Institutional investors, housing supply & real alternatives
The Week in Housing 21/06/24
This week I’m thrilled to bring you the third in our recent series of guest posts. In today’s piece, Colm Healy takes an in-depth look at what the alternative to institutional investment in the apartment sector might really look like, digging into the detail on this complex issue as few others have. Colm is a director of O’Cualann Cohousing and a member of the Green Party’s Housing Policy Implementation Group. All views expressed are personal. Thanks a million to Colm for this fascinating piece. If you’d be interested in writing a guest post, have a look here.
Few issues in housing, in Ireland and internationally, have proved as controversial as institutional investors in the PRS. Some call for their blanket abolition, while others see them as the cure to persistent under-supply. Between these two poles is the messy reality of the complex relationship between institutional investment and housing supply. Getting to grips with that reality can help us understand exactly what is at stake and plot out real alternatives.
In the wake of the Global Financial Crisis (GFC) the ‘new kid on the block’ has undoubtedly been institutional capital. In the throes of the sovereign debt crisis the Irish Government introduced a range of policies favourable to such capital participating in the Irish real estate sector, both commercial and residential. These ‘cuckoo’ funds are often seen as swooping in to hoover up housing which would otherwise be available for owner occupiers. Some of these households ‘locked out’ of home ownership must nurse their grievance while paying rents to these same institutional landlords.
The argument in favour of the participation of institutional investors in the Irish housing system is that without them, these homes would not exist. It is only the prospect of sale to an institutional investor that makes some types of development viable - in particular high density apartment schemes in Dublin. It’s important to note that this is an argument in favour of facilitating institutional investment in new housing. According to Daly, in the period 2018 to 2021 Institutional investors purchased a total of 16,872 homes. Of these, 6,004 were second hand.
In the 12 month period from April 2023 to March 2024 work commenced on nearly 15,193 homes across the four Dublin local authorities. This was an increase of 31% on the previous 12 month period, and is a welcome development given the need for new housing. 7,209 (47%) of these units are in 25 large apartment schemes in Dublin. Five of these schemes are 100% social and affordable housing. The vast majority of the 5,415 units in the other twenty schemes are destined for the Institutional PRS.
The institutional PRS is still a small portion of Dublin’s housing. According to Daly, in 2022 there were 21,917 institutionally owned rentals in Dublin, representing 4% of total stock. However its share of new construction is currently running at close to ten times this rate. It’s worth noting that this high level of institutional investment is happening notwithstanding rent controls (which industry lobbyists tell us are a major dis-incentive to greater investment) and the move to a higher interest rate regime (over the course of 2022 Irish 10 year Irish Government bond yields increased from close to zero to around 3% and have remained around this level since.)
The large apartment schemes being constructed by institutional players are located in a variety of locations: the new residential development zones at Clongriffin, Poolbeg, Ballyogan and Citywest, established suburbs such as Finglas, Howth, Glasnevin, Ballyfermot, Sandymount and Blackrock, and a variety of city centre locations. Recently completed schemes in these and similar locations have median rents of €2,600 for 2 bed apartments and target high income two earner households.
As mentioned, some have argued that policy should attempt to drive out this type of investment entirely. Doing so would be relatively easy. The simplest route would likely be via the tax code. For example, the Government could apply a 10% rate of stamp duty, which currently applies to bulk purchases of houses, to apartment purchases.
But what about the consequences of such a move for new private supply ?
If they were unable to sell to institutional landlords, one option for developers would be to re-plan their schemes to focus on the owner occupier market. For example an apartment scheme like the one at the former De LaSalle school site in Ballyfermot, could be re-designed to provide own-door housing for owner occupation. The recently updated Sustainable Residential Development Guidelines allow for reduced garden sizes, parking requirements and separation distances to facilitate medium density low rise development. Such a re-design would reduce housing yield from the current 702 units to around 500 units. However the net loss of accommodation would be lower as the mix would move from 1 and 2 bed apartments to 2 and 3 bed terraced houses and duplexes. What’s more, such medium density, low rise housing is compatible with climate related objectives around compact growth. Medium density own door housing is cheaper to build, easier to finance and is the greenest form of residential construction. This would also provide more homes suitable for families with children (while the number of families with children grew by 6% nationally between 2011 and 2022 it remained static in Dublin, where overall population growth was 12%).
Another option for developers would be to build low rise apartment blocks. Such apartment construction is lower cost and could produce units at a price point attractive to owner occupiers or small landlords. Five of the twenty PRS schemes mentioned above are medium density (below 150 units per hectare) and could be re-designed to deliver circa 1,200 units of own door housing.
But we still need apartment development at sites close to high capacity public transport (commuter rail, Luas and metro) and employment centres. The planning schemes for the Cherrywood and Adamstown Strategic Development Zones, for example, mandate apartment blocks in the vicinity of existing or planned public transport. County Development plans also impose density requirements at similar sites which require apartment construction. The State has committed to buying 8,000 such units between 2024 and 2028 under the LDA’s Project Tosaigh programme i.e. 1,600 per annum. Institutional investors are the only private sector actors interested in buying such housing units. Individual homeowners don’t see new build apartments as representing good value due to their high relative cost and their perceived lower amenity. The per square metre delivery cost of medium rise (six to eight storeys) apartments is 50% higher than for terraced houses. In addition, Buy to Let mortgage lending has slowed to a trickle meaning that individual landlords no longer have access to finance at scale.
While a switch to medium density, low rise design and the LDA’s Project Tosaigh, have significant potential to counteract a fall in supply arising from measures to curb institutional investment, we would still be left with a circa 3,500 unit ‘hole’ to fill if we are to wean the housing system off institutional investment. This gap could be addressed via the expansion of cost rental housing. At 2,000 units per annum, Housing for All’s cost rental targets are modest (a point made in the recent Housing Commission report). Increasing this by 3,500 would address the above mentioned gap but would require a 40% increase in State capital investment in housing from the current €4 billion to €5.6 billion.
Increased investment in cost rental could be combined with some level of subsidy for owner occupied apartments. The Government’s Croí Cónaithe (Cities) scheme is one possible model. Under this scheme developers receive a subsidy of up to €120,000 per unit to construct owner occupied apartment schemes. The only scheme of this sort which has commenced to date is in Cork, not Dublin, a fact which may be explained by the absence of institutional investors from markets outside the capital. Combining this with a cost purchase scheme, as advocated by Sinn Fein and the Green Party, among others, would also make sense.
Preventing further institutional investor penetration of the Irish housing system would offer considerable benefits. It would close off a flow of demand which is elevating the price of second hand housing and urban development land. It would also reduce the role in housing provision of actors who have shown an ability to distort Government policy, who can concentrate control over supply and who are resourced to rigorously implement profit maximising strategies, all to the detriment of tenants. A further benefit of the exit of institutional investors is that it would allow the State to acquire well located sites for public housing at lower cost.
However measures to mitigate the consequent supply shock would be essential. Such measures need to go beyond asking that the Government step into the shoes of the institutional investors. That the State needs to increase its role in rental housing supply is a given. But beyond that, we need to consider how to engineer a situation where institutional investor role in housing supply is replaced by prospective owner occupiers. A combination of a move to own door medium density housing and subsidised apartment development offers a way forward.
News & events
Even though summer is upon us there are plenty of seminars and events over the next couple of weeks. On July 2nd the Housing Agency are organising the second of their summer seminar series, this time looking at housing children and young people. Michelle Norris is giving the next #SimonTalks webinar (July 1st, 10am), looking at the Housing Commission recommendations on social housing reform. On June 26th, 10am, Threshold will launch their latest tenant sentiment survey.
What I’m reading
Focus Ireland launched a new report with a decade of data on homelessness in Ireland. For Pride Month the Housing Agency have put together a list of housing related LGBTQ publications.