Institutional investors in Irish housing
The week in housing 01/12/23
This week I am delighted to bring you a guest post by Pierce Daly, an economist at the European Central Bank and PhD candidate at the School of Politics and International Relations, UCD. The below draws on Pierce’s excellent research on institutional investment in Irish housing (make sure to check that out here), shedding light on the complex reality of the ‘financialization of housing’ and introducing a number of crucial distinctions that can help us understand how institutional investment impacts the housing system. Many thanks to Pierce for putting together such an empirically rich and insightful piece.
In recent years, there has been significant increase in institutional investment in the Irish housing market, primarily the purchase of housing units in the Dublin region. Against the backdrop of the current housing and affordability crisis, this has led to ongoing debate on the positive and negative implications this activity may have on the housing market. However, the absence of comprehensive publicly available data means such discussions continue to be based on colloquial evidence. In recent analysis, I have sought to establish some statistics on key elements of this activity, including who these investors are, the extent to which they support new supply and if this activity could impact house prices, rents and investor characteristics (see Daly, 2023). I’ll touch on all these issues below, but first let’s consider the broader context of the ongoing housing crisis and why institutional capital is essential to delivering new supply.
Data published by the Central Statistics Office earlier this year shows almost 30,000 housing units were completed in 2022. That said, this still falls short of the 50,000 units most stakeholders now agree are required annually. When one thinks of the major investors/financiers of new housing supply, they commonly consider three key players: the State, banking sector and institutional (mainly foreign) capital. However, given the lack of State and banking sector capacity to fund this level of construction annually, over the long-term, it’s clear that foreign institutional capital (a key factor supporting new supply to date) will be essential to bridging this remaining gap going forward.
However, when we talk about “institutional capital” it’s important to note what we really mean is investment from the “non-bank” financial sector. The non-bank sector consists of a diverse array of financial companies (e.g. private equity firms, special purpose entities, real estate investment trusts, insurance companies, pension funds and investment funds), with diverse investment strategies, who may seek to invest in housing. Consequently, referring to any investment from this broad group as being “institutional capital” masks extensive heterogeneity. For example, some companies invest indirectly in Irish housing via equity investments (i.e. shareholdings) in, or debt financing of, homebuilders. This, while indirect, is positive and channels essential funding to homebuilders, thereby enabling them to build houses . For simplicity, and to establish some distinction between business models, lets refer to these indirect investors as providing “institutional capital”.
Other companies invest directly in Irish housing, via the purchase (or in some cases building) of housing units. These are what a growing literature refer to as “institutional investors” in housing. Unlike what I have, above, called “institutional capital”, these “institutional investors” are active on the buyer (i.e. demand) side of the market. Consequently, this has raised questions on their investment activity, i.e. to what extent they support new supply and whether their investment activities could have negative implications for the local housing market. My own analysis suggests that, once you exclude institutional investors purchases of second-hand units (which dominated until 2017 and still account for a sizeable share of investment), along with new units acquired from Cairn and Glenveagh or acquired/built by institutional investors that receive State funding via the Irish Strategic Investment Fund (ISIF), it implies that only 40% of total institutional investment in housing units between 2018 and 2021 related to purchases or building of new units by solely private funded investors (Figure 1).
Figure 1: Investment in new units by solely privately funded Institutional Investors
Source: Daly (2023); Notes: *Refers to new units purchased by institutional investors (II’s) that receive funding from public sources (i.e. ISIF). **Refers to new units purchased by solely privately funded II’s.
Ultimately, this indicates “institutional investors” are very active in the second-hand market and the extent to which they support new supply is more limited than one would generally expect, in part because previous estimates of their contribution to supply tend to conflate investment from these institutions with the support institutional capital investors provide to homebuilders’ output. Additionally, the scale of investment is such that institutional investors now account for 1 in every 10 residential property transactions in Dublin, and in some Eircodes purchase 4 units for every 10 units bought by households (Figure 2). Given their growing share of investment, they may contribute to increases in house prices above what’s warranted by economic fundamentals, implying negative consequences for affordability. Additionally, my estimates don’t capture another smaller phenomenon: institutional investors directly bidding against prospective households to acquire one-off houses, for which no data is available.
Figure 2: Institutional Investment as a share of household purchases, by Eircode, 2012-21
Source: Daly (2023); Notes: This chart captures only €7bn of the total €9bn of Institutional investors purchases of housing units between 2012 to 2021, thus may underestimate II’s share of investment.
Unlike homebuilders (and the “institutional capital” that supports them) who follow a Build-to-Sell business model, “institutional investors” are active in the private rental sector (PRS) market, i.e. they primarily buy-(or in some cases build)-to-rent. However, the scale of their purchases in recent years means they now account for a growing share of Dublin’s PRS (Figure 3). Given the limited number of institutional investors involved, their growing market share raises questions over potential impacts on rents. More analysis is needed here given: (1) these investors may renovate and provide higher quality rental units than small household landlords, and; (2) the exit of small landlords from Dublin’s rental market in recent years may contribute to their growing market share. Nonetheless, clearly these investors are increasingly important.
Figure 3: Institutional Investors share of Dublin’s private rental housing stock
Source: Daly (2023), CSO Census 2016; Census 2022, and the RTB; Notes: *RTB data as at July 2019, taken from the ’Tenant, Landlord and Letting Agency Research 2020 - Technical Appendix’. **Estimates for institutionally owned units includes total number of unique units purchased as of end-2016, end-2019 and end-2021 respectively.
Given I seek to distinguish between providers of “institutional capital” and “institutional investors”, it’s useful to demonstrate the differences in the names and types of companies across these two groups. Table 1 below shows the list of significant investors in the equity/shares of Cairn and Glenveagh. Unfortunately, it’s not possible to replicate this for other Irish homebuilders, whose investors may differ, due to the absence of data. In the case of Cairn and Glenveagh, most of their funding comes from equity investment, with a smaller share coming from loan borrowings (syndicated facilities from Irish banks). Therefore, the below investors account not just for a large share of the equity funding to these two homebuilders, but also a large share of total (equity + debt) funding.
Most big shareholders in these homebuilders are UK and US asset managers (AM’s). These AM’s establish investment funds (in this case likely equity funds) who invest in the equity/shares of listed companies such as Cairn and Glenveagh. Unfortunately, this analysis is only based on two listed companies, as there is no public data on unlisted homebuilders who may receive financing from other non-banks (e.g. Quintain, who receive debt financing from Activate Capital).
Institutional investors directly purchasing housing units also establish funds, though in this case real estate investment funds (i.e. REIFs, or IREFs for Irish tax purposes) given they are purchasing physical property (Table 2). It’s noticeable that the names of these companies differ to those providing institutional capital to homebuilders (from Table 1). Ultimately, this reflects the diverse investment strategies of different companies. The geographic location and type of investor in physical Irish housing units is also more diverse (Table 2), with a larger role for US and UK based private equity firms and European REIFs, who are often backed by insurers and pension funds.
Table 1: Significant shareholders in listed Irish homebuilders
Source: Cairn & Glenveagh Annual Reports 2022; Notes: Significant shareholders are those who hold at least 3% of ordinary share capital. For Cairn Homes shareholdings are as of 22 March 2023, while for Glenveagh Homes holdings are as of 28 February 2023. Company sectors are assigned based on public information.
Table 2: Top 20 institutional investors in housing: 2012-2021
Source: Daly (2023); Notes: *Relates to entities that receive funding from the Irish Strategic Investment Fund (ISIF), which is aimed at financing new housing supply. It is not possible to calculate the share of funding these entities receive from the ISIF. “REIF” = real estate investment fund; “REIT” = real estate investment trust.
But why is this all important? It’s important as it demonstrates that the investors in physical housing units are not the same as those supporting our homebuilders. Thus, underscoring the need to look beyond the broad umbrella of non-bank capital that has been presented to date. Instead, we need to consider the benefits and costs of these different forms and channels of non-bank funding. While there is a strong case for the positive role institutional capital plays in supporting Irish homebuilders, the role of institutional investors direct purchases of housing is less clear and could have negative implications for the housing market and affordability. Thus, we need to weigh up the pros and cons of various segments of non-bank funding as part of the wider public policy considerations.
However, a key pre-requisite to doing so is improving data on this activity. Many industry, institutional and public sector bodies have data on elements of these purchases, but despite the salience and ongoing debate, we have no consolidated data sources on this topic. In other words, we need to develop better data on this form of investment. This in turn can enable robust analysis and further inform public policy and ultimately its key aims of boosting housing output and affordability.
Events & News
A couple of weeks ago I spoke, along with a number of TD’s and Senators, at the launch of Threshold’s annual report. The theme of the discussion was the ‘future of the private rental sector’ and you can now watch the recording here. For anyone considering doing a PhD, this fantastic project is now seeking applications.
What I’m reading
An interesting analysis of the drivers of rent increases in New Zealand. More policy insights from the Housing Agency. Two new interesting pieces of PRS research from the UK: this one looks at the impact of regulatory reform on the PRS (of great relevance here); while this one conceptualizes the role of landlord-tenant relations in shaping tenant experiences. Finally, I’m not sure if it’s true but apparently China has indicated intentions to introduce a Singapore model of housing (something I’ve written about in these pages before).