Investors Call For State Flexibility To Kick-Start PRS Market

Two. That's how many build-to-rent deals there were in the first quarter. And that is a spike — in the previous two quarters, there weren't any. 

Much of the residential development in and around Dublin has been built to service the Irish capital’s rapidly growing work-based population, attracting investment from the U.S. and Europe. Between 2015 and 2022, the BTR sector created thousands of homes in the Irish capital. But a slowdown in office demand, higher inflation and interest rates, plus the controversial rent caps, have slammed the brakes on much of the private rented sector.

With concerns that international investors are being put off Dublin, the question is how to unblock this important part of the market, and the answer could be surprisingly simple.

“U.S. investors especially typically do not like heavily regulated markets, which is where we are in Ireland right now,” Grayling Properties Managing Director Peter Horgan said, adding he believes the fundamentals are improving. “Right now, yields have stabilised at around 5% and could come in to 4.75%, and we have seen some more interest from local investors around that new stability.”

He also pointed to rent rises softening to around 2.5% over the past 12 months, which is improving affordability for tenants, with few signs that this is likely to take off again. However, rent controls, development costs and planning mean development is broadly not viable, he said.

“Rent caps were designed to protect occupants, but as we have seen in the past, they address a problem in the short term but store up more problems for the longer term,” he said. “What we need is some more flexibility around the caps so they are focused on the tenancy, not the property. I can’t see that happening preelection but perhaps once the next administration, whoever that may be, has five years ahead of them, they may be better positioned to talk about a way forward that makes development possible again.”

Indeed, while some PRS investors continue to operate in the Dublin market, many developers have switched focus to approved housing bodies and the Land Development Agency, which continues to show its appetite to buy in bulk to help address the housing crisis nationwide.

There are at last some green shoots. Following two consecutive quarters without any PRS investment sales, Q1 marked a long-awaited uptick in activity, with a total of €43.6M spent across two deals, representing 27% of the total market turnover for the quarter, according to adviser Lisney.

By far the larger of the two transactions was Germany-based KGAL’s off-market acquisition of TPG Angelo Gordon and Carysfort Capital's Shackleton Park in Lucan, which was the main transaction of the quarter, accounting for 26% of the total turnover. Shackleton Park comprises 104 units and was sold for a reported €42M. The second was the more modest sale of a six-unit apartment block at Winstonville in Clontarf for €1.6M to a private investor.

Despite the challenges, Hines Senior Managing Director Brian Moran said there are reasons for optimism, but only if the state and private sector can find “commonsense solutions” to the challenges that have brought PRS development to a standstill. He estimates demand is roughly 20% for social housing, 40% for market-value rents and 40% for more affordable rents, with the latter where public-private relationships can make a difference.

“In order for the state to address the undersupply of homes, it needs to focus on finding ways to use the current regulations, the Secure Tenancy Affordable Rental investment scheme and a new planning and development bill, to work with developers,” Moran said. “And in my view, while the schemes are not perfect, they are a smart way of approaching the issue.”

He described the rules as a “Version 1.0” on the journey to a more workable framework to maintain affordability but encourage development. He said they will take some time to be adapted, but they mean that “the architecture is there, and I genuinely believe we do have a structure in place to create the affordable homes that we need.”

Like Horgan, Moran is concerned that the 2% rent cap is too crude an instrument and is acting as a deterrent for international investors. He said there needs to be a correlation between wage growth and rents to create a solution that is fair to occupiers but does not put off investors from outside Ireland.

He also said the proposed new planning regulations have chosen to put a ceiling on new private residential development instead of creating a minimum number of units, which he warned is further putting off developers.

“If we look at the greatest need demographically in Dublin, then it’s for affordable apartments,” he said. “And we’ve done the sums at Hines and believe that with a more nuanced approach from the state, we could produce homes in the €800 to €1,200 monthly rent range that stack up financially and also help to meet sustainability targets through compact development.”

Moran said he believes “tweaks” rather than major changes could make a huge difference.

“It's politically sensitive right now, but calibrating rents with wage growth would give investors confidence and remain fair to tenants,” he said. “We need commonsense conversations to discuss finance, location and housing quality to make sure we deliver the right accommodation stock, because the real crunch is over apartments. That's why it's also crucial to stop dezoning land for residential too.”

Hines is sitting on a development pipeline of around 6,000 units, and only small changes are needed to move forward with them.

“If that happened, it would give me a great case to go back to my funds to unlock investment,” Moran said.

Meanwhile, Horgan said he hopes political sensitivity over rent levels could be revisited post-election in a bid to reignite the market and make Dublin attractive to investors, who are free to choose between a host of European cities over where to deploy their capital.

“Regulations [over minimum room sizes] pulled the rug out from under the feet of the build-to-rent market in Ireland, which had created something like 10,000 dwellings in Dublin,” Horgan said. “For the next phase of PRS development, we’re going to need some flexibility from the state.”