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Foreign investors have been made scapegoats for Ireland's housing crisis

Institutions are better suited to private rentals than small buy-to-let investors

Institutional investors have been attracted by high rents, not vice versa. Photograph: Chris Ratcliffe/Bloomberg

A convenient scapegoat has been found to blame for Ireland’s dysfunctional housing market; namely foreign institutional investors, accused of driving up rents and outbidding first-time buyers.

These accusations are false. First, rents had exceeded their Celtic Tiger era peaks long before institutional investment stepped up in 2018. Notably, average rents rose by 8.5 per cent in Dublin in the 12 months to March 2019, with small landlords clearly circumventing the 4 per cent regulatory threshold by fair means or foul. The largest institutional player in the Irish residential market Ires Reit increased average rents by 3.7 per cent last year.

The debate on institutional investment into the sector has been skewed by an assumption it must mean less investment in social and affordable housing

As is often the case, commentators have confused the chicken with the egg. Institutional investors have been attracted by high rents, part of the natural supply response, not vice versa. Without such investment, new apartment blocks would not have been built – exacerbating the problem. It would be far more worrying if fresh investment had not been attracted to Ireland by high rents.

Second, the assertion that institutions are crowding out first-time buyers can be refuted. There were €1 billion of large residential transactions in 2018, close to 2,500 units, paling in comparison to 18,000 housing completions and 55,000 transactions. The majority of new homes are sold to owner-occupiers, with relatively few available to meet demand for rental accommodation.


Wrong narrative

Additional demand from institutional investors has been more than offset by the decline in cash buyers. The number of non-mortgage-financed purchases has actually been declining since 2015, improving the likelihood of first-time buyers securing a property, contrary to the popular narrative.

The debate on institutional investment into the private rented sector has been skewed by an apparent assumption it must mean less investment in social and affordable housing. This is not the case. These are not mutually exclusive objectives but can only be realised gradually as capacity within the construction sector to build homes slowly expands.

Most sensible commentators accept the pressing need to expand the private rented sector given demographic pressures but also a shift in preferences among some groups away from home ownership. This is most evident in Dublin, where the emergence of a largely European, transient workforce in the ICT sector has accentuated demand for rental accommodation. Institutional investment can also provide a more professionalised product for such groups that smaller investors cannot provide.

The question is who will fund this expansion. Ireland’s experience during the Celtic Tiger era provides a cautionary tale. Interest-only mortgages and section 23 tax reliefs encouraged small buy-to-let investors, overly focused on short-term returns, despite rental yields often below the rate of inflation.

Long-term arrears

The legacy of that period is still evident today, with 12,000 buy-to-let mortgage accounts still in long-term arrears – on average €137,000 behind on their payments – a significant part of the cost of bailing out the banking system. Many buy-to-let investors have sold up as they have finally moved out of negative equity. Like it or not, they will probably continue to do so because of rent controls, as has typically been the case in US cities where similar measures have been put in place.

So it is therefore neither desirable, nor likely, that the required expansion of private rented accommodation will be led by small buy-to-let investors. That leaves only one alternative.

Crucially, institutional investment is now bringing sorely needed equity to help stimulate housing supply. A decade on from the financial crisis, many homebuilders’ finances remain impaired or they may still be resolving their relationship with Nama. These companies will need to attract equity to expand their operations.

Institutional investment is now bringing sorely needed equity to help stimulate housing supply

In the case of Cairn Homes and Glenveagh Properties, now listed on the Iseq index, public capital markets have been the source of such finance. Institutional investment into private rented accommodation provides a further channel, de-risking new developments through forward funding or forward sales, improving viability.

Housing supply

It is now recognised that large-scale housing investment can speed up housing supply. A London School of Economics study found build-out rates on large urban sites can be increased by three to five times for build-to-rent product. A review by Oliver Letwin for the UK treasury came to similar conclusions, finding slow development reflected a lack of diversity in the type and tenure of homes on offer and the limited ability of the market to absorb housing developments solely targeted at the build-to-sell market.

Of course, the pick-up in homebuilding is still in its infancy. Planning permissions were granted for almost 10,000 apartments in 2018, five times the 2,000 completed. Capacity constraints within construction will hold back the recovery. In many instances, developers may not be able to demonstrate a sufficient track record of delivery to secure funding from institutional capital. Nonetheless, it is clear that with demand for rental accommodation so strong and the buy-to-let sector in structural decline, institutional investment must be part of the solution.

Conall Mac Coille is an economist with Davy