‘Cuckoo funds’ are not the enemy

Funds filling gaps created by buy-to-let landlords leaving the market

The rhetoric surrounding the property crisis has taken what many might consider a predictable turn in recent weeks. As is often the case in a situation such as this, lines get drawn and sides taken.

And so, it now seems that one must either be on the side of the “first-time buyer” or on the side of the “renter”, but not both.

We have seen this all before so many times and the outcome, unfortunately, is largely predictable. In the late 1990s as the economy recovered, the housing market struggled to keep pace with demand.

The government of the day introduced measures aimed at supporting first-time buyers, to the detriment of investors. The result was a rapid increase in rents. We can’t keep making the same mistakes.

There is little doubt that the market is again struggling to keep pace with demand and the result is a shortage of houses for first-time buyers. But there is also a chronic shortage of property available for those seeking to rent.

Rather than labelling PRS investors as 'cuckoos', we should welcome them as part of the solution to the shortage of rental properties

In recent weeks, we have started to hear references to “cuckoo funds”. As the name implies these funds are accused of stealing property from under the noses of first-time buyers. Private Rental Sector (PRS) funds as they are less pejoratively known are backed by institutional investors such as pension funds.

As is often the case when something is said, or better still written, it is treated as gospel. So, before we are awash with “cuckoo” stories, it is worth looking at the facts.

Firstly, we don’t have a housing crisis, we have an accommodation crisis. The distinction is important. Calling it a housing crisis implies that we simply need to build more houses. While that, in many ways, is true it is simplistic. We need to build more homes of all types for everybody.

Government policy, with some success, has front-loaded the construction of starter homes for first-time buyers. However, our housing market requires a lot more than just homes for first time buyers.

Properties available to rent

Notably, the number of properties available to rent has fallen in recent years. Private investors are leaving the buy-to-let market. For every investor buying into the market, two are exiting. The volume of investors in the new homes sector is negligible. In 2018, only 91 mortgages were drawn down for investment in the Irish new homes sector.

As a result, the lettings market has effectively lost thousands of units in recent years. Rents in our key urban centres are now higher than those achieved at the height of the Celtic Tiger. This is clearly not sustainable; we need a growing rather than contracting stock of rental property.

Approximately 3,000 units are available to rent on any given day in the entire country. Eight years ago, the figure was 19,000.

Rather than labelling PRS investors as “cuckoos”, we should welcome them as part of the solution to the shortage of rental properties. We should also not exaggerate their role in the market.

PRS is a relatively new concept in the Irish market. The first PRS investments began in 2013. Investment has grown quickly with a record €1.25 billion invested in 2,950 units last year. Approximately, 62 per cent or 1,800 of the properties bought by the funds were already built and 90 per cent were already occupied.

But the reality is that investment by PRS funds is simply not sufficient to counteract the net outflow of private buy-to-let investors from the market, and so the rental crisis worsens.

Part of the solution

Indeed, without their involvement, there will be a lot less development in the coming years, as it will not be viable. However, we should be cognisant that PRS is only that, a part of the solution. Private landlords are also an essential ingredient in the mix.

If we are to halt the outflow of private landlords, it is essential that we offer them a more equitable tax treatment, particularly given the very favourable tax structure offered to other investment vehicles.

Simply removing PRSI and USC from rental income in the first instance would have a positive impact on yields.

The lack of accommodation is leading to significant hardship for many people and indeed poses a threat to our future competitiveness and success.

As we now approach full employment, our economy will be increasingly dependent on migration, if we are to grow our labour force. As such we need an expanding stock of homes to buy but critically also homes to rent.

Marian Finnegan is chief economist with the Sherry FitzGerald group