Bulk purchases of apartments by international investors have come back with a bang this year, with €1.9 billion of private rental sector (PRS) deals sealed in the first nine months, after a dip during the height of the Covid-19 pandemic in 2020.
You only have to look at the rental yields in the home market of the German funds managers – such as Union Investment, Deutsche Bank's asset management arm DWS, and Real IS – that have been among the most active in Dublin in recent years, to understand why.
While prime apartments in Dublin are currently generating rent to deliver an investment yield of about 3.6 per cent, according to Savills, yields in the Bavarian capital, Munich, are about 2 per cent, rising to about 2.5 per cent in Berlin and Dusseldorf.
Performance
Still, you wouldn't think that PRS was the hottest area of the Irish commercial property market – accounting for more than half of the value of all real estate deals so far this year – to look at the share price performance of the State's largest private landlord, Ires Reit, led by chief executive Margaret Sweeney.
Shares in Ires, which has a portfolio 3,836 apartments and almost 800 more in the pipeline through its own developments and forward funding deals with builders, have edged up just more than 4 per cent so far this year, about a quarter of the pace of the wider Irish market.
They’ve even been underperforming the office property group Hibernia Reit’s 11 per cent advance. That is something, given the live debates over how and where we will work in a post-Covid world, and what international corporate tax changes will mean for foreign direct investment into the State.
Ultra-low official interest rates – with the European Central Bank’s main rate at a record low of zero for the past 5½ years – continue to encourage overseas money into Irish multi-family apartment block. For now. Things could change when rates start to rise again.
But Goodbody Stockbrokers property analyst Colm Lauder this week gave up his long-held belief that Ires's shares, currently changing hands at a little over 90 per cent of their book value (the net value of assets recorded on a company's balance sheet), should trade in line with the traditional 110 per cent ratio of companies in more developed European rental markets.
Shift
In a report for clients, Lauder lowered his target to one times book value, a level where the European sector has drifted back to in recent times, amid a general political shift across the continent to the left and a sweeping backlash against big landlords as a broader accommodation crisis internationally has sent rents soaring in the past decade.
Voters in Berlin, a city of 3.7 million people, 80 per cent of whom live in rented homes, passed a referendum last month calling on city authorities to seize more than 200,000 apartments from the city’s largest landlords. While the ballot was non-binding, it has rattled investors in publicly-quoted European residential property groups.
In Sweden, prime minster Stefan Lofven lost a confidence vote in June after proposing changes to abandoned traditional controls and allowing more rents for new apartments to be set by the market.
And, of course, here in the Republic a 4 per cent annual rental rise limit introduced in 2016 for so-called rent pressure zones was replaced in July by a limit based on general inflation. Which is no bad thing, even though consumer price growth has soared to a 13-year high of 3.7 per cent as of last month.
The summer also saw the Government’s snap decision to introduce a 10 per cent stamp duty on the purchase of 10 or more houses in a 12 month period – after a public backlash over investment funds beginning to creep into commuter towns to snap up semi-Ds in bulk in new housing estates. It was the correct move.
Funds
But apartments are different. For all the talk about so-called cuckoo funds elbowing out would-be buyers of apartments, most of the new multi-family developments in the Republic would not have been built had there not been overseas pension money waiting in the wings to buy them – or prefund the projects.
Banks may be willing to lend to established builders ready to go on housing schemes, comfortable in the knowledge that projects can be done in stages and that it takes typically between six and nine to complete a phase.
Building an apartment block is another matter, and can take up to three years (for those that manage to get through the planning and, more often than not these days, judicial reviews). In many cases, without investment funds willing to prefund the development, schemes would never be constructed, because the high-cost financing terms on offer from alternative finance providers make them inviable.
As of Friday afternoon, there were 977 apartments available for rent in Ireland on Daft.ie. That's a woeful level of undersupply for a population of 5 million.
The Government’s Housing for All strategy, aimed at delivering 300,000 homes over the next eight years, including social and affordable homes, will probably cost €11 billion a year to deliver – with only €4 billion coming from the public purse (mainly through bond market borrowings).
While building homes for first-time buyers is the main political focus, PRS has to be part of the solution – funded by the same types of pension funds that we will be expecting to buy government debt to meet its financing commitments.
Polls
With Sinn Féin on the rise in opinion polls – opening up a 10-point lead over its nearest rival, with 32 per cent voter support, according to the latest Irish Times/Ipsos MRBI poll published last week – investors are closely studying the policies of a party that has a very real chance of leading the next government.
“The key risk factor is how much of pre-election policy would make it to Cabinet approval, however, details from recent Sinn Féin policy documents have consistently pushed for arbitrary rent freezes while also pushing to remove the tax efficiencies enjoyed by [Ires] Reit and other such funds used for residential property investment in Ireland,” said Lauder.
While the Goodbody analyst continues to rate Ires shares a “buy”, saying the long-term investment case for PRS remains solid in a market that is undersupplied and underfunded, stock market investors may have reason to remain wary.
