Rents are driven up as shift from home ownership risks pension timebomb
Cuckoo funds have splurged €2bn snapping up thousands of apartments and still have more than €6bn left in their coffers to invest in the housing market, according to a new report.
International investors have piled into property since 2014 as funds have been attracted by record high rents and low investor taxes.
The report, by global real estate adviser CBRE, found €2bn was spent in Ireland by so-called “cuckoo funds” between 2014 and 2018 and these cash-rich investors have a further €6.3bn to spend.
Dublin has now entered Europe’s top markets for the funds.
The scale of the trend is highlighted by figures showing 40pc of commercial property investment here in the first half of the year is now pouring into the residential market. Traditionally commercial property was dominated by the office, retail and industrial sectors.
Experts are now warning the Government is failing to prepare for the long-term effects of the shift to a rental market - including for pensions.
Assistant Professor Orla Hegarty, a housing expert from UCD's School of Architecture, Planning and Environmental Policy, said the State's whole pension system relies on 70pc of people not having to pay housing costs when they retire.
A long-term shift to renting will put more pressure on the pension system, she warned.
Prof Hegarty warned the arrival of huge funds in the market is driving up rents because they are paying above what other buyers can bear.
"Our whole pension system relies on the fact that it used to be that 70pc of people bought their own home and by the time they came to retirement they didn't have to pay any housing costs so their pension just needed to cover their day-to-day expenses," she said.
"If Government policy is to shift into prioritising renting long term and not buying, then there are very significant implications for the economy with the amount of money that will be going offshore and the amount of people who won't have pension provisions."
Ireland has made itself a "very favourable place" for big investors "because we have very good tax benefits for these investors and because we have lower tenancy protections than other places", she said.
Supporters say cuckoo funds - so called because they buy up blocks of rental investments that could otherwise be bought by home owners - will add to the capital's dire housing supply but will eventually help stabilise rents.
But critics say the funds are distorting the market and crowding out would-be home buyers, who are forced to rent or move out of the city.
"With the price being paid for the land for these units we will see high rents and that tends to have an inflationary effect on all the rents in an area," said Prof Hegarty.
She said build-to-rent homes tend to be smaller units, such as studios and one- and two-bedroom apartments, where the return on investment is higher.
"Build-to-rent standards no longer require a mix of larger units, so rental apartments can be built without a crèche, a playground, and less parking," she added.
"They are not family housing, which is needed in the cities.
"Build-to-sell apartment standards are suitable for families."
However, investors are able to spend money faster than traditional developers and drive efficiencies, said Tim MacMahon, head of residential capital markets at CBRE Ireland. That should mean more homes being built, faster.
CBRE, which prepared the research, said changes in Government regulation and population have contributed to the increasing numbers of international investors entering the Irish market.
"We expect there to be further internationalisation and consolidation, as fund managers set up new dedicated pan-European investment vehicles and global capital is increasingly finding its way into the markets," Mr MacMahon said.
The influx of foreign investment into the housing market looks set to continue with CBRE finding there is more than €6.3bn in funds looking to be deployed in the market.
Overall, €52bn was committed to European residential property between 2015-2018.