Although patronising, the “generation rent” moniker describing young workers with pitiful prospects of home ownership is becoming more accurate by the month.
The story is a familiar one: earnings are not keeping pace with house prices and tight credit limits in the Irish market are curbing what can be borrowed. Limited stock is compounding the problems in this most unhealthy market and, as a result, a new asset class is beginning to emerge. Generation rent, say hello to “build-to-rent”.
Institutional investors are clambering to get a piece of the private rented pie and the burgeoning build-to-rent market is their vehicle. For a long time synonymous with mature markets such as Germany and Canada, build-to-rent is pretty much what it says on the tin. A developer builds a series of apartments in one development and, instead of selling them to individual buyers, they're sold in one lot for rental purposes.
In some cases, property companies themselves will develop the land which they will subsequently rent.
For tenants, the promise of a better rental experience and more amenities is the big draw. This is particularly the case for transient city centre workers, such a many of those working in the tech sector. Ireland’s success in attracting talent for such ventures means build-to-rent is making its presence felt.
Take Kennedy Wilson’s Capital Docks scheme, for example, where one can expect to pay €3,300 for a two-bedroom apartment. That comes with a concierge service, a cinema, a gym, resident lounges, business suites, a games room and a so-called chef’s kitchen.
"What these landlords are offering is a lot more than we've come to understand renting as," said Goodbody real estate analyst Colm Lauder.
For institutional landlords, the potential for secure, inflation-proofed income streams, coupled with the growing rental demand, is proving attractive.
And, from the developers’ point of view, they can in some cases expect to command a higher price for the sale of one block to one buyer than if they flogged the lot to individuals.
But institutional investors have an image problem – and not of their own making, it must be said. In some cases, it’s fear of the unknown.
In a high-end Cairn Homes development in Rathgar, Dublin 6, rumblings of institutional investors coming on the scene is troubling residents. Cairn had planning permission for 22 five-bedroom homes on part of the site. They have ditched that plan and are now seeking permission for 107 apartments, which could be shifted on to institutional investors.
Then there’s the aforementioned Capital Docks scheme. It has attracted some ire despite the fact one estate agent said he had been achieving similar prices in the area for some time.
"A lot of these institutions are here for a long-term play," said Ross Harris, head of residential investments at Sherry FitzGerald. "I think we need these guys as part of the solution. They're not the full solution but equally home ownership is not the solution on its own."
That may be the case. But the ability of one landlord to enter an area and effectively set the market rent can be daunting for tenants. The argument goes that a landlord with 300 apartments is better positioned to set high rents than a plethora of landlords with one or two properties ever could.
"If you think about it, there's nothing to say the rents won't be what the market is willing to pay for them," said Savills Ireland's investment director Dessie Kilkenny. "If I was going to sell these off individually, I'm going to rent them at the strongest rent I can get. That then has a spin-off for what the other units are rented at. It'd be the same if I'm a private investor," he said, adding that if institutional investors don't have high occupancy, they won't achieve their planned return.
In effect, it's not in their interest to set rents too high, Mr Kilkenny suggests.
Nevertheless, the institutional investors will be looked on as an expensive alternative simply down to the fact their rents are so visible.
“If you’re a listed entity, then transparency is required. I-Res [Reit] publishes their average rents for properties every month or two,” explained Goodbody’s Lauder. While positive, that visibility can’t be seen to the same extent with the traditional private sector landlords.
And although the Residential Tenancies Board (RTB) is trying to change things as they stand, there’s still some way to go before we get an accurate picture of what rents look like in an area. One would have to think therefore that the fact the institutional investors have published rents so publicly has been a disadvantage to their image, albeit a good thing in the long run.
Lauder also argues that the sector needs to be “professionalised” in any case. Otherwise, he says, there won’t be sufficient stock available.
At present, the tightness of the rental market is beginning to damage competitiveness. A number of businesses have reported that it is inhibiting their expansion plans. A recent survey by Performance Reward Consulting, an advisory company that helps businesses with pay and benefits structures, found that one in four businesses believes lack of housing in their area was impeding their ability to expand. Some 23 per cent said employees had sought pay increases as a response to the housing crisis.
"In my experience in talking to clients, this is a hot issue," the company's managing director, Patrick Robertson, said.
This week alone, the chairman of small business group Isme, Ciarán Murtagh, said housing costs had now become a “material threat” to Ireland’s social prosperity.
The chronic undersupply is certainly getting the attention of foreign suitors. Earlier this year, a report from commercial property company CBRE found the volume of "institutional equity targeting the residential sector in Ireland now exceeds €5 billion, with considerable interest from European, Canadian, UK and US investors".
Market dynamics in the Republic suggest that institutional equity is sniffing out a good opportunity. About 4.8 per cent of the population lives in apartments, the lowest percentage in the European Union where the average is 23.8 per cent. Meanwhile, the availability of rental stock was at a record low – about 0.3 per cent of the total Dublin housing stock.
But it’s not just the international players. Irish investors are also getting more involved in the sector. Hibernia Reit recently said it may sell all of the more than 320 apartments it owns to finance the building of new homes on a site it is acquiring at Gateway, Newlands Cross.
“The likes of a Hibernia, they are primarily an office vehicle. It’s in their interest to provide sensibly priced apartments,” said Goodbody’s Lauder.
Hibernia Reit chief executive Kevin Nowlan said the company could not continue to develop offices in the capital – its prime focus – and let them to businesses if there was nowhere for those organisations’ workers to live.
“The biggest risk to Hibernia in my view is the lack of residential development in Dublin,” he said. “From a philosophical point of view, that’s what tweaked our interest in Gateway.”
The National Asset Management Agency (Nama) has also had some involvement in the sector, given the hangover of half-built apartment blocks from the collapse of the building boom. Of the 8,013 homes, it has funded the delivery of since 2014, 19 per cent have been sold to institutions including pension funds and property investment funds.
“While there has been some demand for Nama-delivered units from institutional investors who buy units en bloc for the private rental market, this source forms a relatively small percentage of demand for Nama-delivered units,” a spokesman said.
For this range of reasons, build-to-rent is fast becoming a feature of the Irish property landscape. A more efficient fast-track planning process coupled with less risk than a traditional build-to-sell model is encouraging developers. “If you sell it to one entity, you’re de-risking the development to a certain extent because you’re selling all the units in one go,” Sherry Fitzgerald’s Harris said.
The institutional investors can then count on yields in the region of 4 per cent, as was the case in a Cairn Homes development in Hanover Quay which was sold for €101 million in the summer. Similar yields are being achieved elsewhere by Irish Life and Kennedy Wilson.
Although that’s not necessarily a spectacular return, the alternative of just buying an office with one or two tenants who pay large leases is becoming less attractive. Having 150 tenants can “spread the risks and gives you less concentration to one industry and one tenant”, according to Savills’ Kilkenny.
In Dublin’s central business district, there is an increasing murmur that big tech companies are offering to supplement workers rent.
Those central areas will remain “very suitable for build-to-rent”, Kilkenny believes. Similarly, schemes located near good infrastructure will also be attractive. “The rental product that doesn’t sit on any key infrastructure or is a long commute from the central business district needs to be looked at with more focus,” he added.
Because of the lack of uncompleted stock, Harris expects about 80 per cent of build-to-rent stock in 2019 to be on a “forward commit basis” – where a purchaser commits to buying before a block is laid. The likelihood of developers getting on board is almost a given. According to Kilkenny, “developers will do what the market dictates”.
All things considered, build-to-rent looks like it’s here to stay. Investors could see greater returns in logistics and industrial, but the ability to achieve scale in those sectors in Ireland is “very difficult”.
And then there is the issue of the more traditional amateur landlords. Despite the booming rental market, Sherry Fitzgerald data suggests that for everyone buying a property, two are selling.
Still, build-to-rent is unlikely to seek out opportunities outside of major urban centres. At present, they have barely looked beyond Dublin.
For tenants, build-to-rent should offer management from a more professional landlord.
“If there’s something wrong with the property, [they want] to be able to make one phone call and have it fixed the next day,” said Harris.
And make no mistake; tenants are seeking out these comforts. "When we were selling the Grange [in South Dublin], and it surprised me at the time, I found they received in or around 100 parcels a day [to a centralised acceptance area for parcels]. That's for 405-odd units. That's how society is changing and we need that type of offering," Harris said.
Those tenant amenities, while they won’t necessarily drive substantial rent increases, will protect a company’s rent roll, he added.
Build-to-rent does appear to be attractive to a portion of the market, but it is by no means the solution to the Republic’s chronic housing issues of itself.
“We need a lot of first-time buyer apartments,” Lauder stressed, adding that we should stop encouraging urban sprawl and start looking at developing industrial estates in west Dublin.
The Irish rental market is in dire need of change. And investors and pension funds can play their part in helping to reshape our relationship with property and home ownership. But it will never be a case of one size fits all.
Transient workers aren’t the only ones who need homes, and rapidly rising rent is fast becoming the political hot potato of our time.
Build-to-rent: How much are two-bed monthly rents?
Capital Dock, Dublin 2 – €3,300 – Kennedy Wilson
The Marker, Grand Canal Dock – €2,716 – Ires Reit
St Raphaela's, Stillorgan – €2,000 – Shannon Homes
Honey Park, Dún Laoghaire – €1,950 – Patrizia
Clancy Quay, Dublin 8 – €1,900 – Kennedy Wilson
Beacon South Quarter, Sandyford – €1,622 – Ires Reit