Sales of multi-unit investments set to reach €500m by year end

The value of transactions in the multi-unit residential investment market has increased sharply, according to analysis of the sector by agent Hooke & MacDonald.

It reports that spend on this sector in Dublin was €426 million from 2016 to the third quarter of 2017 and this figure should reach €500 million by year end. While it accounted for 6 per cent of the Dublin commercial property investment market in 2016, this has surged to 17 per cent in 2017.

There have been about 20 significant multi-unit property sales in Dublin since 2016. This year, for example, the Cosgrave Group sold the 319-unit Charlotte apartment block at Honeypark in Dún Laoghaire to a German fund for €132 million to reflect a gross yield of 5.68 per cent.

“This has been the largest reported investment transaction for all asset types in 2017 to date,” according to Hooke & MacDonald. “It is also the first time in the Irish market that entire blocks of apartments have been pre-sold in bulk at an early stage of construction rather than on completion and this has been an important element in the funding of these projects.”

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Meanwhile, a 53-apartment building at Shelbourne Plaza on the Ringsend Road made about 24 million while 28 apartments at Castleforbes Square on Castleforbes Road in Dublin 1 were sold for €6.9 million in a receiver sale to Carysfort Capital which secured a gross yield of 6.33 per cent.

Two other multi-unit receiver sales this year secured attractive yields. The first, of 50 apartments at Abberley Square on the Belgard Road in Tallaght for €5.8 million, resulted in a private buyer banking a gross yield of 11.38 per cent. The second, where 25 apartments at 5 Hanbury Mews on Hanbury Lane in Dublin 8 sold for €4 million, meant an Irish investor walked away with an estimated gross yield of 30 per cent.

There were also plenty of meaty transactions in the sector during 2016. The 197-apartment Neptune Building at Honeypark in Dún Laoghaire was sold for €72.5 million at an estimated yield of 5.8 per cent; 201 apartments at 2 Elm Park on the Merrion Road in Dublin 4 were bought by Starwood Reit for €59 million; and 160 units at 3 St Edmunds on St Loman's Road in Dublin 20 were bought by Carysfort Capital for €36 million.

Hooke & MacDonald believes that “uncertainty” created in the sector by the introduction of rent measures by the government in December 2016 has now “settled down”. Sales that were agreed prior to the introduction of the rent certainty measures, but not closed, resulted “in many cases to price reductions of 5-15 per cent”.

Market rents

Properties which have since been put on the market have generally been priced on the current rental income as opposed to the market rents achievable, according to the agent. “Investors have now accepted the 4 per cent rent increase restriction per annum,” it says. “As a result, there has been further demand and a compression of yields, with prime gross yields as low as 5-6 per cent being achieved in some cases.”

The Budget 2018 increase in stamp duty on commercial property transactions from 2 to 6 per cent will result in investors who had been looking solely at commercial investments turning their attention to the residential market, according to the agent. Stamp duty levels remain unchanged for multi-family sales at 1 per cent for the first €1 million and 2 per cent thereafter.

“Investors have shown a particularly strong interest in build-to-rent sales as they are purchasing a high quality new-build product with the ability to achieve full market rents which is not the case for the existing occupied stock,” says Hooke & MacDonald. “We expect sales of traditional occupied multi-family assets to slow down with new stock required, as there is significant appetite emerging from pension and institutional funds for build-to-rent product in Dublin.

“Potential buyers are placing increased importance on design quality, internal layouts, resident facilities and the reputation and track record of developers. Joint ventures with site owners are likely to become more prevalent as there are considerable opportunities for landowners/stakeholders to tailor their developments to provide the design driven multi-family stock required.”

The agent says apartment construction in Dublin is at a “very low level” due to “obstacles” such as planning regulations, the uncertainty and cost of the planning process, VAT, levies, lack of financial incentives and viability.

It believes the conditions are right for a major programme of apartment construction if obstacles to viability could be “quickly addressed” as there is a “massive imbalance between supply and demand”.

The agent suggests abolishing VAT for a 3-5 year period for apartment developments in areas close to transport infrastructure in urban and suburban locations; the introduction of a Section 23-type tax incentive measure in key locations of rental demand for a limited period; and the “freeing up” of sites suitable for build-to-rent projects.