The funds report
The Week in Housing 24/02/25
With all the discussion about the role of institutional investors in apartment supply, this bonus post looks at the recent review of the funds sector published by the Department of Finance. The section on property, like the report as a whole, focuses on taxation and financial system issues, but there’s some interesting insights in there in terms of housing. This post goes out to paid subscribers first and to free subscribers two weeks later.
“Ireland does not have a sufficiently large permanent pool of domestic capital to draw upon for property development and investment. In building out domestic legislative, regulatory and tax policy, the Irish authorities must be conscious of balancing the need for international capital with the need to develop a larger permanent capital base domestically, and to reduce reliance on international capital over time”.
This is the first paragraph of the section on property investment from the Department of Finance’s recent review of the Funds sector. What’s interesting here is that rather than arguing that we are, and must continue to be, dependent on international funds for housing delivery, it argues for a ‘balance’ between this and the medium to long term need to develop domestic finance. They also note that our reliance on international capital is very high by international standards. Our pillar banks, the traditional source of domestic development and investment finance, have largely walked (or been pushed) off the pitch by a combination of international/EU banking regulation and the balance sheet legacy of the Celtic Tiger. Nevertheless, it seems highly unlikely that we’ll be able to get our housing system on a sustainable footing without some source of domestic finance. This particularly frustrating given the high level of household savings in the country. There must be some way to transform these savings into housing investment?
The recent programme for Government mentions getting Credit Unions involved, an idea that has been pushed by the Trade Union movement and others for some time. The Labour Party’s pre-election manifesto floated the idea of a ‘save to buy’ scheme, along the lines of France’s well-regarded Livret A model (I don’t know the details, but I believe this involves a savings option targeted at households which has tax/interest rate advantages and which is earmarked for affordable housing investment. Austria has a similar model in the form of a bond that can be purchased by households, with the money then earmarked for its cost rental and affordable homeownership models).
The above aside, what can we learn from the Department of Finance’s report on the role of funds in Irish property? We know from the RTB registration data that around 11% of PRS tenancies nationally, and 20% in Dublin, are held by ‘large landlords’. The RTB defines this as landlords with 100 or more properties, but these are not all institutional funds. So the insights form the report here are useful (see also this from Pierce Daly, who investigated this issue).
In terms of the impact on supply, the report provides an estimate, but acknowledges the data is incomplete. It estimates that 20,500 units of PRS stock have been built from 1 January 2017 to 30 April 2024 for, or by, these large landlords, consisting of around 19,000 (92.5%) apartments and 1,500 houses (7.5%). 95% of these were in Dublin. This accounted for nearly half the apartments built during the period, with the remaining half going to the social/cost rental sectors.
In terms of the ownership structure, the report estimates that 12,000 of the apartments built since 2017 are now owned by IREFs (Irish Real Estate Funds) and that a further 561 were developed within the REIT structure. More generally, it concludes that REITs are not going to play any role in future PRS delivery, and that IREFs and other structures have taken over (IRES REIT, our largest landlords, is the only REIT left in Ireland).
The report suggests some of the reasons why funds might be reluctant to invest in Irish PRS housing (based on stakeholder engagement):
(1) residential rent caps – increases capped at levels lower than inflation;
(2) planning delays and uncertainties;
(3) the upfront costs in Ireland (stamp duty of 7.5% for non-residential property and other transaction costs);
(4) lack of scale/depth of investors reducing opportunities to exit;
(5) lack of transparency as there is only one listed vehicle (IRES REIT) and one other vehicle which issues regular public updates;
(6) a lack of stability.
In general, the report’s focus is on taxation and the most consequential recommendation is a review of the tax structure of IREFs. It also recommends legislative change to allow revenue to collect data on institutional landlords to give us a better picture of the scale of the sector.