The Irish real estate market and the law of unintended consequences – there is enough material for a book. The rapid acceleration in PRS (private rental sector) investments – the latest dynamic running through the system – and the associated narrative that so-called “cuckoo funds” are driving first-time buyers out of the market have sparked a national outcry. It has also panicked the government into making politics on the hoof. Earlier this month, a higher 10 percent stamp tax rate was introduced on bulk purchases of homes, apparently in response to a single transaction, the purchase of a housing development in north Dublin by British real estate investor Round Hill Capital.
The influx of these funds – Sherry FitzGerald estimates that PRS funds have invested nearly EUR 7 billion in the Irish property market since 2011, including EUR 3.7 billion since 2018 – is undoubtedly part of a broader global trend. The world is full of cheap money and housing construction offers excellent returns for investors. Dublin is a prime example of the high rents it produces.
But two large domestic political measures inadvertently shaped this dynamic as well. The first concerns reducing risk in the banking sector. The National Asset Management Agency (Nama) was set up after the crash to clean up bank balance sheets of toxic assets. The agency took over 74 billion euros in non-performing real estate loans – albeit at a massive discount – and launched a gigantic auction to recoup their expenses on behalf of the taxpayer.
The sale of Nama was facilitated by government policies that included a capital gains tax (CGT) amnesty for investors and the introduction of new laws to set up real estate investment trusts who bought assets, and of course, extremely favorable tax laws. Oaktree, Kennedy Wilson, Hines, and Ires Reit – the latter is now the largest landlord in the country – were among dozens of funds they participated in.
Hence, institutional investors – and remember, we didn’t have them before 2008 – have been systematically embedded in the country’s rebound from the Nama crash and risk reduction on bank balance sheets.
The then Fine Gael-Labor government feared that without it there would have been no buyers, property prices would have continued to fall, and banks would have to take larger write-downs on non-performing loans (NPLs), which the state might have to pump in more Money.
The next big policy initiative came in the form of changes in planning standards supposedly aimed at encouraging higher density development. This allowed for a larger cluster of apartments on a given site by effectively changing the aspect ratio, reducing the need for parking spaces, and allowing for greater height.
The unintended consequence of this was a reconfiguration of funding for an urban housing estate. Previously, a developer secured funding to gradually expand his program. While this is still the case, the new higher-density rental housing standards require a larger portion of the upfront funding. With banks still recovering from the crash and refusing to lend to developers, foreign mutual funds filled the void.
Most major projects in Dublin are currently being built on the basis of a pre-sale or pre-lease agreement, with the developer being funded by the final buyer or being funded because there is a guaranteed final buyer or tenant. And because the end buyer is a PRS investor, the units bypass the sales market in favor of the rental sector, which is why there is a perception that first-time buyers are being pushed out of the market. This type of procurement now seems like the only game in town.
The Construction Industry Federation (CIF) estimates that mutual funds bought 95 percent of the homes completed in 2019. More recently, they have started buying residential projects, including developing starter homes in Dublin’s commuter belt.
And even if the funds – for whatever reason – were anxious to sell the units to owner-occupiers, the price metrics don’t work. The Society of Chartered Surveyors Ireland (SCSI) estimates the cost of delivering housing in urban Dublin between € 493,000 for a two-bedroom unit in a medium-sized building and € 619,000 for a two-bedroom unit in a high-rise. And so, in the midst of a real estate crisis, we’re getting top-of-the-line luxury properties, many of which remain vacant due to high rents, as well as a lack of affordable units. The same thing happened in London.
Successive Irish governments, perhaps with the aim of increasing property values - as a prerequisite for Nama to get its investments back and banks to stay healthy – have created the current fund momentum. They attracted money here and in some cases created a situation in which developers are increasingly dependent on foreign investment. The result is that more people rent and fewer people buy. Home ownership has collapsed among adults in their prime working age – 25 to 39 year olds – from 22 percent in 2011 to 16 percent in 2016 according to official figures and to an estimated 12 percent now.
The tide of global residential investment is, of course, fueled by accommodative fiscal and monetary policies, including the massive quantitative easing programs used by central banks to protect economies from the effects of the coronavirus. But what happens when that spins the way it needs to be safe? Will higher interest rates stifle the investment and then who will finance the development?