Meet the landlords buying in bulk and changing the market

Institutional property investors supplant small-scale buyers and build strong reputation

 

They’re slowly changing the landscape of the Irish rental market, promising professional service levels, offering screening rooms, gyms and kitchens for cookery demos and charging tenants a premium price while they’re at it.

While the crash may have brought despair to the property market, it also ushered in a new dynamic: the professional institutional property investor.

Since 2012 funds such as Kennedy Wilson and Marathon Asset Management, and real estate investment trusts (reits) such as Hibernia and Ires, have spent more than €1 billion snapping up properties all around Dublin.

Unlike the investor of old, these funds have rapidly built up significant portfolios in the capital, acquiring whole swathes of apartments from vendors such as the banks and the National Asset Management Agency (Nama).

“Institutional involvement in the residential market is a good thing for the marketplace and it’s a good thing in terms for setting standards in terms of ongoing management of blocks,” says Davy Stockbrokers research analyst Ray Crowley, adding that for Dublin’s new landlords, branding is a key element of the proposition.

“They are building up a strong brand in the marketplace, building up trust and trading off that brand over time.”

The Ires Reit, for example, is now one of the country’s largest landlords, with a portfolio of some 2,056 apartments, having acquired properties in Beacon South Quarter, Sandyford and the Marker Residence in Grand Canal Square. US fund Kennedy Wilson owns more than 700 apartments in the capital, including the 210-apartment Alliance Building, part of the Gasworks in Dublin 4 as well as 423 apartments in Clancy Quay.

Patrizia German Residential Fund bought 63 apartments in the Park Lodge development on the North Circular Road in 2015, while investment manager Ardstone Capital bought 54 apartments in Annaville Residence in Dundrum. And US- owned Starwood Capital and Irish-owned Chartered Land acquired the Elm Park complex in Booterstown earlier this year.

Premium product

By buying in bulk, the funds can negotiate a good price. Kennedy Wilson, for example, paid an average of €190,476 for apartments in the Alliance Building in 2012, while in 2015 Marathon Asset Management paid an average €223,054 for 347 apartments across the city, including Beechwood in Stillorgan, and Northern Cross on the Malahide Road.

“What they do is aim to deliver a premium product,” says John McCartney, director of research with Savills.

But with a “premium” product comes a premium price. Renting an apartment from a professional landlord may mean a slick fit-out and a more efficient approach – one not characterised by calls to your flat for rent, in cash, on the first Friday of the month. It may cost you, however. Ires Reit for example, is charging a hefty average rent of €2,328 for a two-bed apartment at the Marker Residences in Grand Canal Square, while Kennedy Wilson is renting two-bed apartments in the Vantage in Leopardstown – which comes with a fitness room, games room and cinema/screening room for residents – for €1,750 a month.

As a comparison, according to the Private Residential Tenancies Board, typical rents in Dublin 18 for a two-bed apartment are €1,256 (albeit for 2014). In Dundrum, Hibernia is charging an average of €1,700 for a two-bed apartment in Wyckham Point, €1,550 in nearby Dundrum View.

But with such scale a concern is whether reits and property funds are having an undue influence on rents in the capital.

Crowley says that about 6,500 units across Ireland have been acquired by institutional funds since 2012, with the large majority of these in Dublin; but even so, based on census figures for 2011, this accounts for just about 6 per cent of the rented stock in the capital. Nonetheless, given their density in certain parts of the city – Sandyford/Leopardstown, for example – they may have a bigger impact than their size would suggest.

“It’s a small part of the market relative to size of rented tenure; but it’s a significant part of the flow,” says McCartney, adding that by acquiring so many apartments the funds can dictate the tone of rents within the scheme.

Indeed, answerable to their investors, these funds have a firm focus on growing rents. Ires Reit, for example, signalled “continuing rent increases” in its most recent investor presentation in December. And, while new regulations limit rent hikes to every two years, property funds will of course be able to increase rents when tenants move out.

Turnover

Ires Reit reported that about 20 per cent of its apartments turned over in 2015, and it managed to secure monthly rental increases ranging from 10 per cent to 15 per cent each time. At Dundrum View, 43 of the leases have expired since Hibernia acquired it, and have been re-let or renewed – at an average rent uplift of 6 per cent.

However, Keith Lowe, chief executive of DNG, asserts that the presence of these institutional players has helped keep supply coming at a time of considerable demand. And he rejects the suggestion that they could be behind rent rises.

“Ultimately there would be upward pressure on rents anyway,” he says, adding: “I think we’re lucky to have them.”

But with the stockpiles of apartment buildings left over from the bust on the wane, what does the future hold for these property funds?

“I think it’s peaked in its current form,” says McCartney, but adds: “It will probably continue to be a big thing on a design- build-operate basis.”

Indeed, Ires Reit says it has the opportunity to add 600 to 650 apartments to its current sites, pending planning permission, and other opportunities are there to build and operate student accommodation or social housing.

Other players, however – particularly those backed by private equity – may look to chop up their portfolios and sell them back into the market one by one, McCartney says, although Crowley suggests a more likely outcome would be for the units to be sold in a block to another landlord.

“To sell down those units in a market like Dublin’s today takes a long time to exit.”

Are reits driving the cash deals?

It continues to perplex, but latest data shows that about 47 per cent of all residential property transactions in 2015 were bought with cash. But how many of these deals were individuals with access to significant savings, and how many were property funds and reits buying on a cash basis?

“The reits are cash positive, so they have gone and raised the funds up front and then have a war chest to go out and deploy into the market,” says John McCartney of Savills, noting that institutional deals are typically done with cash – although may later be backfilled with debt – as it enables the purchaser to execute deals.

Over the last four years, for example, about 11.5 per cent of all sales in the Dublin market were in multi-family investments, so have been significant contributors to that “one in two” cash buyer tag.

But as the sale of multi-family units begins to decline, as is expected, McCartney asserts that cash sales will remain strong, pointing to two other cohorts.

Homeowners trading down account for about 10 per cent of all Savills sales – and with an average sale price of €1.1 million and a purchase price of €540,000 there is a lot of headroom to pay for the new property with cash.

The other cohort are smaller investors, McCartney says, pointing to an average yield on a one-bed of 7.9 per cent in the capital, which is pulling this market back in.

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