While the debate on housing continues to rage, some things have become uncontestable clear. Two years ago, IIP estimated the cost of delivering the Government’s Housing for All target of 33,000 new homes annually as €12.5 billion.
Since then, the impact of inflationary pressures driven by global events means this figure has risen to €13.5 billion – as verified by the Government’s own analysis. Notably, despite the strongly held differences of opinion on all matters housing, not a single voice has been raised to dispute this number.
In 2021, Irish Institutional Property (IIP) published research showing we needed to build a minimum of 50,000 new homes annually. In the interim, a number of authoritative voices, including the Taoiseach, has said we likely need to build 60,000 homes yearly if we are to crack one of the biggest social and economic challenges the State faces.
So, we appear to all agree that we need to build a lot more houses and will need a lot more funding to do so.
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There are three known sources of capital to fund new homes at this scale – the State, the banks, and institutional equity and debt investors.
In the case of the latter, they have been the source of 70-80 per cent of that funding in recent years. The State and banks are important sources of funding but have obvious and well-understood limiting factors in their ability to scale up their contribution to funding an almost doubling of current new-homes output.
They are neither so-called vultures, nor cuckoos. These terms of abuse are cynically attributed liberally to a variety of private capital firms without distinction
Meanwhile, soon-to-be-published research from IIP has updated its residential development funding model, estimating that a minimum of €18.5 billion will be needed annually to deliver a near doubling of current new housing output. Even with a step up from the State and the banks, IIP estimates that almost 70 per cent of that funding will need to be sourced from institutional investors.
Who are these institutional investors and have they the wherewithal to play their part in funding this much-needed investment in housing?
They are neither so-called vultures, nor cuckoos. These terms of abuse are cynically attributed liberally to a variety of private capital firms without distinction.
Institutional investors whom I represent are long-term investors, in the main investing funds of pension savers, taxpayers and retail investors locally and globally, seeking the kind of moderate longer-term returns that will pay the pensions of tomorrow.
Another question posed in recent years is, are these investors still committed to the Irish market?
The firms I represent have invested more than €20 billion here and are still investing to fund a series of developments that are currently in the course of completion. Any fair-minded commentator would acknowledge that investment at this level represents more than a casual relationship with the Irish real estate market. It is “committed” capital, as the assets funded are immovable.
Without doubt there has been a marked slowdown in private market funding globally and locally – a direct consequence of the current funding cycle driven by global macroeconomic policies and geopolitical events. Ireland is not immune to the impacts.
Ireland remains an attractive long-term investment location, with strong demographics and economic drivers. However, we compete for this capital with other locations, so at a minimum we need to ensure we don’t put up any barriers to securing that investment
Equally, history teaches us that these cycles pass and resolve over time. Importantly, the Government has responded with a suite of countercyclical funding supports to Croí Cónaithe, the STAR programme and Approved Housing Bodies, with a view to unlocking institutional investment in sustainable social and affordable homes, while the private market recovers.
Have private investors the long-term capacity and commitment to fund Irish residential and real estate markets at the scale required into the future?
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The answer is a firm yes. Ireland remains an attractive long-term investment location, with strong demographics and economic drivers. However, we compete for this capital with other locations, so at a minimum we need to ensure we don’t put up any barriers to securing that investment.
The Government is conducting a review of the funds regime applicable here. The opportunity this review presents needs to be firmly grasped to ensure we have a stable and predictable policy regime going forward that enables us to regain our competitiveness and capacity to attract the scale of institutional capital required to fund Ireland’s residential and real estate markets into the future.
The second qualifier relates to the rental market, where a series of changes to the rental price rules in recent years have made Ireland less competitive than similar jurisdictions, in effect contributing to deepening the supply crisis rather than alleviating it. The fundamental issue, the urgent need to generate new supply, has not been grasped.
Rather than addressing the issue we have regressed by imposing a blunt 2 per cent annual cap on all rent increases, thereby ensuring that private investment in new stock has been effectively killed off.
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In this environment, who would fund an investment in rental property where rental prices are capped by the State at 2 per cent but due to ongoing inflation, operating and interest costs are growing well in excess of that rate. It does not make economic sense and no pension saver will mandate their pension fund to do so.
Such a regime also makes it more difficult for investors to respond to the Government’s climate action plan, which calls for substantial further investments in climate-proofing their properties. Here again the current rental sector review by the Government represents an opportunity to address this issue.
IIP recognises the need in these challenging times for social solidarity and has put forward the commonsense proposal that the cap, while remaining in situ, be modified in one important respect. That is, to apply the cap to the tenant as opposed to the tenancy. Looking ahead, we need to replace short-term, politically driven rental price controls with a system that fairly reflects the needs of all stakeholders.
With a general election due in the next 18 months, all political parties must address the elephant in the room that is funding for new homes. With the manifesto-drafting season now drawing near, it is essential that politicians spell out now how they will fund our housing and related infrastructure needs.
They must also articulate what role they see for institutional capital and most importantly how they plan to create an environment in which such capital can fulfil that role. This is critical, as many of the key Housing for All initiatives rely on the availability of private capital to expand the delivery of social and affordable housing.
Pat Farrell is chief executive of Irish Institutional Property
