The week in housing 07/05/2021

Then they came for the Semi-Ds...

The big news this week was the cabinet approval of the Affordable Housing Bill. However, you certainly wouldn’t think that was the case because all eyes were on institutional investment in the PRS and the dreaded 'funds'. Roundhill Capital's purchase of 135 units on a housing estate in Maynooth, reported in last Sunday's Business Post, really threw the cat among the pigeons. The Irish political class reeled in horror as the investment funds they had welcomed into our beleaguered property system had the temerity to spot opportunities in the kind of place FF and FG voters might hope to see their children buy their 'forever home'.

As it happens, this was also the week in which I published a paper with the Geary Institute for Public Policy on the impact of Covid-19 on investment in the institutional PRS globally. The paper argues that institutional investment in PRS housing will come out of the pandemic stronger. The sector did take a hit in 2020, but not as severe as we would have thought. Average prime rental prices internationally declined by 2.5% in 2020. Looking at Irish data from Q4 2020, average rents nationally grew year-on-year by 2.7%. In Dublin the figure was 2.1%, while in the Greater Dublin Area it was 5%. While rents suffered somewhat in 2020, rent collection held up well. In the UK rent collection stood was around 96%, showing little if any decline. We don’t have data for the sector as a whole in Ireland, but we can look Ireland’s largest institutional landlord IRES REIT:

·         Net rental income rose from €50.5 million to €59.8 million;

·         98.4% occupancy, up slightly on 2019;

·         Rent collection 98.9% for 2020, showing virtually no decline from 2019;

·         Average Monthly Rent = €1,624, up 1.8%.

So what is driving the boom in institutional PRS?

·         Demographics, housing demand and affordability: There are a series of long run demographic factors which support demand for the PRS (urbanisation, growth of smaller households, international migration). But the affordability problems in the homeownership sector are also key: the prevailing view is that affordability will deteriorate further in the wake of the pandemic due to the decline of tenant incomes and economic uncertainty

·         Structural supply/demand imbalance: As Savills say,‘[i]n many places, the rising need for rental homes cannot be met by the current rate of supply’. In the post-pandemic era, this imbalance will intensify due to construction slowdowns associated with public health restrictions, resulting in low levels of supply

·         Interest rate environment and yields: One of the principal factors driving appetite for PRS assets is the low interest rate environment and ‘supportive monetary policy’. Average yields in institutional PRS assets in Europe were 3.25% in 2020. This compares favourably with long term bond yields; average EU sovereign bond yields were 0.3% in 2020. Low bond yields are ‘driving investors up the risk curve’ and supporting demand for alternative assets

·         Sectoral resilience: There is a widespread belief that the PRS sector is ‘resilient’, ‘defensive’ and ‘counter-cyclical’. This belief is in part supported by the performance of the PRS during the Global Financial Crisis and in part by its resilience during 2020

These factors suggest that the ‘fundisation’ of the Irish housing system will intensify in the aftermath of the pandemic. Just look at the following quotes about the structural supply/demand imbalance in Ireland:

The fundamental issue supporting the investment thesis for the multifamily sector in Ireland… is the inherent supply demand balance in the residential sector - which to all intents and purposes, worsened during 2020… (CBRE Ireland).

The fundamentals which underpin PRS demand remain strong, most notably favourable demographic and economic trends, together with a supply shortage, which has been an enduring feature of the market in recent times. This has been exacerbated further by the onset of COVID-19 and the national restrictions which followed (Sherry Fitzgerald).

There remains a clear and significant supply and demand imbalance for all tenures of housing in Ireland. Due to the Covid-19 pandemic, the CSO reported that house completions decreased (IRES).

The ‘resilience’ hypothesis is also a big part of ‘market speak’ in Ireland. There is a widespread view that the PRS sector ‘displayed its much vaunted defensive characteristics’; ‘weathered 2020 with considerable resilience’; and that the ‘resilience of the country’s multifamily sector was impressive’.

There are two trends which I think will be especially important in the post-pandemic era.

First, the PRS is moving from ‘alternative’ to ‘core’ in terms of how investors categorise it as an asset. This essentially opens up the sector to more capital, which should see the trends we have seen since around 2014 consolidate into a mature and permanent feature of the Irish housing system.

Second, there is a lot of discussion about the geography of rental demand. Suburban and regional markets fared significantly better than urban cores, which have traditionally been the best performing markets, across many countries during 2020. In Dublin City average rents grew by just 0.1% in 2020, i.e. much more slowly than elsewhere in Ireland. The factors driving this are already well known: working from home; a greater desire for space; a desire to be closer to natural amenities. In the paper I published on Tuesday I expressed concern about ‘the potential expansion of institutional PRS investment beyond urban cores to suburban and even regional locations’. I wrote this before the story about the housing estate in Maynooth broke, but that story has certainly underlined my concern.

So, what should we make of investment funds and their role in the PRS and the housing system more generally? My mind is not fully made up on these questions. But one thing is for sure: successive governments since around 2010 have supported one central policy for Irish housing - plugging the Irish property market into the global financial system to enable flows of international capital. The rationale for this was the old neo-classical chestnut: all supply is good supply. This view was, and is, hopelessly naïve as it opened up Irish housing to a massive wave of international capital which was destined to destabilise the housing system. At no point has any consideration been given by Government to the likely impact of this radical change of the housing system. That, to my mind, is a major failure of politics. It’s now time we started to get a full sense of the nature, extent and impact of institutional investment and to examine how we can either regulate it in the interest of our housing system or move away from it entirely.

Events

More great seminars to look forward to. An all-star international panel will look at ‘the global housing crisis and the home ownership myth’ on the 9th of June, and closer to home the Self-Organised Architecture crew are presenting their project Roadmapping a Viable Community-Led Housing Sector for Ireland next week.

What I’m reading

This week it’s been all about the media coverage of investment funds, but I did find the time to read Sinn Féin’s private members motion with a series of proposals, many of which deal with the big issues in the rental sector.