APARTMENT CONSTRUCTION GRINDS TO A HALT
Hooke & MacDonald report reveals a drop in the construction of apartments in the private rental market, while a pro-investment culture is urgently needed
A new report on the residential investment and new homes market by Hooke & MacDonald reveals that the construction of apartments for the private rental market in Ireland has ground to a virtual halt, except for a small number of developments nearing completion, including two large schemes in Dublin Docklands.
This dramatic slowdown began before 2024 and intensified throughout the year, with the absence of any newly built or forward-funded private rental sector transactions confirming the severity of the situation. The only new build investment sale in 2024 was a social one. There were no newly built private homes sold to or funded by institutional investors for the private rental market in the country in 2024. While 9,031 apartments were built in Dublin in 2023, this figure fell by 27% to 6,608 in 2024, most of which were for the public sector or build to sell market, highlighting the deepening supply crisis.
The report states that “some parties misinterpret the level of involvement of pension funds and other investment entities in the acquisition and funding of new residential units in the private rental sector. By using stamp duty payments as a guide they fail to appreciate that most of the stamp duty paid in, say, 2024 relates to sale closures on properties that commenced and were purchased in or prior to 2022 and are not a reflection of current market transactional activity. A relatively small part of the 2024 stamp duty payments relates to the sale of existing stock of apartments by investors who needed to exit the market. Little or none of it relates to new institutional purchases of newly built residential properties.”
Other key insights from the Hooke & MacDonald report include the following:
The year 2024 represented a watershed for the multi-family/private rental sector, as, for the first time in a decade, there were no transactions for newly built or forward-funded private rental sector projects. This is a very alarming sign for future rental stock supply for tenants and requires urgent measures by the new government to attract funding into the sector. Key actions should include removing the rent cap, which is having the opposite effect of what was intended, overhauling the planning system, investing significantly in infrastructure, rezoning more land for housing and introducing further measures to make apartment delivery more viable.
New home completions
New home completions in Dublin for 2024 totalled 10,927, of which 6,608 (61%) were apartments, 4,077 (37%) were estate houses and 242 (2%) were single houses which includes a reduction of 27 per cent in the number of apartments delivered (6,608) when compared to the 9,031 built in 2023.
This is mainly due to the lack of funding and non-viability of apartment construction at present and bodes badly for future requirements of both owner occupiers and tenants. If it wasn’t for the purchase of whole new developments of apartments by the LDA and Approved Housing Bodies for social housing, affordable housing and other tenures then apartment construction completions would have fallen by much more than 27 per cent in the capital.
Of the 10,927 new home completions in Dublin in 2024, 3,086 (28%) were in South Dublin County Council area, 3,388 (31%) in Dublin City Council, 2,026 (19%) in Dun Laoghaire Rathdown and 2,427 (22%) in Fingal County Council. This is a reversal of the position in 2023 when the leading area for new homes supply was Dun Laoghaire Rathdown with 3,563 (28%).
The report states that Dublin’s population has surged over the last 3 years, well-beyond predictions – anecdotally, by over 33,000 per annum on a net basis and the Irish population has been increasing by 100,000 per annum over the period. There were 5.1 million people in the State on the date of the Census in April 2022, an 8% increase since the previous Census in April 2016. As of April 2024, the population was 5.38 million, up another 5.4%.
New homes are proving more popular than older properties due to the costs of upgrading the latter and the ever increasing importance of energy efficiency. Developers have responded positively to the strong demand by starting work on numerous sites throughout Leinster and other provinces which should lead to an increase in housing supply in the next three years. Affordability is driving activity in the market. The high quality of the design, construction, layouts, specification and amenities being presently provided by the construction industry in new homes developments is very impressive.
There have been limited market transactions in the residential investment sector in Ireland over the last 24 months with a disconnect between pricing being offered by a limited number of active investors with equity capital to deploy through new acquisitions and on the supply side, the costs of construction for new development and expected pricing of stakeholders for stabilised stock.
Multi-family investments
In terms of multi-family investments there were only four investment transactions in the sector over €10 million in 2024: two of them being existing stock private rental sector investments and two being social housing investments with long-term leases.
The largest multi-family/private rental sector investment in 2024 was the Malahide transaction for €66 million for a stabilised portfolio and at a net yield of c.5.2% for the 136 apartments and houses in North Dublin. The other significant private rental sector transaction was the €42 million sale to the German fund, KGAL by Angelo, Gordon / Carysfort Capital of 104 stabilised apartments built by Cairn plc in Shackleton, Lucan in West Dublin. This was KGAL’s first residential acquisition in Ireland and was secured at a blended net yield of approximately 4.85%, setting a strong benchmark for pricing in suburban locations and is expected to support valuations in other areas as well.
The second largest reported transaction in 2024 was the social housing investment sale of 111 apartments at Grand Canal Harbour, Dublin 8 by Marlet Property Group to New Beginning in Q4 for €54.5 million; the fourth largest transaction was another social housing investment sale – 104 apartments in Dublin 7 also to New Beginning in Q3 for €38 million. Both investments were for blocks with 25-year CPI linked leases (reviews every 3 years) to Dublin City Council and the transaction pricing was in the early 4’s on a net initial yield basis. There is an expectation that there will be limited social housing investment sales in 2025 due to the few long-term lease investments available and the Government discontinuing the policy.
Hooke & MacDonald state that pricing/net yields are being closely watched by investors and stakeholders with stabilised portfolios. Most stakeholders are anticipating compression in net yields as the transactional market and interest rate environment improves with net yields moving towards 4.5% and below for prime multi-family private rental investments. The limited number of social investments with long-term leases are in the 4’s. Student housing still has an edge on multi-family based on the yield profile being higher, in the 5% range.
Positive news on transactions in the first half of 2025 could bring additional stabilised portfolios for sale through processes in the second half of the year as the more opportunistic purchasers that acquired properties between 2018 and 2022 look to complete their business plans and look to sell to longer term core and core plus funds.
A mix of investor capital types, including private equity, value-add and core investors, are currently monitoring the Irish market and looking for opportunities. However, there is a disconnect between the pricing funders can pay and the cost to construct new apartments – this means there will continue to be no new transactions or development. There is also a disconnect between the pricing expected by parties with stabilised portfolios and the levels being talked about in the market by potential investors.
The expectation is that a number of stabilised developments will be brought to the market in 2025 and the reaction to these will be watched by the over 25-plus institutional investors with Irish portfolios and direct exposure to the private rental sector in Dublin. The highly regarded Spencer Place is due to be brought to the market in Q1, 2025.
The future of the private rental sector in Ireland will be significantly impacted by government action to address the impediments and incentivise new funding and supply. The Department of Finance and senior government ministers in 2024 had recognised the need for both domestic and international capital to facilitate new housing development; it is now time for a strategy and policies to be enacted to foster the right conditions to create a sustainable private rental sector.
Institutional investors
Institutional investors have been responsible for funding over 20,000 apartments, mostly in Dublin, not even counting the funding of thousands of social homes, in the seven years from 2016 providing accommodation for approximately 50,000 people based on an average occupancy of 2.5 persons per property. If these had not been built the rental market would now be in a far worse position than it currently is in terms of supply – these properties would not have been built if it wasn’t for these sources of capital; it is not the case that owner occupiers could have funded their construction which in most cases was simply unviable. These funds are not the whole solution to increasing the supply of homes in Ireland, including to the rental market, but they have proven they can make an important and essential contribution towards solving it.
Obstacles impeding housing delivery
The fact that housing completions in 2024 were lower than the 2023 figures is very disappointing and requires urgent action to address the reasons for the fall. They include a flawed understaffed planning system, insufficient zoned land for housing, an infrastructure deficit, a hostile environment for international capital and lack of viability for apartment developments. It is significant that nationally new scheme house completions were modestly up in 2024 to 16,200, an increase of 4.6 per cent on the 2023 level, but apartment completions were down by 24 per cent. This is directly attributable to the rent cap which is killing supply in the rental market and doing the opposite to what was intended, i.e. forcing rents up.
We need to be building well in excess of 60,000 new homes each year, more than a doubling of the 2024 levels. Tinkering with measures will not achieve this. Radical action is needed. The new government have the mandate for this but they need to show that they have the courage and vision to achieve it. People seeking homes to buy or rent are dependent on it.
The extent of the challenges besetting the delivery of new homes for both the sale and rental markets make it imperative for the new government to immediately declare, devise and implement an Emergency Programme for the Housing Sector. The alternative is a continuation of the hardship and deprivation that should be alien to a developed nation such as Ireland.
The Emergency Programme needs to make arrangements to have more land zoned and serviced for housing, more timely planning permissions, embracing new typologies to reflect changing demographics, implementation of measures to revitalise our cities and towns, accelerate the use of modern methods of construction, increase funding options for builders and developers, remove the rent cap and provide stable conditions for international capital funding of the housing market. The Planning Act which was passed in 2024 will take a few years to have any beneficial effect on housing supply.
The Hooke & MacDonald report states that the misguided strategy which closed the door on international capital to fund apartment developments in the private rental sector in recent years is now coming home to roost. It has killed supply in the rental market and has forced rents up as many in the industry predicted. It is significant that rents moderated in Dublin in 2023 when the internationally funded apartment developments were completed and came to the market. Regretfully, the absence of any more of these new developments is forcing rents back up. Most of these developments would not have been built if it wasn’t for the international funders.
Apartment developments
Apartment developments are also needed for the owner occupier market. Although a number of these developments came to the market in Dublin in 2024 which sold well, viability is a major factor suppressing supply. The Croí Cónaithe Cities Scheme is designed to address the viability of apartment delivery for owner occupation in the 5 main cities in Ireland, providing subsidies to bridge the gap between delivery costs and market price. This scheme has good potential and will gain good traction in 2025 and beyond.
The exercise by Government of pragmatic policies and politics to exploit Ireland’s natural assets and to complement the built environment needs to be brave, fearless and far seeking. Such policy must encourage much needed growth and expansion of the building industry whilst also completing the task of making the 2024 Planning and Development Act fit for purpose and enabling a faster development process to occur. Whilst this legislation was completed with haste in the final days of the last government, the fact remains that a significant environmental assessment phase remains to be undertaken together with outstanding amendments, all of which have the potential to further delay the development process. This new government now has this unique opportunity to face off its detractors – those for example, who pejoratively and incorrectly view the role of foreign investment for the Private Rental Sector as exploitative. This requires political leadership for this fresh-start position of promise, as the new Dail of 2025 democratically endorsed by the electorate, commences the exercise of its new term of office.
The Hooke & MacDonald report states that: “Of 1.86 million occupied homes in the State in the April 2022 Census, 85% of them were privately owned. The State, local authorities and charitable bodies make up only 15% of Irish dwellings. Commentators often seem to ignore the fact that Irish housing is mostly constructed, rented and owned by private sector and the industry is largely market-based and driven. The fact that members of the Government and the Department of Finance have consistently over last 12 months had to state that ‘the State can’t do it all on its own’ mantra in relation to the funding and delivery of new housing shows the disconnect between fantasy-land aspirations of many who seek to influence and critique housing policy and the reality that the private sector is needed in housing delivery and the right conditions need to be created to allow for this. This is where Government can have an influence, providing appropriate pro-development policies and certainty, both of which are needed by housing funders, builders and the market in general, but the State and politicians do not control new delivery. “
In terms of residential investment, Hooke & MacDonald suggest the following multi-tenure approach:
1. Reform rental regulations and allow for rents to be marked-to-market both when tenants vacate and for newly completed properties that have never been let.
2. Provide meaningful incentives to allow viability and development of higher density, apartment development and student accommodation in Dublin and other urban areas across the country.
3. Bring certainty to the funds regime and allow for large scale deployment of capital to invest in Ireland’s housing infrastructure.
4. Adjust the STAR (Secure Tenancy Affordable Rental) Scheme to make it institutionally fit-for-purpose, providing an appropriate commercial return.
5. Continue to support the social and affordable/cost rental sector through the LDA and Affordable Housing Bodies.
6. Ensure the rights of tenants are protected through proper enforcement of regulations.
7. Bring more efficiency to Residential Tenancies Board processes, including the process for tenants who are in substantial arrears and not cooperating.
8. Remove impediments in the planning system and zone more land for development of housing.
9. Allow for extension of planning permissions on thousands of apartment sites which have been unviable to date and are now coming to the end of their approval timeline.
10. Foster a pro-funder and pro-investment culture, grounded in policy certainty, similar to that which has been successful for decades in respect of Foreign Direct Investment for multi-national businesses such as IT, funds and pharmaceuticals.
11. Increase engagement between Government, State bodies and the private sector to further understanding of the complexities of housing policy, funding, development and investment, including a reasonable commitment for Government not to issue new laws or policies without appropriate concept review.
_____________________________________________________
Michael McDonnell Managing Editor of Irish Construction Industry Magazine & Plan Magazine
Email: michael@irishconstruction.com WWW.MCDMEDIA.IE