End 'Own Goals' To Reignite Investment, Housing Specialists Tell Irish Government

Investment in the Irish residential sector is in danger of sitting in limbo during the next 12-24 months, as investors and lenders play wait-and-see over the Irish economy, and returns drop as construction costs and inflation soar.

With a chronic lack of housing across much of Ireland, and especially in Dublin, hesitancy from international investors will only increase pressure on the housing market, with the industry calling on the Irish government to help unlock investment.

“The fundamentals [of the Irish residential market] are excellent but we are in a pocket where no one knows what’s going to happen. For the next 12-24 months it’s going to be really difficult,” Urbeo Residential Partner Richard Ball said.

And Ball, speaking at Bisnow’s Ireland Residential Investment and Development conference at the Aviva Stadium, Lansdowne Park, Dublin, on 10 November said that he believed rent caps had created a serious issue for the Irish, and especially Dublin, build-to-rent market.

Since 2016 rents have been capped at 4% or the rate of inflation, whichever is lower, and since December 2021 at the lower of 2% or the rate of inflation within rent protected zones. However, with inflation soaring, that means that the maximum increase is currently around 9% below the prevailing inflation rate.

“We are competing against other cities around Europe. Residential is supposed to be an inflation hedge but the rent cap prevents that," Ball said. "When we score own goals, they are pretty spectacular.” 

However, he said that despite a challenging past six months, the risk for the next 12 months is “probably fully priced in”, and the current situation could also provide a chance for the Irish residential sector to show that it had matured.

“This is an opportunity for us, we have only had institutional capital in the market for the last 10 years, so if we come through this blip we will move up the ladder in terms of attractiveness,” he said.

Demand Outweighs Supply

The key strength for the Irish residential sector is the ongoing surge in demand, with housebuilding at record levels but still lagging projected demand from both Irish residents and overseas workers.

“On the BTR side, there are many markets with undersupply and in Ireland the supply-demand balance you can’t argue with," Hooke & MacDonald Director David Cantwell said. "There are challenges out there but we all know demand from occupants is there.” 

Cantwell estimated that around 80% of investment is currently coming from international institutions and he stressed that the market was supported by a strong infrastructure of experienced developers and investors.

“However, we do need some shift on behalf of government to encourage the new supply of stock for occupants. In a situation where we have a shortage, we need all the actors to play their part,” he said.

Among actions the Irish government could take are a re-evaluation of the cap on rent increases, given soaring inflation rates that are pushing real returns down, and a reduction on VAT rates for construction materials to make new development more affordable, the panel said.

As to where the next tranche of investment is likely to come from, Round Hill Capital Managing Director John Vaudin said that banks are continuing to lend, but said that they will be much more diligent regarding assessing risk, with lending inevitably becoming more expensive. 

“Investors are pausing for a moment and seeing what that means in terms of pricing," Vaudin said. "There’s a lot of talk about in what direction that’s going and how it is affecting investment decisions. Investors look at risk and look at alternative markets and then at working that investment even harder.”

Conditions Still Unstable 

To move forward it is imperative that investors have more predictable conditions with which to make future forecasts and decisions, added Harrison Street Managing Director, European Head of Transactions Josh Miller. He cited stabilisation of interest rates and construction costs, plus a better picture of the future cost of debt and inflation as vital for encouraging uncertain investors.

“There have been no meaningful transactions [recently], investors are all trying to make smart decisions, looking at structured solutions," Miller said. "On the lending side, generally the equity investors are most active but alternative lenders are still open for business. There is liquidity for strong sites and those with a track record.” 

With the current situation leaving “little wriggle room for buyers and sellers” Miller added that the Irish residential sector has now entered a different cycle given the prevailing conditions, but also said that the housing shortage would continue to dominate the situation for those looking to rent or buy in Ireland.

“Constraint of supply is a big issue, and it will only become more of an issue,” he said.