Costs of apartment building not viable - AIB finds
Institutional investors – so-called cuckoo funds – are crucial for the development of large-scale apartment blocks, which otherwise are not financially viable, according to new research by AIB.
The rapid influx of a new class of large-scale residential landlords, who buy entire housing blocks, had – over the past year in particular – led to fears traditional owner occupiers are being squeezed out of the market just as new supply has begun to come on stream.
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However, AIB’s Head of Real Estate Research Pat O’Sullivan, in a new report, said that the viability of apartment construction is challenging in many parts of Dublin, and unaffordable beyond the capital. For those reasons, institutional buyers are the driving force behind large-scale standalone apartment blocks actually being built.
Citing Society of Chartered Surveyors Ireland analysis, Mr O’Sullivan said the costs of apartment development ranged from €400,000 per unit (excluding VAT) in a suburban location to €578,000 (excluding VAT) per unit in an urban location.
“This rules out the ability of the first-time buyer market to afford these type of apartments,” he said.
In the main, the only prospective buyers of suburban and urban apartment blocks are institutional buyers, in particular the investment, pension and property funds which are seeking to acquire apartment blocks for the private rented sector (PRS).
At the same time, the report said rent levels that have been driven up as a result of under-supply are probably not sustainable outside prime locations.
“Rents for prime Private Rental Sector properties in the very best locations are affordable by higher-income cohorts, but it does indicate that the high levels of rents outside the prime locations are probably not sustainable,” Mr O’Sullivan said.