Government Key To Unlocking Living Sector Viability For International Investors

Dublin’s impasse over housing continues to dog the city. Despite efforts by the government to fast-track new builds across the country, housing completions continue to lag requirements and sectors such as build-to-rent and student accommodation remain largely stalled.

One of the keys to unlocking development is international investors, most of which have deployed significant capital into the sector across Europe in recent years and have the luxury of choice geographically.

They have largely left Dublin off their acquisition list in the last few years, citing uncertainty around planning and government policy as reasons for spending elsewhere. Big investors like Nuveen have come into the market, but changes to policy would go a long way to stimulating action by investors that want to finance housing in Dublin but remain wary of the Irish capital. 

“Construction cost inflation combined with the recent market volatility has made it challenging to pursue viable opportunities, particularly in the BTR space,” Nuveen European Housing Director Alisha Chauhan said.

“But we believe the market will regain competitiveness with the anticipated changes to the residential rental cap, which has dampened the view on liquidity over the past 18 months or so. A much-needed change to this cap will be key for institutional players to return to the market.”

Data on housing completions provided some positive news, with new dwelling completions of 8,939 units up 6.3% year-on-year in Q3, according to Central Statistics Office data published this month. That leaves the year-to-date new housing supply at 21,634, slightly below the 22,325 recorded this time last year.

The biggest drag on output in 2024 has been apartments, with completions down 18% year-on-year, while scheme housing completions grew by 23% year-on-year in Q3 and were up 7% in the year to date. Goodbody now forecasts that completions will amount to 34,000 in 2024, up from 32,500 in 2023.

Yet this is still well short of the 50,000 annual completions widely regarded as necessary to keep up with demand.

“It’s been quite a sedate market for some time, largely because of the economic headwinds and also the uncertainty,” Greystar Managing Director Claire Solon said. “That’s true globally, not just for Dublin. But I feel a sense of optimism. There is more stability, and some of the issues, such as high interest rates, are starting to be addressed.

“We have also had some government intervention in terms of looking at planning regulation, which inevitably means there will be some market hesitancy.”

Legislative reform is vital to attract international capital, with investors calling on the government to tackle high construction costs and torturous planning reviews, plus address rent caps. These issues were starkly underlined earlier this month in a report from the Department of Housing that calculated that the average cost of delivering a two-bed apartment in Dublin is now as high as €592K.

Minister for Housing Darragh O’Brien said in the report that a “challenging gap exists between the total development costs and the market price of housing.” He added that the government had introduced “immediate initiatives to help bridge the viability gap and activate supply.”

Planning also remains a major challenge, Solon said, especially for international investors, which remain cautious about residential sites that could get pulled in for judicial review, because of the amount of time such reviews can take to resolve.

“You could be looking at two, three, even four years, and that places a lot of risk on a development,” Solon said. “From our perspective, providing more certainty over the planning process would make investment far more attractive. If the mandate was that judicial reviews would be completed in, say, 18 months to two years, then it would provide far more certainty. Currently, legal challenges are very open-ended, and it’s something that could help unlock the Dublin market.”

Nuveen is an example of an international investor that is a comparatively new player in the Dublin residential sector but still identified opportunity in the market, despite planning, cost and legislative barriers. 

“Dublin continues to demonstrate strong fundamentals across the living sectors, with a significant supply and demand imbalance, ranking high in our cities matrix across Europe,” Chauhan said. “Construction is progressing well on our flagship BTR development in the north Docklands, with over 700 BTR units. The scale of this solidifies our conviction in the market.” 

Her comment on the importance of reforming the rental cap was echoed by Real I.S. Investment Management Director Dorothee Wiedl, who said that more movement is still required among sellers to reignite transactional activity.

“The investment market is still very quiet, as buyer and vendor price expectations have not aligned yet, and because of this, there is quite some uncertainty regarding market pricing,” Wiedl said. “A lot of developers have been able to hold assets due to the strong leasing market in Dublin. Therefore, there haven’t been any fire sales. However, hardly any new projects are being started by developers, as they can’t secure an exit.”

While Chauhan expressed optimism about the prospect of changes to the rent cap, it is a longer-term play. Rent pressure zone caps are in place until 31 December 2025, which makes the fact that construction inflation and financing rates are coming down even more important. She said Nuveen expects this pressure to ease, making Ireland more competitive with some other key BTR markets such as Spain, where Nuveen has more than 3,000 beds in a growing portfolio.

“If the rental cap was softened so that it only applied to existing tenants, rents could be adjusted to market level for a new tenant and would boost returns for investors and make PRS investments more attractive,” Wiedl said.

Real I.S. has been attracted to the Dublin market by Ireland’s economic growth prospects compared with the eurozone over the next five years, which means that Wiedl continues to anticipate strong demand for housing, especially as the expected population growth is the highest in the eurozone.  

“The main opportunity going forward is cheaper financing, which will provide a positive leverage effect,” she said.

The lack of supply means it has never been more important as an investor in the Dublin market to have local knowledge, according to Solon. She said Greystar has capital to deploy, but establishing the viability of a project is very much on a location-by-location basis.

“You need to understand the costs and opportunities of each potential site,” she said. “We are fortunate at Greystar that we have a number of different funds with a pan-European mandate that we can access, because each opportunity may be a better fit with a certain type of fund. That gives us more flexibility in terms of the strategies that we can employ.”

The student accommodation sector has become a key focus for Nuveen, with the company growing its exposure across Europe. It believes Dublin is still relatively underprovisioned for purpose-built student accommodation, so the high-ranking universities and increasing international numbers make it an equally attractive market relative to others in Europe.

“We feel Dublin would be a complementary market. We are currently assessing various opportunities in both the core-plus and value-add space and are keen to gain exposure in this sector,” Chauhan said.

Nuveen has access to various pots of capital ranging from core to value-add strategies, all looking to diversify and increase their exposure to the living sectors in Europe.

“Many of the current active mandates have specific investable cities, for which Dublin is one. Therefore, we are able to screen various deal types for different mandates,” she said. “However, ultimately it comes down to the deal fundamentals and meeting the client return requirements, which have increased given the recent market environment.”

O’Brien, Solon, Chauhan and Weidl will all speak at Bisnow’s Ireland Residential Investment and Development Conference at Aviva Stadium in Dublin on 21 November.