When the team behind Quintain in Ireland acquired the Adamstown regeneration scheme in Dublin in 2015, a half-built apartment block sat in the middle of the 171-acre site.
The previous owners, partners Castlethorn, Maplewood and Tierra, had delivered 1,700 houses, but stalled midway through building the block as the housing crash hit in 2007. It sat derelict in the middle of the 6,000-home site for almost a decade, just walls, no roof or windows.
Quintain is best-known for build-to-rent development, with 8,400 rental flats at London’s Wembley Park and around half its 9,000-home Ireland pipeline dedicated to BTR. The developer is about to submit its first BTR plans with 200 flats in the town centre, after delivering 700 houses for sale.
“In Adamstown today, that would not be viable,” says Quintain’s joint managing director Eddie Byrne.
“The strategic development zone says that you have to build high-density here, so it has to be apartments. The only way that apartments work is if you do them by private rental, if you were to do it for sale, it wouldn’t work.”
Conservative bank lending
In Ireland you can’t build a block of flats for sale. As a result of the financial crash, conservative bank lending to both homebuyers and developers is squeezing the new-build sales market. Developers can’t pre-sell the homes at a level required to repay their loans, which means all high-rise resi is restricted to institutionally-backed rental schemes.
“The economics are very different selling as PRS,” Bryne says. “The easy answer, that you make more money selling as PRS, is correct, but you don’t make any money if you don’t start them. Capital needs to get a return.”
International investors have been branded “cuckoos” as they swoop on new developments, in turn driving up resi land values. The Society of Chartered Surveyors Ireland estimates land values in Dublin rose by 12% in 2018, after a 15% surge the year before. And continued growth is expected, with the government calling for more high-rise development and investors fighting for the limited schemes.
But are bold rents in the eurozone’s most expensive city sustainable, or is developer reliance on BTR fuelling a housing bubble?
BTR surges
Last year, there was €2.366bn (£1.97bn) in Dublin BTR deals, according to research from local agent Hooke & MacDonald. This is well over double the previous year and almost matching the total annual UK BTR investment figure of £2.1bn.
Major deals include Irish Residential Properties’ €285m acquisition of a portfolio of built flats, with 765 flats in Dublin, and Greystar’s €175.5m forward-purchase of 268 flats at Ballymore and Oxley’s Quayside Quarter at Dublin Landings.
Adverts for The Quayside at Dublin Airport target new arrivals to the city, where rents start at €2,850 for a one-bedroom flat. This compares to average one-bedroom flat rents of €1,585 in the area, according to Daft.ie.
Donald McDonald, director at Hooke & MacDonald, says the market is dealing with a huge undersupply of housing, after residential development fell off a cliff in the downturn. “These apartments wouldn’t be built if it wasn’t for the investors,” he says. “The Irish and international investors are filling that gap. We can see that there is a demand and there are people to rent.”
But, he admits that smart pricing is essential. “As with any market, some people will price too high. That is the key point for investors, getting the rents right, because while wages are increasing, they need to look at what people can afford.”
McDonald says the BTR boom and punchy rents are still not indicative of any impending market implosion.
“It won’t be a crash. The Irish downturn was so much more complex than the conditions we have now. The market was at the peak, the conditions are now totally different,” he says, adding that pre-bust developers were over-leveraged, on multiple sites with unsold apartments.
“Now in Ireland, it is nearly the other way around,” he adds. Despite the billions in private and institutional equity targeting the sector, delivery at scale is still a way off. “It’s going to take a long time for the supply to meet the demand. The capacity to scale up will take a number of years.”
Government intervention
A diminished workforce, which has lost an estimated 100,000 workers, is driving soaring construction costs. This puts further pressure on developers, edging those rents even higher.
Ires REIT was set up in 2014 and within two years grew a portfolio of 2,200 flats, largely purchased from Nama. Today it has around 3,700 flats and it expects to grow to 4,500 over the next couple of years.
Ires chief executive Margaret Sweeney says the incoming government will need to help the construction industry gear up, while also tackling issues around affordability and lack of social housing.
“We are not seeing that there’s astronomical profit being taken out by developers or vendors. It has to be around the cost of developing and other factors,” says Sweeney.
Existing stock in rental pressure zones is controlled by a 4% per annum cap on rental growth, in place until the end of 2021, but as new-build stock comes to the market average rents are climbing. Ires rents come in at the lower end, Sweeney says average Ires rents are around €1,600, with the bulk of the portfolio weighted towards two-bedroom flats.
“I could see some focus on affordability for apartment building in Dublin, how you deal with affordability, because ultimately that’s what drives the cost of building, purchase pricing and rents.”
Sweeney says that various bodies are digging into the detail, including SCSI and the housing department. “That’s probably one issue that needs to be really looked at in a lot of detail and much more consistency around the analysis, to really understand why it’s so expensive to build in Ireland.
“The biggest challenge that the building sector has in Ireland is the banks are also very restrictive on the level of debt they provide. A lot of it went through a huge restructuring due to the crash, so there is very little equity,” she adds. It needs the international capital for the 50% equity required to get off the ground now, as opposed to the old debt-funding model.
The listed REIT model offers one solution to this, providing a vehicle for government grants. Today, Ireland only has one resi REIT and that’s IRES. Sweeney says: “The countries with REITs were probably the ones that had the least impact during the last crash, because there is so much equity underpinning them.”
But she doesn’t expect a housing crash in Ireland anytime soon. She argues that despite risks around costs and affordability, demand for rental is strong and the government’s changes to planning support delivery.
“The key objective is to make sure we get more housing built. There are shortages everywhere, in social, affordable, rental and full ownership, ” she says.
Diversity of tenure would also remove the risk. Adamstown could be a case in point, Lone Star has completed 700 houses and expects that, of the 8,000 homes planned for the wider area, around a quarter will be for rental.
“A new town needs not just mixed housing, but also mixed tenure,” says Quintain joint managing director Michael Hynes. “There is absolutely demand from the renter market in Adamstown. The younger workforce is generally the larger part of the renter market, and that means apartments.”
With development still a few years off and expected rents around the €1,700-€1,800 level, it may be some time before we see the proof of that demand, how that might differ in a mixed-tenure location, or whether it, like many others, may be forced to rethink the rental strategy.
European trends driving residential demand
By Stuart Osborn, partner, European Residential Investment, and Oliver Knight, residential research associate, Knight Frank
After consistent year-on-year increases, GDP growth in Europe has slowed since the second half of 2018.
This is predominantly due to greater geo-political volatility and a general deterioration of the global growth environment, as opposed to more specific European drivers.
The economic cycle in Europe, overall, is less advanced than in the US – there has not been an increase in government debt and the general sentiment among investors is that there is room for some recovery in capital expenditure. The consensus is for growth in GDP across Europe to be only slightly below trend, at around 1.5%.
While markets are beginning to adjust to this, global liquidity remains healthy and sentiment towards real estate, as an income producing investment, remains robust. Property yields across European cities remain attractive and, despite the recent economic slowdown, the volume of capital targeting real estate continues to swell.
Estimates from Prequin indicate that private equity funds are sitting on more than $330bn of unspent money for this purpose, while pension fund allocations to real estate continue to edge upwards. However, a limited availability of quality assets has restricted transaction volumes.
For some investors this has meant seeking opportunities within residential investment sectors, which include student property, build-to-rent and senior living.
The key reasons for this growth include a search for diversification, but also the potential value that can be unlocked in the granularity of occupiers that comes with the renting of individual units at scale.
Cities have also become more densely populated and new residential supply has not kept pace. The share of people living in urban areas in Europe has been steadily increasing for more than two decades, in line with a global movement towards urbanisation.
This in itself presents challenges, not least for real estate markets. Advances in technology mean businesses are more footloose. Subsequently, the ability of cities to attract labour, especially top-tier talent, will become increasingly important.
Demographics and shifts in tenure, alongside a policy landscape that recognises these changes, will act as a catalyst for further diversification in tenures. For purpose-built student accommodation, this is exemplified in the improvement to European higher education and the ambitious strategies in place to widen participation.
For the private rented sector, it is urbanisation, affordability pressures and the need to facilitate mobility and nurture and retain talent.
Demographic trends are reliably predicted, and provide a solid footing for demand projections. In contrast, the supply of specialist residential property across European cities is not keeping pace. Both PRS and student accommodation markets across continental Europe face an ongoing shortage of modern, fit-for-purpose stock, which will only enhance the rental performance of those assets that make the grade.
As the share of people living in urban areas in Europe continues to rise in the decades to come, the need to understand the drivers and fundamentals of what makes individual cities competitive will be of increasing importance for investors and developers operating within their real estate markets.
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