This week’s Daft report showed rents accelerating by 5.6 per cent, with particularly big rises outside Dublin. The supply of properties to rent has hit a record low of just 2,455. Despite the obvious demand , the signs are that many private landlords are selling up and getting out of the business. Why is this happening, particularly when returns for investment in other areas remain on the floor?
1. Falling supply
August can be a bad month for rental supply, but the latest figures are extraordinary. Over the past 15 years, there have typically been 9,300 properties available for rent across the State. Now there are fewer than 2,500. Of these, 1,666 are in Dublin – where rental properties did free up a bit during the pandemic– leaving just 789 in the rest of the Republic. In Waterford, just 15 properties were available for rent. The result of constrained supply, particularly outside Dublin, is a big jump in rents – for example prices in Munster rose 14 per cent over the past year. Even in Dublin, supply is well below what is needed. Economist Ronan Lyons calculates that at least 4,000 properties need to be available to keep prices in balance.
2. Departing landlords
So if the demand is there and the returns are rising, surely private landlords are flocking into the market? It seems not. Marian Finnegan, managing director of Sherry FitzGerald estate agents says that sales of properties by private landlords account for around 28 per cent of the agency's total sales this year. Some investors are buying to rent out properties, accounting for 14 per cent of total purchasers. So roughly speaking, for every two landlords selling, only one is buying. And given that a majority of landlords own just one property, it looks like significant numbers are leaving the business entirely, rather than just readjusting their portfolio. Of course we have seen institutional landlords enter the market over the past five years or so. While some are buying up one-off properties, in general the big players are renting out large apartment blocks aimed at better-off tenants. So the bigger players are not "squeezing out" the smaller players as there are plenty of potential tenants. However all renters face the same sums – the price of a new apartment, especially in Dublin, requires a high rent to deliver any kind of returns. For example Lyons says a €400,000 two-bed apartment would require a monthly rent of €1,650 to deliver a return to an investor.And in turn this is affordable for only around the top earning one sixth of households.
3. Why are private landlords leaving?
Ireland’s landlord sector has been typically served by a large number of small landlords. The Rental Tenancies Board (RTB) says that around 86 per cent of landlords own one or two properties and supply just over half the total market. Of 173,000 private landlords, 121,000 rent out just one property.
And they have been drifting away for some years now, with Finnegan noting a particular trend of landlord sales in rural areas. RTB figures show a reduction from 175,000 private landlords in 2016 to 166,000 in 2020. Outrage about poorly built apartments during the Celtic Tiger years – and some landlords providing dreadful properties – has led to moves to increase regulation and “professionalise” the sector.
A recent survey from the RTB, completed by Amárach, shows that while there is not a flood of landlords planning to leave, there is a steady stream. Among smaller landlords with one to two properties, just over one quarter plan to sell a property within the next five years, and around 10 per cent within one year. Very few – just 6 per cent – intend to reinvest in buying more property. Rural landlords were more likely to sell than those in Dublin.
Among the reasons given were the difficulty some found in making a profit, with one in four saying their income was less than their cost. The factors quoted as negatives includded taxes, with landlords complaining that deductions for expenditure which they could make against their tax bill had tightened in recent years. Meanwhile rental income for most is exposed to tax at a marginal rate of 50 per cent plus, as the vast bulk are part-time landlords with other earnings.
More onerous regulations were also blamed by some – seen as tilting the balance too far towards tenants and restricting annual rent increases inside rental pressure zones in the cities. Meanwhile given the generally older age of landlords, some were planning to sell to fund their retirement.
Of course house prices, which are continuing to rise, also offer attractive prices for sellers at the moment. However with the lack of other available investment opportunities to match rental income, sellers risk getting a decent amount of cash, but then struggling to find where else to get a return on it.
The research also contained fascinating insights into the group of medium-sized landlords, generally with between three and 20 properties. These portfolios were typically built up between 1970 and 2000 and many are now managed by the families of the original investor. Some 38 per cent were likely to sell a property within the next five years while just 17 per cent planned to buy more property.
So while many will remain involved, portfolios are shrinking on average. Indeed the research finds that this group has generally not expanded at all in recent years and most remain one-person operations, arguably poorly placed to prosper and grow in an increasingly professionalised environment. Many are not interested, or equipped, to take advantage of the market opportunity and some plan to sell to fund retirement, with tax and regulation also cited as reasons for exiting.
4. Part of a dysfunctional picture
The private landlord sector is part of a dysfunctional housing market where a key issue is the supply of properties and the cost of building them. With the sector dominated by small players, who are drifting away, and medium-sized operators without the tools to expand, there is a real question now about whether more and more of the market will be taken on by the big institutional players. Or are rule changes needed to keep more private landlords in the market? The State has plans to fund more rental properties in the years ahead. But this takes time – and in the meantime private landlords will remain an important part of a sector which faces real problems.
