Much controversy has surrounded the Government’s recent changes to rent pressure zones (RPZs). Any move to make the rental sector more attractive to institutional investors, which are typically pension funds, is quickly derided by an opposition that brands them as “vulture” and “cuckoo” funds. This viewpoint seeks to undermine their important role in addressing the housing crisis in the eyes of a dispirited public that, understandably, struggles to see an end to the problem.
We need private funding to meet our housing targets. For example, the €14 billion Apple tax windfall would cover little more than a 10th of the cost of the 300,000 units targeted for completion between 2025 and 2030. The Government does not have unlimited spending power; it is bound by the annual revenue intake, which is itself a finite resource.
However, for the private sector to fulfil this role, there are practicalities that must be satisfied. To put it plainly, the value derived from an asset must exceed the cost of delivering it. Construction viability hinges on the costs of materials, labour, regulatory compliance and financing, with pandemic-related inflation spikes heaping further pressure in this regard. Indeed, a recent study by property consultants Mitchell McDermott conducted on behalf of the Department of Housing estimated that it costs €549,790 to build a two-bedroom apartment in suburban Dublin, and up to €591,783 in the city centre.
Enter pension funds, which are well placed to forward-fund apartment development. These are long-term investors with low return requirements and they are comfortable with deploying large amounts of capital in one go. Moderate rental growth is a good match for their liabilities, though a degree of flexibility needs to be allowed to adjust rents when inflation spikes as the cost of running an asset rises with inflation. This is why linking rental growth to general inflation is more appropriate than the current cap of 2 per cent if high inflation scenarios occur.
RM Block
The rental return also needs to be sufficiently attractive to compensate for other risks taken on holding the asset, and also for the foregone returns available from investing in alternative jurisdictions in Europe. In recent years, Ireland has not been competitive in attracting foreign direct investment to the rental sector, due to having the most restrictive rent control regime in Europe. Yet the new reform linking rental rates to tenancies rather than properties, thus allowing rents to be returned to the market rate when a tenant vacates, helps close the gap on what has been a major competitive disadvantage.
[ The numbers say we need private rental investment to address housing crisisOpens in new window ]
The looser rental cap on new-build tenancies will not impact existing tenancies, but the future effect will be to moderate rental growth across the entire private market. To understand why, let’s return to Econ101; rising demand requires a proportionate increase in supply to maintain price stability. In the absence of sufficient supply, prices accelerate.
That dynamic is even more powerful when there is a decade-long backlog of unmet demand. With only 30,200 homes built in 2024, against the Government’s expectation for 40,000, the level of unmet demand is continuing to swell. Making it feasible for institutional investors to return to the Irish housing market will support much-needed supply.
Sitting in at the recent National Economic Dialogue, I saw first-hand the variety of issues raised by public, private and social justice groups. The challenge of juggling what can be mutually exclusive demands cannot be overstated, but the private sector clearly has a role to play.
The private market is not altruistic but, with the right policy environment, it can be responsive, pragmatic and highly effective. It need not compete with social and affordable solutions but act as a complement instead. Many agree that a mixed funding model is required, so why the resistance to supporting the quickest method to restoring supply, and giving slower-acting solutions the time to take effect? It’s hard to see how anyone could reasonably disagree, unless they are more politically motivated than solution orientated.
Natasha Browne is a senior research analyst at Savills Ireland
