Ires Reit’s first construction, won’t be completed until next July.

Meanwhile rents are soaring.

The latest figures from Daft.ie show that rents in Dublin are now almost 10 per cent higher than they were in their previous peak back in 2008, as renters look to commit to renting – rather than buying – off plan.

Ehrlich is not ignorant of the financial difficulties the situation is causing.

“I truly feel badly for the Irish people,” he says of climbing rents.

But, answerable to the Reit’s investors, he’s not going to put the brakes on just yet.

Background

Ires Reit, an offshoot of Canadian investment group Capreit, first got involved in the Irish market back in 2014 through Capreit's acquisition of 338 apartments for €42.2 million (or an average of just €124,852 each) in Smithfield, Inchicore, Sandyford and Tallaght at a Lloyd's auction.

The property fund had an established business in Canada owning and renting about 48,000 apartments across Toronto, Montreal and Vancouver.

“We saw an opportunity that the Irish economy would rebound; the housing statistics in terms of supply and demographics looked very good, things like the highest birth rate in Europe,” recalls Ehrlich.

“So that part of it made sense to us – but the question then was what competitive advantage would we have in Ireland? And the answer was there never was a professionally managed apartment sector here.”

It was the latter point that convinced them.

“It wasn’t just building a business it was building an industry.”

Critical also was the publication of legislation, in 2013, which provided for the creation of real estate investment trusts (reits), with Ires Reit listing on the Irish Stock Exchange in 2014 – and Ehrlich had some expertise in the area.

Property forms a large part of his background; he's known as the "grandfather of reits" back in Canada, and helped put Canada's reits legislation together in his previous job as partner at Toronto law firm, Stikeman Elliott.

He moved to Capreit in 2013 – the same time that the legislation was being put into place here. So, why leave the law?

“I think this was a good opportunity for me. The challenges are different and I’m always one to look to a new challenge . . . it would have been interesting in Canada but it’s even more interesting in Ireland.”

Bonus

Erhlich is not Canadian; born in New York City he moved with his family to New Jersey and ended up in Canada after falling in love with a Canadian doctor.

Today he lives with his second wife Mary in Toronto – he’s in Ireland “regularly and whenever necessary. It depends on what’s going on” – and, between them, they have five children.

It’s a good time of life for the 65-year old.

“The families have merged together just perfectly,” he says, “It’s really wonderful”.

What’s also wonderful is the strong performance of Ires Reit, which has rewarded him handsomely – last year he earned €753,000, including a bonus of €376,500, as well as an attractive share option package.

Early days

Key to the company's ability to build its business is the National Asset Management Agency (Nama), which was offloading large blocks of apartments around the capital.

“The question is getting critical mass – if it wasn’t for Nama it would have been impossible for anyone like that, including ourselves, to come into the marketplace,” says Ehrlich.

Subsequent acquisitions mean that Ires Reit has today a portfolio of some 2,377 apartments, making it the biggest residential landlord across the country. Getting in early also means the fund bought a lot of its properties at the right time.

“I think we did well,” agrees Ehrlich.

Indeed, the fund paid some €596 million for its portfolio of apartments – but the market value could be well north of this, given the lift in prices over recent years.

And it won’t be stopping there.

It’s keeping to its target of 5,000 units, although the flow of larger sales is starting to slow. It remains dependent on sellers such as Nama and is having “private talks” with a number of private equity sellers.

Construction

Another way of boosting stock is constructing its own apartments, something which should offer some relief to the overheating rental market by increasing supply.

In addition to the Maple development, Ires Reit has submitted a planning application to build almost 500 apartments in nearby Rockbrook in Sandyford, and expects a first response by November 17th. Further development may follow.

Nama has a site next door, which was originally going to be part of Rockbrook, and Ires has access parking to it.

“We may look to do something there,” he says.

If it gets the green light, it will substantially extend the fund’s grip on the area, which is undergoing another phase of development – beside Rockbrook lies the Sentinel, a skeleton of a building owned by the Comer Brothers.

“Unfortunately it looks ugly,” he says.

But like the build-to-sell market, construction costs are still a consideration however, even for the reit.

“The main thing in that development (Rockbrook) is that it already had a three-storey garage that was substantially complete. It required a fair bit of work to complete, but if you had to include the cost of going down – particularly given it’s granite there – the numbers wouldn’t work,” says Ehrlich.

So, that’s why it makes economic sense for Ires Reit to build when so many other developers won’t? “That’s the only reason – because the infrastructure was in place,” says Ehrlich.

Ires Reit is also looking at another site at Beacon south quarter, "the gateway" into the whole development – diagonally across from Beacon Hospital – which is zoned for office and 65 or so residential units.

The construction of townhouses, something Capreit has a lot of experience in, of up to about 1,200 square feet could also be on the cards for the property investor.

Affordability

It’s no surprise then that, with almost full occupancy, Ires Reit sees further scope for rent rises. With a rapidly growing portfolio, it is now Ireland’s largest landlord. So, how much is it dictating rent rises that are putting renters under increasing financial strain?

“I wouldn’t say dictate – we’re at market. I don’t think we try to control rents. There’s enough competition,” he says.

Indeed Ires Reit and other funds like it, such as Hibernia which owns and rents some 314 apartments at locations such as Wyckham Point in Dundrum, or Kennedy Wilson, which has 1,000 apartments across the capital, only account for about six per cent or so of the properties available for rent in the city.

However, where they do exert an influence is in terms of the flow, with a fair number of apartments available for rent at any one time belonging to an investor such as Ires Reit.

According to Ehrlich, about 25 per cent of Ires Reit’s apartments turn over after one year (Capreit has a rate of 35 per cent in Canada), which means that they are then put back on the market as tenants leave.

“We’ve been surprised at the number. We’re not sure why that’s happening; we thought it would be less.”

But this high turnover rate means that Ires Reit can hike up the rents at each turnover, regardless of the new two-year rule – which means that rents can only be increased every two years for sitting tenants.

Stricter rent controls could be a problem however, in terms of attracting capital.

“If you bring in measures to control rent, it is going to be difficult to do that.”

Ires Reit has a sizeable number of apartments coming up for rent review next year; 10 per cent in the first quarter and about 20 per cent in each of the remaining quarters, with the balance up in the first quarter of 2018 for the most part.

The fund has already achieved annual rent increases in the order of about 10 per cent since launch – so, should tenants expect their rents to rise further?

“I expect they will, but I don’t want to speculate [how much] ,” he says. “There is a point where things will have to slow down in terms of affordability.”

Crisis

Ehrlich sees Ires Reit as being part of the solution to what he sees as a “crisis”.

“Actions have to be taken to increase supply,” he says, adding that something the fund is looking at is more affordable units. “Not necessarily more basic – it’s a question of design and location.”

For Ehrlich, the Irish way of devising planning legislation and amending it over the years needs to change.

“What you really need to do is get right down into the costs, design something that can be more affordable, and then you build the regulations around that.”

Pointing out that Sandyford has a 14-storey building height limit, he wonders would anybody notice the difference if it was 18 storeys – “but it would change the cost significantly”.

But, is it really in Ires Reit’s interests to help with supply issues – given the extent to which it has benefited from rising rents?

“One could argue that, of course . . . I think it’s going to be quite some time before a significant amount of supply relative to demand is brought on. Having said that, we can operate very well in a more balanced environment.”

Indeed, Ehrlich says the fund can operate quite well with 3 per cent annual rental increases.

“That’s a very stable long-term business.”

Biography:

Name: David Ehrlich

Age: 65

Position: Chief executive, Ires Reit

Family: Wife, Mary, and five children between them

Interests: He likes reading biographies and non-fiction – the latest tome he read was Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford.