Pat Farrell: 'Institutional investment is vital to the future of our economy and society'
Nobody is in any doubt of the scale of the housing need in this country, and almost everyone agrees that the solution to the housing crisis will primarily be based on an increase in supply. Institutional investors, despite some suggestions to the contrary, are vital to the delivery of this much-needed significant additional housing. These investors are also vital to the delivery of other critical infrastructure.
In recent years, institutional capital has become a significant component of both the global and Irish real estate markets, providing stable long-term funding to enable sustained delivery of the required supply of critical infrastructure, housing and workplaces. In fact, institutional capital now accounts for 51pc of all institutional and private investment in property in Ireland.
Investment in Irish real estate has fundamentally changed from the Celtic Tiger era. We have moved from a speculative, debt-based funding model to the current model enabled by long-term institutional capital. This has been a necessary shift and will ensure a more stable property market into the future, which is in the best interests of the country.
Irish Institutional Property (IIP), launched recently, is the voice of the sector. Our members currently have €11bn of assets under management in Ireland.
They have also collectively built over 5,500 new homes since 2015, provided 1.3 million square feet of commercial office space since 2016, 127,000 square feet of retail space in the same period, and more than 600,000 square feet of hospitality space in the past year alone.
This sets the scene for the years to come - and demonstrates how we can help deliver the goals set out in Ireland 2040, the Government's national development plan. While the State will contribute €116bn in capital investment to deliver this plan, we estimate that institutional and private investors will contribute €322bn. That means private capital will be providing almost three quarters of the investment needed to deliver what Ireland requires, in terms of new and refurbished housing, offices, retail, hospitality and other important infrastructure.
In other words, our sector is vital to the future of our economy and society, as it will provide the funding needed to help our country progress.
Of course, we have our critics. For example, some mistakenly describe institutional investors as 'cuckoo funds' that purchase properties, particularly apartments, to the exclusion of first-time buyers. The truth is more complicated than that. The current economics of apartment building and funding in Ireland mean that without institutional investors to commit to funding and purchasing these apartment units, many of these schemes would simply not get built.
By making these investments, far from depriving people of homes, we are helping deliver significant additional supply for the rental market, which is under significant pressure. IIP fully supports a strong market for apartments for purchase and many of our members are actively developing for this market as well. However, the presence of income caps on mortgages, coupled with the fact that apartment construction costs are very high relative to house building, means that actual sales at viable prices are very slow.
The agenda for all stakeholders must focus on helping solve this challenge to have a stronger development pipeline of for-sale apartments, alongside apartments for rent.
It has been said that the recent significant increase in institutional capital committed to boosting rental supply is responsible for driving up rents. This again is not the case.
Recent research published by Davy shows that landlords of scale with over 100 tenancies account for only 5pc of tenancies in the private rented sector.
The vast majority of rental stock continues to be owned by traditional buy-to-let investors and small-scale landlords. The product we offer represents good value for money, is professionally managed and benchmarks alongside the best properties available globally. Those seeking high-quality, well-managed rental accommodation close to workplaces, public transport and social amenities are voting with their feet as demand for our proposition continues to strengthen.
As Minister for Finance Paschal Donohoe said in the Dáil recently: "On a national level, institutional investors remain a small minority of landlords. However, such investors do play an increasingly important role in the private rented sector."
We agree with the Minister when he said institutional investment is likely to be the driving force behind a recent increase in the number of apartment units granted planning permission in Dublin.
The Minister's views are supported by the Davy research, which highlights the benefits institutional investment can bring. It states that in relation to apartments, "forward sales for institutional investors de-risk such developments - helping to unlock funding". It goes on to quote a recent Savills/LSE study which found that "build-to-rent can increase build-out rates on large urban sites by three to five times".
Further to this, institutional investment "improves regulatory and taxation compliance". Crucially, the Davy research suggests institutional investment is "typically financed through equity rather than bank funding", and therefore "reduces the risks to financial stability and potentially dampens residential property cycles".
One of the reasons why myths exist around our role in the sector is the absence, up to now, of a representative voice. The creation of IIP addresses that.
Another reason is the lack of data and evidence around the role institutional investment plays in the market. That is why one of the first tasks of our new organisation is to commission research into the positive role institutional investors are playing in the Irish property sector. This work will hopefully correct some of the inaccuracies relating to institutional investment, and highlight the important benefits it brings to the property market and country in general.
Pat Farrell is chief executive of Irish Institutional Property