Are property funds turning us into a nation of renters?

Based on Central Statistics Office (CSO) filings, the average price paid by household purchasers of apartments in Dublin last year was €381,892. We know, however, that the main purchasers of the 4,000 apartments in the capital in 2021 were not households but institutional buyers. Estimates vary, but the Construction Industry Federation (CIF) says funds bought 95 per cent of the apartments built in the State in 2019.

As for the price they paid, the CSO’s house price data doesn’t specify. A recent report by property firm Hooke and MacDonald, however, lists the blocks bought by institutional investors during 2021, the prices paid, and the number of units in each block. From this it can be derived that these investors paid an average price of €448,031 for apartment units. This was 17 per cent higher than what households typically paid, mindful we’re talking about a range of different apartment types in a myriad of locations.

The price differential is significant, however, and there are two ways of looking at it. You can take perhaps a negative view, noting that funds, backed by a wall of cheap money, are paying over the odds for properties and driving up prices. Dublin’s build-to-rent sector has attracted a veritable reservoir of international money — upwards of €7 billion since 2012 — on the back of the strong returns it delivers for investors. Rental yields in Dublin are among the highest in the world.

Demographic pressures, investor-friendly housing policies, and even the recent loosening of the Housing Assistance Payment (HAP) scheme thresholds also speak in favour of investing here. Hence we have a greater proportion of institutional investors in the market — we had practically none prior to 2008 — and a higher proportion of the population renting as a result.

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Or you could take the view, as the industry does, that the price differential and the premium numbers being doled out for apartments by funds is facilitating supply that otherwise wouldn’t have materialised. Most apartment projects in Dublin are being facilitated by forward-commitment arrangements whereby funds buy blocks during construction or off the plans. Investors typically pay a premium to buy in bulk as it is easier and cheaper to manage multiple units in one location.

Builders, developers and agents say these projects would never have got off the ground without institutional money as banks have — to a large extent — vacated the development lending space since the 2008 crash.

If an institution buys an apartment block that never comes to the market for first-time buyers, is that a bad thing in absolute terms? They are adding units to an undersupplied rental market. And is an owner-occupier more preferential than a renter? You could argue that both ways. Home ownership is preferential but the needs of renters in a housing crisis may be more immediate. Either way, the reason why institutions are drawing out more supply is because they can afford to pay more than ordinary punters. The downside to this is higher prices.

However, what’s missing in these arguments is that, if institutional buyers pay a higher price for property, the higher price gets capitalised into land values. The interplay between land values and property prices is a key dynamic. If sales prices increase, the value of land — comparable land — goes up by a multiple of the increase.

This incentivises landowners to hold on to their assets to extract the maximum possible value, which in practice means drip-feeding land into the market on a cyclical basis. That’s why the Government is busy devising strategies to penalise land hoarding.

A lot of policy focus here has been on reducing construction costs — smaller units, no balconies, fewer car parking spaces — but the relationship between end prices and land values gets less airplay.

The 1973 Kenny report, which recommended the State adopt a system of “active land management”, suggested that local authorities be given the power to buy development land, using a compulsory purchase order, at its existing use value plus 25 per cent in a bid to clamp down on land speculation and limit seemingly ever-increasing land values. It’s a shame that advice was never adopted.

The big question going forward is whether a new era of higher interest rates — the European Central Bank will begin a sequence of rate rises from next month — will dampen institutional appetite for Irish real estate and what would happen if rates are normalised. Given interest rates are so low and demand for property so high, it’s unlikely an initial sequence of 0.25 per cent hikes will change the dynamic much. And the feedback from investment brokers working with international clients is that investors will buy as much private rental sector product in Ireland as you can put in front of them.