JENNY PRUNTY, Divisional Director, HWBC, writes that the level of affordable accommodation for private renters across Ireland will not shift in the right direction without more investment coming into the sector.
Over the past 12 to 18 months, the delivery of housing stock has continued to be impacted by the country’s complex planning system, with increasing construction costs and rising interest rates bringing more challenges to bear on the market.
Traditionally, build-to-rent (BTR) schemes have been transacted with investors off-market, sometimes prior to site works ever commencing. But, due to increasing interest rates and returns on sustainable and affordable rents with a 2% cap, developers are finding they have to build out and stabilise schemes before generating interest at levels that they can trade.
In this situation, developers are essentially acting out an investor’s first two to three-year business plan or strategy before the investor commits.
With Eurostat finding 68% of people aged between 25 and 29 years of age in Ireland are still living at home, we rely solely on developers and investors to provide private rental accommodation, which, unfortunately, in some cases, can only be offered at terms that have made the schemes viable. And that’s if the developer has been fortunate enough to secure construction finance to elevate the project to that point.
Within the investment market, the residential sector has been the dominant performer, outweighing investment turnover for offices, retail and logistics. However, the trend changed for the first time in five years in Q2 2023, and this most likely mirrors projections over the coming 12 months.
As investment into the BTR market is significantly lower than in previous years, exit strategies are becoming more difficult to withstand. The level of affordable accommodation for private renters across Ireland will not shift in the right direction without more investment coming into the sector.
Temporary Time-Limited Waiver
The government’s temporary development contribution waiver scheme is some help towards lowering costs for some developers, but this single waiver is not sufficient to outweigh the rate of inflation. Imposing a residential zoned land tax (RZLT) with tight restrictions outside of a landowner’s control will further impact the viability of future residential development.
Incentivise office conversions
The idea of converting office space to residential is being mooted, particularly with older office blocks in Dublin city centre. The government should incentivise these redevelopments so that the buildings can be acquired at levels that would maximise returns and increase output.
As a result of planning restrictions and system backlogs, it is expected that certain landholders will come under pressure in the coming months, and land values will most likely fall, in turn assisting scheme viability, deliverability and affordability for both developers and renters.
Approved Housing Bodies activity
Recent market activity has been driven almost entirely by approved housing bodies (AHBs), which have a much lower cost of capital than most commercial investors. Their involvement has proven crucial in unlocking units that would not otherwise have been delivered, but a note of caution must always be sounded when government-funded purchasers are dominant in the market to this extent. For the immediate future, the combination of higher interest rates and capped rental growth will see many commercial investors stay out of the market until pricing adjusts. At some point, market pricing must be allowed to assert itself.
There has been a marked uptick in sales from distressed situations as lenders seek to recover loans. Sites without planning are under particular stress as investors shy away from spending an indeterminate time in the planning process. Sites with planning permission have seen more demand, albeit current pricing still reflects increased debt and construction costs.
HWBC is Ireland’s leading independent property firm. Its team of over 30 property professionals has more than 300 years of expertise in the industry with a track record of creating solutions for clients that focus on delivering long-term value. HWBC prides itself on ensuring clients receive senior director support on any project on which it is engaged.