Exclusive: Dutch Giant APG On Its €450M Cherrywood Residential Deal

Dublin is experiencing the worst housing shortage that Ireland has ever seen. Supply is low and many people have become homeless or are stuck in overcrowded situations.

Even for those not in such dire circumstances, house prices and rents are high. It is a big challenge for the city — if people cannot afford to live in Dublin, it will potentially discourage the flow of global companies that have relocated to the city in recent years.

Against this backdrop of limited supply and high demand, last week Dutch pension fund APG Asset Management announced they would be backing a €450M investment that will kickstart the development of a new town that is being created in South Dublin.

The first phase of Cherrywood, situated on the green luas line, will feature 1,221 build-to-rent apartments built by Hines with backing from APG. When completed APG will own them for the long term.

Cherrywood will ultimately comprise 7,700 new homes, six schools, three major parks and leisure facilities, supported by an existing light rail system and serving an eventual planned population of 25,000 people.

In an exclusive interview, Europe's second largest property investor with around €43B of assets talked to Bisnow about why it decided to invest in Ireland's largest ever build-to-rent scheme, what makes the Dublin rented residential market so appealing and whether it will be investing more in the city.

Dublin has been on the investor's watchlist for some time, and particularly the residential sector. It previously had exposure to the city through investments in listed companies like Green REIT and IRES and joint ventures in student accomodation. It is also an investor in Value Retail's Kildare Village outlet centre.

“Dublin ticks a number of boxes for APG, one of those being an appealing risk-return profile for residential investment,” APG Senior Portfolio Real Estate Manager Paul van Stiphout said.

“It’s a perfect combination of factors,” van Stiphout said. "It is low on supply and high on demand. Ireland is known for its positive demographics, which is the opposite of most countries in Europe. Dublin in turn benefits from this on the back of strong urbanisation. If you have healthy population growth that bodes well for residential investment.”

He also cited the transparent market in Dublin and the outward looking nature of Ireland in general as one of the reasons why it wanted to invest in the capital.

"Ireland has always been open minded and welcoming when it comes to immigration and has a very business-friendly environment, and that is one reason why you have seen so many multinational companies setting up headquarters there. And from the point of view of a pension fund investor the Irish investment market is efficient and transparent, all of which further underpins our investment here.”

In terms of the effect of Brexit, van Stiphout said he expected Dublin to be one of the biggest beneficiaries.

"Obviously Ireland's economy has very close ties to the U.K., so on a net basis it is very hard to say what the result will be. But it shares a time zone and a language with the U.K., a lot of the legal system and is business friendly. Dublin has a lot of good cards to potentially benefit from Brexit.”

APG's investment in Cherrywood mirrors its strategy across Europe, where it has been a major investor in rented residential in cities like London, Madrid and Helsinki. This was because of the long-term and stable returns that the sector offered, van Stiphout said.

In terms of the investment in Cherrywood, van Stiphout said the size was part of the appeal — APG's scale means that the investments it makes need to be big to make it worth its while. And this was appealing for Hines, as it meant it could partner with a single investor rather than having to put together a club of smaller investors.

“It is a function of minds meeting, they know what we think and look for. We know Hines well, they know our risk appetite, and we know the developments they have completed across the globe. This is a complex project and build-to-rent residential needs a good manager.”

Because Cherrywood was placed in a strategic development zone it took out the risk of pre-planning obstacles, van Stiphout said. In terms of the target audience and how it will appeal, he said this project will be a new departure in the build-to-rent market for Dublin.

“The first units will be delivered in mid 2020 and will be a mixture of studios as well as one, two and three-bed apartments. The local population including families will be targeted. This project is a new standard in the build-to-rent market. I know it is a bit of a cliche, but people want to work, live, learn and play in the same area now, and this won't be a place for people to just live, it will have everything people need to spend their time meaningfully. We hope that will resonate with future tenants.

As for the price APG paid: “Only time will tell of course. We have assumed rental levels fitting the quality of the product, whilst keeping a close eye on current and expected market rental levels.”

Good news for the Dublin market is that APG has not necessarily hit its ceiling for investment in the sector.  "It depends on what's available but we would look to get more exposure," van Stiphout said. "It would need to hit our risk-return criteria but the market in general is suffering from a big backlog of the right product."

Watch this space.