Business

Wednesday 16 October 2019

Claws off our houses: can we curb the vultures?

We welcomed big global investors during the bust but now the UN wants them reined in by law - and fast. It's a time for cool heads, writes Richard Curran

Public anger: a sit-down protest in a ‘Raise the Roof’ rally outside Government Buildings in Dublin last October. Photo by Reuters
Public anger: a sit-down protest in a ‘Raise the Roof’ rally outside Government Buildings in Dublin last October. Photo by Reuters
Rapporteur: Farha has criticised the Irish Government
Richard Curran
Richard Curran

Richard Curran

International property investors welcomed into Ireland during the crash are now shaping the future of the housing market.

The whole sector has become dependent on their money, their land banks and their expertise.

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This week, a UN report criticised several governments, including ours, for giving private equity funds too free a rein when it comes to housing.

Greeted as part of the solution to the fallout of the property crash a few years ago, these large international investment funds are increasingly seen as part of the problem when it comes to repossessions and rising rents.

UN special rapporteur Leilani Farha wrote to the Irish Government, along with governments in five other countries, to accuse them of facilitating the "financialisation of housing" through preferential tax laws and weak tenant protections.

Farha's big issue is with the way private equity giants like Blackstone have gobbled up thousands of houses in parts of the US and other markets, and then rented them out at high prices. Blackstone refutes the claims in the report and says it is helping to develop a rental market in US cities.

Back in 2010 and 2011, hundreds of thousands of homes were repossessed in the US as people hit by the financial crash could not afford to meet the repayments. Between 2011 and 2017, some of the world's largest private equity groups, hedge funds and other large investors, spent $36bn on more than 200,000 homes in struggling markets across the US.

In one Atlanta postcode they bought 90pc of the 7,500 homes sold between January 2011 and June 2012. Big funds set up these businesses to cash in on the race to provide rented homes to families who could no longer afford to buy a house of their own.

Blackstone and Starwood merged their two home rental companies in 2017 and together rent out 82,000 single-family homes across America. The big names mentioned in the burgeoning home rental empires of the US like Blackstone, Colony and Starwood are familiar in Ireland, even if they are not necessarily involved in the market activities here.

In Ireland, following the crash, fewer people can get a mortgage or save the deposit required to buy their own home, so there is a massive shift towards long-term renting.

This shift presents similar opportunities for investment funds, whether they are from Wall Street or big Irish stock market funds with lots of different shareholders.

Private equity and vulture funds have played a big role in reshaping the Irish property sector after the crash. They were invited in with open arms in 2011 because nobody wanted to invest in Irish property.

Irish investors were broke. The banks were broke and wouldn't lend. The Government decided to tempt these funds in with incredibly generous tax incentives. They were treated like 'charities' doing Ireland Inc a favour and they were given a charity-status tax break to match.

This wasn't such a big problem as long as they were involved in developing commercial buildings like office blocks or hotels. After all, does it really matter who owns an office block or a building?

Knock-down prices

The funds fed voraciously by snapping up commercial properties at knock-down prices and selling them quite quickly at huge profits, while paying very little tax.

The plan worked. Nama paid down its €32bn of borrowing early. Ireland was seen as open for business. Thousands of construction positions and other jobs were created. Some of the funds moved on. Others looked for the next opportunity.

Housing is not the same as office blocks and hotels. It does matter who owns the housing stock in a country or a city. It is a social issue as much as a financial one. It affects quality of life, community and economic competitiveness.

A different kind of investment fund has emerged - one which seeks to buy or develop houses and apartments and then rent them out.

Not all property investment funds in Ireland are the same. Some are in it for the long haul and plan to deliver consistent returns to pension fund shareholders.

Locals are priced out

Some are successfully building entire rental villages and communities in parts of big cities like London. But locals are often priced out.

After feeding off the crash and bagging millions in profits on commercial sites, some funds see buy-to-rent as the next big opportunity. That may mean building apartments to sell as a block for rent, or owning and renting them out themselves.

Funds like Kennedy Wilson, Lone Star, Hines and Starwood have all committed hundreds of millions to build-to-rent projects in Ireland.

Irrespective of their approach, their financial power is significant in a market where more people are forced to rent - there aren't enough houses being built and rental regulation remains weak.

The difficulty that Farha has with the policies of several governments, including ours, is that housing is different. She says we have provided preferential tax rates to corporate landlords. This is correct.

She says the Government has stood over weak tenant protections. Compared to some continental European countries, this also seems justified.

She has gone as far as reminding countries they have human rights obligations to regulate investment in residential real estate so that it supports the right to adequate housing and does not undermine it. "Governments seem not to have made the connection that this new form of finance is taking place in an area that is governed by international human rights law, which imposes obligations on them."

Firms will do what firms will do. As more big investors turn to the rental market for opportunities, it is up to government policy to restrain them from the worst excesses of what rapacious market-driven forces can unleash.

But the regulation has to be realistic and not counterproductive.

Fixing the housing market will take years. The failure of the Government to tackle the economic and social scourge of massive rents has already done a lot of social damage.

The economic hit will soon follow as firms are put off investing in Ireland because of the exorbitant cost for employees of putting a roof over their head.

Rent control zones have failed miserably. They are only having an impact in areas now when rents are at sky-high levels. Housing Minister Eoghan Murphy made the extraordinary admission this week that rent pressure zones would have to be strengthened because they are contributing in some way to higher inflation.

The big question for the Government is how dependent is the supply of housing on the current status quo enjoyed by these funds. Would they still build and buy if their tax breaks were closed off? If they backed off, who would replace them and build the new homes needed by our growing population?

Would they continue to invest if there were much greater tenant protections and much stronger rent control regulations?

Or could an attempt to introduce a fairer system reverse the little progress being made in the supply of housing?

The funds will argue one thing. Others will argue something else.

With a possible general election getting ever-closer, the Government may be forced to find out.

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