Do real estate funds make us a nation of tenants? – The Irish Times

Based on reports from the Central Statistics Office (CSO), the average price paid by apartment buying households in Dublin last year was €381,892. We know, however, that the main buyers of the 4,000 apartments in the capital in 2021 were not households but institutions. Estimates vary, but the Construction Industry Federation (CIF) says the funds bought 95% of apartments built in the state in 2019.

As for the price they paid, the CSO house price data does not specify. A recent report by real estate firm Hooke and MacDonald, however, lists the blocks bought by institutional investors in 2021, the prices paid and the number of units in each block. It can be deduced that these investors paid an average price of €448,031 for the apartments. This was 17% more than what households typically paid, knowing that we’re talking about a range of different apartment types in a myriad of locations.

However, the price difference is significant and there are two ways to look at it. Perhaps you can take a negative view, noting that funds, backed by a wall of cheap money, are paying above the odds for properties and driving prices up. Dublin’s build-to-let sector has attracted a veritable reservoir of international money – over €7 billion since 2012 – thanks to the strong returns it offers investors. Rental yields in Dublin are among the highest in the world.

Demographic pressures, investor-friendly housing policies, and even the recent easing of Housing Assistance Payment Program (HAP) thresholds also speak in favor of investing here. As a result, we have a higher proportion of institutional investors in the market—we hardly had any before 2008—and a higher proportion of the population renting as a result.

Or you might consider, as the industry does, that the price differential and the premiums the funds put on the apartments facilitate a deal that otherwise wouldn’t materialize. Most apartment projects in Dublin are facilitated by term commitment agreements where funds buy blocks during construction or off plans. Investors typically pay a premium to buy in bulk because it’s easier and cheaper to manage multiple units in one place.

Builders, developers and agents say these projects would never have seen the light of day without institutional money, as banks have – to a large extent – left the development lending space since the crash of 2008.

If an institution buys a building that never makes it to the first-time buyer market, is that a bad thing in absolute terms? They are adding units to an undersupplied rental market. And is an owner-occupier more preferential than a tenant? You could argue that both ways. Home ownership is preferred but the needs of tenants in times of housing crisis may be more immediate. Either way, the reason institutions attract more supply is that they can afford to pay more than regular punters. The downside is that the prices are higher.

However, what is missing in these arguments is that if institutional buyers pay a higher price for the property, the higher price is capitalized into the value of the land. The interaction between land values ​​and property prices is a key dynamic. If sales prices increase, the value of the land — a comparable piece of land — increases by a multiple of the increase.

This incentivizes landowners to hold on to their assets to extract the maximum possible value from them, which in practice means bringing land to the market drip-by-drip on a cyclical basis. This is why the government is working to develop strategies to penalize land hoarding.

Much of the policy here has been focused on reducing construction costs – smaller units, no balconies, fewer parking spaces – but the relationship between end prices and land values ​​is less aired.

The 1973 Kenny Report, which recommended that the state adopt a system of “active land management”, suggested that local authorities be empowered to purchase building land, using a purchase order, at their existing use value plus 25% as part of an offer. to suppress land speculation and limit seemingly ever-increasing land values. It is a pity that the advice was never adopted.

The big question going forward is whether a new era of higher interest rates – the European Central Bank will begin a sequence of rate hikes from next month – will curb the institutional appetite for Irish property and what would happen if the rates were normalized. Given that interest rates are so low and housing demand is so high, an initial sequence of 0.25% hikes is unlikely to change the momentum much. And the return of investment brokers working with international clients is that investors will buy as many private rental sector products in Ireland as you can offer them.