Thursday 22 March 2018

The right moves: Forward-funding is the key to delivering supply of new housing quickly

Paul McNeive
Paul McNeive

Paul McNeive

Despite ever increasing demand for accommodation to rent, this year's likely completions of approximately 19,000 new units will be nowhere near enough to ease the upward pressure on rents. The lack of development finance is probably the biggest obstacle to increasing supply to the 30,000 or so new units we need every year in the medium term. However, the emergence of 'forward-funding' deals is one great way to stimulate supply, on a large scale.

Irish Residential Properties REIT plc (Ires), recently announced a deal to forward-purchase 91 houses and eight apartments at Hansfield Wood, Ongar Road, Dublin 15 and I met Philip O'Sullivan, Chief Economist with Investec Bank, the Ires brokers, to discuss the forward-funding model.

Ires Reit has paid €7m for the 4.5 acre site and is paying Garlandbrook Ltd - the developer - and Newline Homes Ltd - the contractor - €23m to build the units. Garlandbrook has already sold 325 houses in phase one at Hansfield Wood. O'Sullivan described the transaction as a "win-win" and pointed out that the key to this type of deal is bridging the development financing gap which the 'pillar banks' are still not meeting. "Banks are reluctant to lend over 50pc of residential development costs, despite big improvements in their capital base," he told me. They will lend at 6 to 7pc, but the loan-to-value (LTV) restriction rules out many developers, whose capital base is only recovering after the recession.

The beauty of a forward-funding deal is that it practically removes all risk for the developer/contractor, who has a signed contract for everything he is building. This allows the developer to secure financing from a range of lenders, at better rates.

O'Sullivan wouldn't be drawn on the question of whether or not Ires had also supplied the development funding (as well as buying the units) in the Hansfield deal, but he agreed that they could do this, too, on other sites.

The benefits for Ires see it achieving a large number of units in one deal, and without having to compete to buy them, as they would if they had been placed for sale on the open market. As O'Sullivan told me, the Hansfield site meets all the Ires requirements of proximity to transport, employment and schools. There is also a "quick transition" from writing the cheque to receiving income, in that houses will be available for letting from year end.

Another advantage is that producing new units sees landlords securing full market rents, as distinct from capped rents where they buy existing schemes. With 2,449 units let, and scope to build 600 more, Ires is already a significant part of the supply equation and I can see these forward-funding deals becoming more common.

• On Track For Big Profits

There are no sure bets in life, but the closest you will get to one in property is to buy before new infrastructure arrives. Hopefully, readers of this column took my advice in 2014 to buy property along the route of the new Luas line to Broombridge, and particularly accessible to the new DIT college at Grangegorman. The line will open next week and an expert in the area, Vincent Mullen of Douglas Newman Good confirmed that there have been big increases in the values of commercial and residential properties.

Examples he gave me included, 15 Bannow Road Cabra, a three-bedroom terraced house, which was sold in 2014 for €183,000. Number 51 Bannow Road, a similar house, was sold last September for €325,000 - that's a 77pc increase in three years.

Pre-'63 investment properties in areas such as the North Circular Road and the Old Cabra Road that were making approximately €400,000 are now fetching twice that. A largely-vacant investment property comprising three apartments over two shops at Grangegorman Lower, was put on the market last year at €650,000 and then withdrawn by the vendor. It's back on the market now, and already under offer at €860,000.

As Vincent Mullen put it, it's hard to think of anywhere in the country where there's more activity, between the Luas line, the new DIT campus and the re-developments of Phibsborough Shopping Centre and Dalymount Park. My experience is that there is usually another increase in values when the line opens and people start using the new stations, which will be added to increasing demand for residential units from more students at DIT. However, every property is different, and involves risk, and you must take independent expert advice.

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