Given the severe and deepening rental crisis in both the private and social housing market, new legislation capping rents at 4 per cent annually appears a reasonable proposition, especially if it is only for three years as promised. But a number of significant drawbacks in the way the law has been drafted will lead to some unwelcome inadvertent consequences.
In particular, the legislation does not allow for any adjustment to properties being let at rates below the current market rental value. So a high number of landlords, those who have allowed their tenants to stay in properties at low rents as a reward for being good tenants or simply out of decency, are now being penalised as rents can now only be reviewed by 4 per cent a year, even if the property is vacated and re-let to a new tenant.
As a result, the new measures enacted in late December are nothing less than rent control in all bar name, and the fallout that follows will add further pressure on the sector.
There is no doubt that certain properties have dropped in value within the rent pressure zones due to the new legislation, and that some of the large investment funds are becoming increasingly nervous about Ireland as they try to decipher the most recent rental market interventions and reflect on what might come next.
Decision on hold
Indeed, a number of international investment funds have gone as far as putting their buying decisions on hold as they assess the new legislation. Many large portfolios of Irish property purchased last year were based on the fact that the buyer could review rents to market value at the next rent review date – a date that was already pushed out by the “two-year rent freeze” introduced by Government in December 2015.
This is now not the case, as rents can only increase by 4 per cent and not to current rental value, as buyers would have expected.
This type of legislation, which acts retrospectively and lacks reliability, certainly makes buyers, especially those from outside Ireland, nervous about future Government actions and may change their perception of investing in Ireland.
Nor has it just been the large-scale institutional investors that have been affected. A domestic landlord whose property is rented out at under market value and wants to exit the sector will realise that in order to achieve full market value for the property, tenants must be evicted before owner-occupiers can purchase. As it is now, owner-occupiers are the ones who can afford to pay market value, which is the exact opposite to what the Minister wished to accomplish.
By way of example, DNG is selling a buy-to-let apartment in a modern block in west Dublin. The current rent is €800 per month or €9,600 per annum, which can now rise by only 4 per cent a year for the next three years. The rent has not been reviewed for a number of years. The value of the property as a buy-to-let investment based on a yield, which in this area is in or around 9 per cent, values the apartment for investment purposes at €110,000 or thereabouts.
The actual current rental value is about €14,000 annually. This would value the property on the same investment basis at, say, €150,000, a similar value to that which an owner-occupier would pay. The tenant will now most likely be evicted in order to enable the property to be marketed vacant for €150,000 to owner-occupiers. The net result is that the evicted tenant goes back into the system seeking a new buy-to-let property.
Unintended consequences
I am certain this is not what the Minister envisioned or anticipated, but unfortunately it will be one of the unintended consequences of the new rental legislation. It is now evident that an apartment that has not previously been rented is more valuable to an investor than an apartment currently rented out at below market value.
The so-called Tyrrelstown amendment prevents vacating 10 or more tenancies at any one time for the reason of sale. I believe this figure should be increased to 20 units, as many small- and medium-size landlords will be adversely effected. At the same time, the Minister needs to remedy the legislation and allow rents to be reviewed to full market value at the the next rent review, and then reviewed annually at 4 per cent thereafter for three years.
Institutional and private, smaller-scale landlords are providing much-needed rental homes – and the majority only wish for steady, reliable rents. Continuing to penalise those providing the supply is not the answer, even as a short-term solution.
Keith Lowe is chief executive Douglas Newman Good estate agents.
