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The faceless funds behind Ireland’s surging buy-to-rent sector

The private rental sector is a typical feature of most mature housing markets

For a decade we’ve been talking about the need to build up, not out. In other words, more apartments in high-density locations and fewer three-bed semis.

It's the way things are in other countries. Apartments account for 30-50 per cent of the housing stock in most European countries; in Ireland they account for just 10 per cent.

In London housing estates are a thing of the past. When space is at a premium the only option is to go up. High-density housing also facilitates infrastructure, something we’ve been slow to realise.

Most of the bottlenecks in the Irish economy – transport, health, water, broadband – stem directly from poor spatial planning. This notion has been well aired, and seems now to have colonised official thinking on housing. The Government's new Land Development Agency was specifically set up to identify high-density locations for housing, and its chairman John Moran is wedded to the idea of high-density development.


The change in perspective can been seen in the recent housing completion figures. According to the Central Statistics Office (CSO), the number of apartments completed in the final quarter of last year rose by 45 per cent to 1,724.

Scheme dwellings made up 56 per cent of all new home completions in the period – 23.3 per cent were apartments, 20.4 per cent were single dwellings. The CSO noted that this was “the first quarter since the series began in 2011 that has seen more apartments than single dwellings completed”.

However, the arrival of a more efficient housing model has shone the spotlight on another area – affordability. It seems no one can afford to buy these apartments.

Sale prices

The Society of Chartered Surveyors Ireland (SCSI) – the professional body for the construction industry – puts the cost of delivering apartments in urban Dublin, as opposed to suburban Dublin, at between €493,000 for a two-bedroom unit in a medium-rise development to an eye-watering €619,000 for a two-bedroom unit in a high-rise development.

And remember this is only the cost of delivery; sale prices tend to be 10-15 per cent higher.

Developers say they can’t build them at rates affordable to homeowners because the development costs – construction, land, financing, tax, professional fees – are so high.

The gap, however, is being filled by institutional investors. International investors have flocked to Ireland since 2011 to avail of comparatively strong returns from the rental sector, and are buying apartment developments off the plans as single lots.

Prior to this we didn’t have institutional investors in the market. Landlords were typically small-time, buy-to-let investors, nursing a handful of properties.

The arrival of these big multinational funds was – initially at least – encouraged by government as a means of stimulating activity in a moribund market. They have been daubed “cuckoo funds” in certain sections of the media, the suggestion being they are chasing out individual buyers and aggravating the State’s housing crisis. But the reality is more complex.

Yes, they’ve fed off the carcass of Ireland’s property crash, picking up assets for a song off Nama. Yes they’ve used low-tax vehicles to do it.

But what was the alternative? To spurn the investment? For the State to build itself? Perhaps, but successive Irish governments, for whatever reason, seem disinclined to take on this role.

According to estate agent Sherry FitzGerald, private rental sector investors have put €6.6 billion into the residential market here since 2011, €3.7 billion since 2018, and most of it in Dublin.


But who are they?

The biggest is Canadian-owned Ires Reit, which is now the State’s largest private landlord with just under 4,000 rental properties. It recorded a 30.2 per cent increase in net rental income in its latest half-year results despite the pandemic.

Structured as a real-estate investment trust (Reit), it was responsible for the single largest private rental sector deal in 2019 when it acquired Project XVI, a portfolio comprising 815 properties at multiple locations across Dublin, from Marathon Asset Management for €285 million.

Ires is thought to have seen off rival Avestus Capital Partners, whose backers include Nordic and German institutions.

Avestus was responsible for the second largest deal that year when it acquired a portfolio of 382 rental apartments distributed across two high-end developments in south Dublin for €216 million.

Both those deals were for what the industry calls “standing stock” – completed units. Increasingly deals are being done on a “forward commit” basis, with the developer selling their schemes as a single job lot to investors before they are even fully built.

The largest residential investment transaction last year saw the Cosgrave Property Group secure €195 million from the forward sale of 368 apartments at Cualanor, Dún Laoghaire, to Deutsche Bank subsidiary DWS. The latter also bought the Prestige portfolio, a mix of 317 residential units spread across four developments in north Dublin, from MKN Property Group for €145 million.

Another significant player is US property giant Greystar, which is buying 385 homes being developed by Cairn Homes on a site at Griffith Avenue in Marino, Dublin, for €175 million. Greystar is said to have several other deals in the pipeline.

The Quarter residential development at Citywest, Dublin 24 – also being developed by Cairn Homes – is also the subject of a forward sale to property fund Urbeo, which is backed by US investment group Starwood Capital.

In 2019, German fund Patrizia completed the acquisition for €93 million of 166 apartments being developed by the Marlet Property Group at Mount Argus in Harold's Cross, Dublin, and it is also understood to be closing in on a new residential development in Dublin's Drumcondra comprising up to 475 apartments.

Another big player is Los Angeles-based Kennedy Wilson, responsible for Dublin's 22-storey Capital Dock tower, the city's tallest residential block, where the penthouse suite on the 22nd floor will set you back €20,000 a month.

Kennedy Wilson is said to have spent upwards of $10 billion amassing property in Europe since 2011.


The private rental sector channel is a typical feature of most mature housing markets, says Ross Harris, head of residential investments at Sherry FitzGerald. "It arises because a cohort of the population either don't want to own or unable to purchase. And if that's the case, where do they live; they have to rent."

Harris also notes that the Government has a taxation structure for domestic landlords that is not favourable – they incur a tax liability on their rental income. In contrast, most of the funds are buying the property through special purpose vehicles to minimise their tax liabilities.

In 2019, for example, Ires Reit reported a total profit of €86.3 million, and paid no corporation tax. Sherry FitzGerald data suggest that for every domestic landlord that is buying into the Irish market, two are exiting.

“In a lot of cases these apartment blocks wouldn’t have been built without the forward commitment of institutional investors because they wouldn’t have been viable,” Harris says.

“They are providing homes that would not have been built otherwise,” he says, while noting it is extremely difficult for developers to get finance from domestic banks for speculative apartment builds.

It is estimated that 70-80 per cent of this private rental sector activity is funded by foreign money. These funds are chasing yield for clients (the average net yield for prime product here is currently about 3.75 per cent), which is higher than what is being achieved elsewhere in Europe.

In an era of ultra-low interest rates and low returns from other investment classes, the Irish residential sector stands out. This is best illustrated by the fact that in many of the deals above the units are being sold at higher prices than they would have fetched on the sales market. In other words, buyers are paying a premium over “the break-up value” by buying in bulk rather than receiving a discount.

The treatment of foreign institutional funds in terms of tax had become a bone of contention between Fianna Fáil and Fine Gael in the lead-up to their coalition deal, but that seems to have gone away.

Fianna Fáil has pledged to clamp down on institutional investors buying entire schemes here by insisting developers devote a significant section of their homes to the sales market for individual buyers. It remains to be seen if such a move would change the dynamic.

Foreign funds

Rick Larkin, director of development firm Twinlite, dismisses the notion that institutional investors are chasing individual buyers out of the market.

“Nobody wants to grasp the nettle and it’s easy to point the finger at foreign funds, but it’s nonsense because they make up such as small part of the market.”

He says foreign investors are buying approximately 10 per cent of the new housing stock coming on stream, while affordable housing bodies backed by the government buy around 20 per cent.

His point is that in the boom-time era a third of new properties were bought by buy-to-let investors, and that institutional investors are only replacing this group – and even then only partially – though he concedes their footprint in the apartment sector is bigger.

“The problem is supply. Construction costs are too high, land costs are too high, planning is too slow,” he says.

Planning permission is no guarantee of viability because of the myriad of processes, including judicial reviews, that can stall a project, Larkin says.

He believes the private rental sector schemes are becoming costlier and costlier, and their attractiveness as an investment will eventually wane. This is because land prices have kept rising while rents have flatlined. This makes the risk premium for investors harder to justify.

This changing dynamic is also reflected in what he describes as a “stasis” in the land market with almost no transactions over the past 12 months.

“The scale of the opportunity for foreign investors here is a lot smaller than is made out,” he says

He also makes the point that given the choice Irish people still want houses over apartments, a choice that has been facilitated up to now by Dublin’s low-rise development pattern. The tenant make-up in his company’s scheme in Clongriffin in Dublin is 98 per cent foreign.

He says in London the choice between house and apartment isn’t available because houses aren’t built to the same extent anymore: if you want a house it means moving outside the city with a potentially more disruptive commute.

Either way it’s no longer economic for developers to build apartments – the very units we need for our cities – for the sales market as people on average incomes and even above average incomes cannot afford them.

So we have a new player in the market, the institutional investor, which is facilitating a new stream of rental stock.