Sunday 20 August 2017

Rent caps are set to trigger flight of buy-to-let investors

The Government's new rent cap regulations may drive investors away from the residential market
The Government's new rent cap regulations may drive investors away from the residential market

Donal Buckley and Ronald Quinlan

The Government's introduction of rent control measures could prove to be the trigger for a flight of buy-to-let investors from the residential to commercial property sector according to Richard O'Neill, head of commercial auctions at Allsop Ireland.

Speaking to the Irish Independent ahead of the publication next week of Allsop Ireland's Commercial Auction Report for 2016, Mr O'Neill said the performance of the residential rental market this year would depend on the "effect and interpretation" of the rent cap changes introduced by Housing Minister Simon Coveney.

"The lack of rental growth prospects may negatively impact on the yields investors are prepared to pay for tenanted investments," he said.

Under the new regulations, landlords are limited to 4pc increases each year where rents are both above the national average and have seen annual rent inflation of at least 7pc for four of the last six quarters. While Dublin and Cork city were the only places designated as rent-pressure zones following the scheme's introduction before Christmas, Mr Coveney said he expected it would be extended to as many as 16 areas within the commuter counties of Wicklow, Kildare and Meath, and parts of Cork, Galway, Limerick and Waterford cities.

With vacant properties unaffected by the new rent caps in the first year though, Allsop's Richard O'Neill believes there will still be potential for growth in the demand for this stock "given the likelihood of continued interest from the non-profit sector and the fact that these developments can provide the investor with market-value rents".

Referring to the potential switch of residential investors to commercial investment, he noted that a similar move was seen in the UK after the increase in stamp duty on buy-to-let purchases.

He said: "There, traditional residential buy-to-let investors turned their backs on the sector and moved into commercial property to avoid crippling stamp duty levies.

"On foot of this, our London Commercial Auctions have just recorded one of their strongest years in a decade with £610m raised - a significant figure when compared against a 10-year annual average of £450m. It will be interesting to see if there is a similar reaction here, especially in the €200,000-€500,000 value band, for example," Mr O'Neill added.

In its annual residential property review published yesterday, the Society of Chartered Surveyors Ireland (SCSI) noted the consensus among its members that rent caps were the "highest negative measure that will impact upon the supply in the rental market".

Ronan O'Hara, chair of the SCSI's Residential Agency Group, said while the proposals to extend the designated rent-pressure zones to more towns might be well-intentioned, it was also shortsighted.

"If this goes ahead, it will discourage landlord investment in the rental market. Similarly, anyone involved in buy-to-let properties will exit the market and it's likely a lot of owner occupiers will purchase them. That might be good news for them but not for those renting as rents will continue to rise. The Government may be putting out one fire, but they are simply starting another," he said.

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