Savills urges easing of rental caps in next budget to arrest sharp decline in construction

Property company Savills has urged the Government to ease rental caps in the next budget to arrest a sharp decline in the completion of new properties available for rent.

The recommendation, which the company said was designed to “create a more favourable investment climate”, is contained within its pre-budget submission to Government, published on Wednesday.

It said the private rented sector has experienced a “dramatic downturn” in recent years, which it attributed primarily to “government interventions” such as rental caps, combined with rising interest rates and construction costs.

The Government introduced a 4 per cent cap in 2016 on rental increases in designated rent pressure zones in a bid to protect tenants from soaring rents.

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“These measures, although aimed at protecting tenants, have inadvertently discouraged international investors,” Savills said in its submission.

It said this has led to a decline in the development of new rental units, with private rented sector completions in Dublin set to decline by 68 per cent to 1,600 units in 2025, according to Savills’ own data.

“This reduction is further evidenced in the Central Statistics Office’s planning permissions data for the first quarter of 2024, which showed a 57 per cent year-on-year decrease in the number of apartments approved in Dublin during the quarter,” it noted.

“Rental caps have made the market less attractive to investors by limiting potential returns on investment.”

Savills said investors typically have an exposure of 20 per cent of rental income that goes on operational costs. “In an inflationary environment where rents are capped at 2 per cent but costs are uncapped, costs will erode ever more into the revenue element,” it said.

Other recommendations from the company included the extension of the Help to Buy scheme until December 2028 as well as raising the property value threshold from €500,000 to €614,000 in Dublin to account for rising construction costs and consumer inflation.

Savills has also proposed a reduction in the stamp duty rate on commercial property from 7.5 per cent to 2 per cent to “restore investor confidence and boost market activity”.

On labour shortages in the construction sector, Savills noted that 67,250 workers will be needed by 2025 to meet the annual target of 33,000 housing units delivered per year, with this figure rising to in excess of 82,300 by 2030.

“The source of this labour demand could include net inward migration via changes to the employment permit system, as well as increases in education and training outputs,” it said.

“The ESRI suggests that a reallocation of resources from the commercial section of the construction sector to the residential section could help alleviate some of the potential labour constraints on today’s housing delivery.

“Savills would strongly caution against such a reallocation, however, given the economic importance of commercial development to attracting foreign direct investment,” it said.

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