While the combination of inflation, rising interest rates and increased construction costs is seeing a more conservative approach to risk, pricing and transactions from funders and investors, the appetite for Dublin’s private rented sector (PRS) market remains relatively robust.
That’s according to the latest Dublin residential investment report from agent Hooke & MacDonald, which finds that notwithstanding the current uncertain economic environment, a total of €1.25 billion was spent by investors across 22 main PRS transactions in the first three quarters of this year. Some €232 million was invested in the first quarter while the second and third quarters saw sums of €437 million and €597 million being spent respectively.
The PRS sector continued to be the top investment asset class in Dublin and the greater Dublin area (GDA) in the first three quarters of 2022, capturing 37 per cent of the total €3.5 billion investment spend, followed by offices at 30 per cent and industrial at 12.5 per cent.
However, in the third quarter of the year, this order was reversed – with offices taking the lead with 43 per cent of the total €1.7 billion spend, driven to a large extent by the €500 million paid by Blackstone for Salesforce’s newly developed European headquarters in Dublin’s north docklands. As a result, the PRS’s market share fell to 36 per cent during this period while the industrial and logistics sector fell back to 4 per cent. Investment in retail fell to 1 per cent in the first three quarters of 2022, compared with 6 per cent in the whole of 2021.
The most valuable PRS sale so far in 2022, meanwhile, took place in the third quarter and saw US-headquartered property giant Greystar paying €123.5 million on the forward purchase of 242 apartments being developed by Brian M Durkan Ltd at Brickfield Square in Crumlin, Dublin 12. The acquisition, which was supported by debt financing from AIB, represents Greystar’s fourth transaction in the capital since its arrival in the Irish PRS market in 2019.
Commenting on the completion of the deal, Brian Durkan said: “The forward purchase of this development enabled the funding and delivery of these much-needed units to proceed. Indeed, without the forward sale it is unlikely in the current environment, that this scheme would have gone ahead.”
Greystar, whose Irish operations are headed up by Claire Solon, currently owns and operates a portfolio of 610 apartments, with 342 of these located at the Griffith Wood development in Marino and 268 units situated in the Quayside Quarter at Dublin Landings in the city’s north docklands.
Earlier this year, Greystar paid €30 million for Dalguise House near the south Dublin village of Monkstown. While the property and its nine-acre site came with planning permission for a 290-unit residential scheme, the development had already been the subject of judicial review proceedings being led by the Monkstown Road Residents Association at the time of its sale. Greystar has this week applied for permission for a larger development comprising 491 apartments. The proposed scheme is expected to cost in the region of €190 million to deliver, bringing Greystar’s overall outlay on the project to €220 million.
Pointing to the prospects for the wider PRS market in Dublin, Hooke & MacDonald’s latest report into the sector claims that there is still “considerable interest” among investors despite a series of challenges which have emerged over the past six months.
Among the factors which the report’s authors say are having “critical consequences” for higher-density apartment developments are “increased costs of construction, beyond what has been seen before, and inflation rate increases and interest rate increases with a more conservative approach to risk, pricing and transactions from funders and investors”.
They add: “The consequences are that viability has been further eroded as builders need higher prices to pay for the construction of the same apartments and investors are not able to pay the same price as their returns are being impacted by higher finance costs.
“While the majority of apartment projects outside of Dublin were already unviable, many new projects in Dublin no longer make sense financially. The results of this will have devastating medium- to long-term negative consequences on housing supply for owner-occupiers and renters in the private, social and affordable sectors. Many planning permissions in place cannot be delivered.”
Referring to recent reports that the State’s Land Development Agency (LDA) may take over apartment planning permissions that are not being developed using normal, private commercial funding, Hooke & MacDonald say: “It is totally unsustainable and burdensome for the State and taxpayers to replace all or most private funding and investment.”
Hooke & MacDonald expect to see a full-year total of 26,500 units delivered in 2022
Looking at the number of homes completed in the capital and beyond in the first three quarters of 2022, the report finds that 7,505 houses and apartments were built in Dublin while 4,914 were built nationally.
Some 2,653 new homes were commenced in the capital in the third quarter, according to figures released by the Department of Housing, with 2,033 of these being apartments and 581 estate houses, down 22 per cent year on year. Nationally, there were 2,211 homes commenced in September, down 31 per cent, with apartment commencements down almost 30 per cent and falling.
Taking together the number of completed homes with those commenced in the third or final quarter, Hooke & MacDonald expect to see a full-year total of 26,500 units delivered in 2022. While that figure represents a 30 per cent increase on the 20,443 built in 2021, the recent fall-off in commencements puts the prospect for further increases in completions in 2023 and 2024 at risk, the report states.
Commenting on these low home commencement and completion rates, the report’s authors say that a “lack of viability” is preventing hundreds of sites throughout the country from being developed.
On this, they add: “It is disingenuous for certain politicians and commentators to state that developers are not availing of planning permissions when, unless construction delivery viability is addressed in a meaningful way, lack of funding is preventing these projects from commencing. When developers access funding from forward sales of apartments to pension funds, some parties criticise them even though this is the only avenue in most cases for these developments to be built.”