Real Deal: Oversupply in the capital?
The business of property
Student accommodation - or lack of it, especially in Dublin - has been a topic of conversation for many years. Every August, following the return of many students from their alcohol-infused appreciation of all things sunny (Ibiza), preparing for college becomes the priority and the news outlets are awash with stories that lament the shortage and exorbitant cost of student accommodation.
Historically, this type of accommodation had not been available where it was most needed - on campus or near the colleges. Where supply did exist, it was limited to particular areas like Rathmines, Rathgar and the South Circular Road, which have been synonymous for decades as student hangouts, primarily offering Pre63-type living accommodation.
But recently, this has changed as purpose-built student accommodation has become attractive to the professional investor as an asset class that offers real opportunity.
A number of prominent and substantial new developments are currently under construction in areas such as Dublin's Gardiner Street, Thomas Street and Brunswick Street. These modern, purpose-built structures are a far cry from the digs of old - they comprise of individual, self-contained en-suite bedrooms, with quality communal living quarters, at a cost of roughly €250 per week. An added incentive for the investor with this type of asset is off-season income during summer from short-term tourist lets.
This sector received further attention in recent weeks with the sale of the former Montrose Hotel beside UCD for over €37.6m. The property had been converted to student accommodation in 2014 by English specialist company Ziggurat.
It has now been purchased by Hines, one of the primary funds that have been purchasing distressed residential and commercial stock in volume around the country. This is the biggest purchase to date in Ireland of a fully operational development of its type and because of its proximity to UCD, there should be no difficulty filling its beds.
But Enda McGuane, MD of Winters Property, the largest private operator of PBSA in the country, sounds a note of caution: "Purpose Built Student Accommodation [PBSA] is currently benefiting from the overall shortage of residential accommodation and we advise clients to remember this when conducting development appraisals on sites. You need to carefully consider a site's proximity to a third level institute and the particular student demographic you are targeting, ie., first year, post grad, foreign, when designing a property. This is important for future-proofing incomes, because when construction in the private residential market picks up you will see a drop in demand for PBSA."
He believes that some sites are over-supplied, for example, the new DIT Grangegorman campus that will offer approximately 8,000 bed spaces in its immediate environs. Up to 2,500 of these bed spaces will be provided on campus alone. Yet, once complete, the expected student population will be just 3,000.
While some of the slack may be taken up by students studying at other third-level colleges, demand is likely to fall well short of actual supply, with many students preferring to live closer to their own third-level college.
It is a scenario that has similarities to the residential market which currently has oversupply issues in the wrong locations and under-supply in the areas of greatest demand.
This week the Government increased the number of Rent Control Zones to include Maynooth in Kildare and Cobh, Co Cork, two popular commuter towns for Dublin and Cork cities. According to the Minister, "57pc (186,000) of tenancies nationally are now located in Rents Control Zones". While this will provide some certainty initially for tenants in these locations, the ramifications may be less beneficial for the market in the medium term as investors look elsewhere for returns which are determined by natural market forces.
If we're to believe the rumours, the Government is currently giving serious consideration to introducing incentives to attract landlords back into the residential investment market. Not before time. The incentives anticipated are in the areas of the reintroduction of 100pc tax relief and the abolition of Residential Property Tax for landlords. These moves are necessary now. Some believe though that the result will be higher prices. I disagree. Once access to credit remains controlled, and the Central Bank seem committed to this, then the danger of the market overheating remains limited.
The Government's progress in the delivery of 'rapid build homes' only highlights the fact that the housing shortfall will be solved much more efficiently by the private sector. One only has to look at the recent announcement that three of the five developments of modular homes currently under construction are running behind schedule. Some homeless people will remain in hotel accommodation beyond the target date of July, despite emphatic promises by the Minister to the contrary. I wonder who will be held accountable?
Finally, we are seeing the Government address the core issue - lack of supply.
And so it has come to pass
The dirty deed is done. Britain has invoked Article 50. And the question I'm pondering is who is set to gain from this? The gloves are now off and the hard bargaining begins. The UK will remain in the EU until 2019 at the earliest with many years to follow before trade restrictions will be fully implemented.
Since the vote was taken, UK-based investors in Irish property have all but 'left the building' as they monitor how the situation evolves. And the main Irish property groups have not hosted their usual exhibitions in London this spring.
In the UK, figures recently published confirm that transactions year-on-year are down by up to 20pc in the London area. An additional disincentive was the introduction of the 3pc stamp duty for second properties last April. London is the most-affected area - values have hit a plateau and, in some of the more exclusive areas, are even falling. Yet since 2014, London values had increased by 10pc a year.
It's difficult to assess whether this cooling off can be attributed to Brexit or is a natural adjustment following a prolonged upward movement in values.
In the rest of the UK, values have been less affected with average increases of 5pc experienced over the last 12 months. Areas outside London had experienced lower increases in value over the previous three years.
The UK, like Ireland, is also experiencing a significant shortfall in supply, therefore domestic demand is likely to be the sustaining force over the next 18 months. Closer to home an essential cog in the wheel for our property market will be the retention of an open border between the North and south. One positive is the fact that PM Theresa May alluded to its importance in her 'letter of resignation' to the EU. Based on the initial response from Brussels, it seems the feeling is mutual.
The reintroduction of a hard border would have a negative impact for property both North and south, and would be a backward step, significantly restricting the movement of people and their living options.
Celtic Tiger legacy, SCSI raises new concerns
The Society of Chartered Surveyors Ireland (SCSI) has raised concerns that a further raft of problematic Celtic Tiger developments may yet be to surface, at their annual conference on Friday in Carton House, Co Kildare. The Society confirmed that while high-profile cases like Longboat Quay and Priory Hall had received much of the publicity, many of their members are seeing similar issues with buildings constructed between 2000 and 2008.
The SCSI is calling for the Government to undertake a study identifying high-risk residential buildings, focusing mainly on multi-storey developments, to identify where the spread of fire is a high risk. They are also calling for a mandatory Construction Industry Register of competent contractors to protect consumers in the future against recurring defects. Lessons must be learned from past mistakes. Surely this should be a minimum requirement?
Philip Farrell is a market commentator and property consultant