Monday 23 October 2017

'At some point you have to get out and build - that is the only solution'

Since setting up in 2014, IRES Reit has become the biggest private residential landlord in the country, and its chief executive says he wants to help fix the national housing crisis, writes Peter Flanagan

‘We are the exact opposite of vulture funds. In terms of outlook, we take an infinite view of apartments,’ says David Ehrlich
‘We are the exact opposite of vulture funds. In terms of outlook, we take an infinite view of apartments,’ says David Ehrlich

For a man who is arguably the most powerful man in the Irish property business, David Ehrlich does not come across as a Master of the Universe.

The soft-spoken head of IRES Reit resembles more the man who works in the background - the "guy behind the guy".

Considering he has been one of the pre-eminent property lawyers in Canada for years, and a top advisor to the ceo of Canada's gigantic landlord CapReit, that perception is not surprising.

However, since 2014, Mr Ehrlich has very much been 'The Guy'. As chief executive of IRES, Mr Ehrlich runs a company that in the space of barely two years has become the biggest residential landlord in the country.

The scale of IRES is hard to grasp. It controls 2,288 apartments around Dublin, and plans to double in size in the years to come. While it has assembled its portfolio largely by buying in bulk from the likes of Nama and other banks trying offload assets, it is now planning to build several hundred apartments at developments it owns in the likes of Sandyford in south Dublin. And if that isn't enough, IRES has the firepower to spend around another €150m on future deals even without raising more cash.

Those sort of figures make Mr Ehrlich one of the elite few who can move the Irish property market with a single decision.

IRES is backed by CapReit, which controls upwards of 27,000 homes across Canada. It was there that the Toronto native made his name as a lawyer immersed in the property sector - so much so that he became known as the "grandfather of the Reit".

While the Reits have been hugely successful in Canada, the UK and elsewhere, it was not until 2013 that the business model became possible in Ireland.

A Reit - short for Real Estate Investment Trust - has emerged as one of the most popular ways to invest in the property market. Traditionally an investor bought a property outright, earned an annual return through renting it out, and then sold it for a profit. That is the plan anyway. However, when the market turns it can be impossible to sell.

The Reit model allows for a listed company, or trust, to buy property. An investor can buy shares in the Reit which can then be sold on with relative ease. The model, which is tax efficient, also requires the trust to payout most of its profits through dividends.

The 2013 Budget passed legislation allowing for Reits in Ireland and it was then that Mr Ehrlich and his team saw their opportunity here.

CapReit believed Ireland was on the rise so it bought 338 units here. However, as a Canadian-focused Reit, there was a limit to how much capital it could put into this country.

"So CapReit was the sponsor of the IRES flotation in April 21014, set up an office here supported by its team in Toronto and people are back and forth constantly from both sides of this business," he says.

IRES has been one of many big players from overseas buying up Irish property, but unlike some others, Mr Ehrlich is at pains to point out that his firm is in Ireland for the long term.

"We are the exact opposite of vulture funds," he claims.

"In terms of outlook, we take an infinite view of apartments. That is what CapReit has done for almost 20 years and the same policy is in place here.

"The quick flip is not our business," he says.

IRES set up at a good time. With a completely dysfunctional housing market, there is scope for big profits. IRES has done well. It made €30.8m last year and has increased rents across its portfolio. It could probably increase rents even more, but that is not what Mr Ehrlich wants.

"In a way, the best thing for us would be to continue to have supply-and-demand imbalance because that avoids competition and keeps occupancy high and rents high, but here is a housing crisis and we want to be part of that solution.

"The only solution is more supply, but it has to be financially viable in order to attract the capital and so forth but with our access to capital and debt, we don't need a fund from the Government. We can move quickly."

"Grand statements about building so many homes are fine, but at some point you have to get out and build," he adds.

By now it is pretty clear that Mr Ehrlich's preferred topic for today is the housing crisis and what IRES can do to help fix it. As a player focused entirely on the rental market, he believes his firm can build a lot of apartments quickly, but makes clear they will be different from what it has bought here so far.

The cheapest way to build a lot of apartments quickly is to build a single block with corridors. That is impossible under current regulations though, which require at least 50pc of apartments to have two sides with windows - known as dual aspect. That, along with other requirements, needs to change, he believes. "We are in a crisis here. And a crisis calls for really looking at the situation from the ground up. It's nice to have grand statements but the reality is you have to start from the bottom.

"The reality is the economics really don't work to build right now. So it has to make economic sense and the most efficient way to build is with a long corridor.

"Our condos in Toronto are built like that. People pay millions of dollars for those apartments and the corridor is like a hotel.

"The cheapest thing to do is build a rectangle with one elevator core in the middle, and the savings are very, very significant.

"Elevator core is a major factor in costs. When you start having cores all over the place you need a lobby to service each of them so its not as grand an entrance as when you put all the lobbies together which tenants like. The real problem is the dual aspect and that has to be looked at. With the requirement of 50pc dual aspect I think there is an admission that it's okay for half the people not to have dual aspect, so it is clearly not required for everybody if that is the case.

"What it means is instead of being able to build a rectangle you have to have all kinds of angles and offshoots to make the dual aspect.

"It is a highly inefficient way of building. Compared to just going straight across. There also has to be space between the buildings so it's not a very good use of land either," he believes.

Housing minister Patrick Coveney is taking submissions on the housing market, but Mr Ehrlich would like to se a working group created to that every aspect of the market can be assessed and brought together. Indeed Mr Ehrlich has met the minister on the problem.

It isn't just building regulations though. There are other ways the system can be improved.

"We have been working with planners in Dun Laoghaire-Rathdown Co Council about building in Sandyford. The planning team is understaffed. Something as small as hiring more planners there would make a significant difference. It's similar with the way compliance with fire regulations is managed - perhaps more staff there could speed up that process. There are a number of small things that together can help quicken the planning and building process, without compromising on quality."

IRES is has plans to build apartments in Dublin at Rockbrook, Bakers' Yard and Beacon South Quarter in Sandyford. That will help get the company up to its target of owning between 4,500 and 5,000 apartments in Ireland. Most of those future purchases though will come from Nama portfolios and private equity sales - something Mr Ehrlich is keen on.

The advantage of coming into a market like Ireland after the Crash is the outsider's perspective. The 65-year-old is clearly staggered at what went on here. He trails off when he thinks of "the money that was lost building some of these complexes".

"I've never seen anything like the building that went on in the Celtic Tiger. We bought units at Elm Park. That development is so overbuilt - that reflects what rent you would have had to get.

"The planners wanted retail everywhere, much of which will never be rented. Developers probably knew that but were making so much on apartments they didn't care. What's unusual to me about the Celtic Tiger is that the builders went really overboard not so much on the apartments themselves but other elements and just assumed house prices would go up and up and up."

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