Ireland well on the way to becoming a nation of renters

Around 30pc of the population rents homes - and that figure will only get higher as developers favour the build-to-rent model, says Commercial Property Editor Ronald Quinlan

Growing: The €2bn mixed-use development at Cherrywood in south Dublin shows the potential of the PRS market

Ronald Quinlan

'You're not going to turn the Irish into Germans overnight." That's what Cairn Homes CEO Michael Stanley told me last September when I asked him for his view on the future balance between home ownership and long-term rental in Ireland.

But while Mr Stanley may believe Irish people's traditional relationship with the roof over their heads will remain unchanged for the foreseeable future, in responding to another question on the current concentration by developers on the delivery of offices, he offered up one important reason why it won't.

Cherrywood development

He said: "One of the challenges with a house builder is that you've got to take the risk that if you're building 300 homes, you've got to find 300 customers when you're finished, or you've got to find 100 individual customers per year.

"I think that's the thing people don't fully appreciate. The risk level in house-building is higher. That's why funders or banks that support builders are understandably much more nervous."

What makes funders and banks far less nervous is the build-to-rent (BTR) model in which large-scale residential developments, typically apartments, are delivered to the market in one fell swoop rather than in phases, and to one purchaser.

In the last 12 months alone, hundreds of new apartments distributed across several Dublin schemes have been acquired by institutional investors with a view to offering them to the rental market.

The purchase last May by Irish Life Investment Managers (ILIM) of all 262 apartments at Park Developments' Fernbank scheme in Churchtown in south Dublin arguably put the changing nature of the residential property market into sharpest relief.

Some 1,000 people had expressed their interest in buying homes at the south Dublin scheme before ILIM snapped it up in its entirety for €120m.

Elsewhere in the capital, Ireland's biggest landlord, Ires Reit effectively removed 128 apartments at Hampton Wood Square in Finglas from the owner-occupier market, paying €40m for the portfolio in May.

Last June, US-headquartered real estate firm Kennedy Wilson and joint venture partners AXA Investment Managers acquired 274 of the 507 completed apartments and a four-acre site with capacity for a further 263 apartments at the exclusive Grange development on the Stillorgan Road in Dublin for €160m.

In the same month, Cairn Homes secured €101m from the sale to Carysfort Capital of all 120 apartments and two retail units at 6 Hanover Quay in the Dublin Docklands.

In October, European real estate investor Tristan Capital Partners entered into a €140m deal with Twinlite to forward purchase all 372 apartments the developer is building at Clongriffin in Dublin 13.

Tristan and its Irish operating partners, SW3 Capital, entered Dublin's nascent PRS market in 2016, paying €72.5m to acquire all 197 apartments at the Neptune Building at the Cosgrave Property Group's Honeypark scheme on the site of the former Dun Laoghaire Golf Club in south Dublin.

Nearby, Tristan Capital and SW3 own 185 apartments at Dwyer Nolan Developments' Elmfield scheme in Leopardstown. They bought the portfolio in two phases for €68.5m.

Earlier this month, the undoubted potential of the country's PRS market was in evidence with Hines's commencement of construction of 1,269 rental apartments within the town centre of its €2bn mixed-use development at Cherrywood in south Dublin. Clearly conscious of the opportunity the Irish market represents, Hines and its Dutch partners, APG Asset Management, have now signalled their intention to invest up to €1.1bn on delivering a total of 3,000 BTR apartments across Dublin and the Greater Dublin Area (GDA).

Hines is not alone in terms of its ambition for the Irish market. Following its acquisition of the Grange apartments, Kennedy Wilson restated its intention to grow its Irish PRS portfolio to 5,000 units.

But while this year's build-to-rent deal activity is worth noting, it will pale into relative insignificance in the coming years as the sector comes to account for a far greater share of our residential property market. As it stands, CBRE estimates that some €5bn in international capital is targeting acquisitions, primarily in Dublin.

There are certain obstacles which experts in the field believe the Government may need to address however before the true potential of BTR is realised here. In a recent report on the sector, international construction consultancy Linesight identified several such barriers it believes are acting as a disincentive to builders who may be considering the delivery of dedicated rental housing stock.

Arguably the most notable of these is the reluctance of developers to designate new schemes as build-to-rent under the planning guidelines, due to what Linesight refers to as the "restrictive requirement" for such developments to be held for at least 15 years before being sold.

Also noteworthy was the report's finding that while build-to-rent units can be delivered at a similar cost to those being constructed for the build-to-sell (BTS) market, a premium cost is attached when it comes to offering flexibility for future conversion from BTR to BTS.

Notwithstanding those barriers, there are compelling reasons for investors to deploy capital in Ireland's build-to-rent sector.

Quite apart from the role such investors might play in helping the Government meet its oft-stated target of ramping up the construction of new homes to between 25,000 and 35,000 units annually over the next 10 years, the international funds and developers whom they finance are well-placed to deliver thousands of apartments within a short timeframe to help address the current housing crisis in Dublin, Cork and other of the country's main cities.

The case for the BTR model is further strengthened by the findings of a CBRE report published in October 2017. It noted that while Ireland has been traditionally associated with high levels of home ownership, the proportion of renters is growing. In 2016 there were 497,111 households renting, up 4.7pc from 2011, bringing the proportion of renters to nearly 30pc of the population.

Meanwhile, an analysis of the nature of occupancy in Ireland by age group showed that younger sections of the population have a higher propensity to rent, with around 65pc of the Dublin population aged 25-39 renting from a landlord. Only 26pc of people within the same age segment own their home, with the remainder renting from a local authority.

In the case of Dublin, Cork and other of the country's main cities, the private rented sector will have an increasingly important role to play in meeting the short to medium-term accommodation needs of people employed in the financial services and technology sectors.

In a recent interview with the Irish Independent, the managing director of the Ballymore Group, John Mulryan, suggested that the delivery of PRS accommodation in Dublin will need to grow substantially to comprise up to half of the new builds in the city centre, if the needs of business and the wider economy and society are to be met.

He said: "Building high-quality residential accommodation for people in Dublin is really important, particularly when you look at the economy in terms of the growth of tech businesses. You naturally end up with a more mobile workforce, people who are very happy to live in rental accommodation. There's a huge lack of that in Dublin."

Ballymore made its own entrance to the PRS market in Dublin last October with the launch for sale of 268 apartments at Dublin Landings, the million square foot mixed-use development it is delivering in partnership with Oxley in the Dublin Docklands. The apartments at Dublin Landings are expected to command a premium once they come to the rental market. Two-bed units at Kennedy Wilson's Capital Dock scheme on the south side of the River Liffey are currently being advertised for €3,300 a month.

The BTR model may yet be used however to meet the housing requirements of a far-wider cross section of Irish society judging by the recent arrival on the scene of Urbeo Residential. The company, which is being funded primarily by US investment fund Starwood and to the tune of €60m by the Irish Strategic Investment Fund (Isif), is different to the majority of operators in Ireland's fast-growing BTR sector, in specifically stating its intention to deliver "an element of social and supported tenancies" both in Dublin and other major cities.

There is little doubt that the Government is supportive of the growth of BTR generally.

Arguably, the most important statement of intent in this regard was the decision by Finance Minister Paschal Donohoe in last October's Budget not to increase the rate of stamp duty on the purchase of apartment blocks by institutional investors from its current level of 2pc to 6pc.

While the prospect of such a hike had been speculated on within the property industry both here and overseas for weeks in advance, the Finance Minister's laissez-faire approach to the issue sent a clear invitation to the international funds eyeing up opportunities in the Irish market.

When one considers the welcome being afforded to the proponents of BTR against the obstacle the Central Bank's stringent mortgage lending rules present to prospective home buyers, it's plain to see that we may yet end up becoming more German than the Germans themselves.