We have heard a lot about the crisis in Dublin’s rental sector in recent months. On the surface, a lack of properties for sale or to let on the market has contributed to rising rents and the crisis of homelessness. But underneath this, a less visible, though no less worrying, change has been taking place – the rise of the transnational landlord.
Traditionally Irish landlords have been small-time amateurs. 65% of landlords have only one property with most others having just two or three. Many landlords work full time in addition to renting properties and up to one third are described as ‘accidental landlords’ – such as people renting out their own principal residence due to mortgage arrears. But recently a new breed of landlord has entered the scene, referred to as ‘professional’ or ‘institutional’ landlords. The most prominent is Ireland’s largest landlord, I.RES, a Real Estate Investment Trust focusing on long term investment in the rental sector. Other examples include global real estate companies such as Hines, Kennedy Wilson and Oxley Holdings, all of which are pursuing ‘build to rent’ strategies across Dublin.
Like much of what’s going on in the Irish property market, this development is driven by three interacting sets of dynamics.
Firstly, Irish property is being sold en masse at bargain basement prices . The sellers are financial institutions seeking to deleverage rapidly. These include foreign lenders such as Lloyds who sold their mortgage book to private equity firm Lone Star Capital. But the main players have been the Irish bad banks – Anglo and especially NAMA. Indeed 800 of the 1,200 apartments owned by I.RES were bought in one go from NAMA under Project Orange. The largest asset class held by NAMA is development land, and much of this has been sold to global property companies seeking to become long term investors in rental accommodation. For example, NAMA was one of the main owners of 400 acres of suburban land in Cherrywood sold to Texas based Hines. Hines plans to develop up to 3,600 apartments on the site.
Secondly, there has been plenty of money washing around the global financial system and seeking to find its way into Irish property. As a PWC report earlier this year put it, European debt markets are ‘awash with capital’. The global financial environment continues to be characterized by some of the core dynamics that drove the financial boom of the 2000s: very low interest rates and low yields in traditional asset classes such as government and corporate bonds. Add to this significant quantitative easing in the US, UK and now the EU. There is a lot of money out there looking for somewhere to go, and heavily discounted real estate looks like a good bet. Hence, much of the money buying up Irish real estate is flowing in from the global financial system. Hines, itself a Texas based company, is backed financially by New York private equity firm King Street Capital. I.RES has funded its property shopping spree through its Canadian backer, the Canadian Apartment Properties Real Estate Investment Trust.
Thirdly, and finally, the transformation of the Irish housing system has turned the rental sector into a viable investment for international players. The sector continues to expand rapidly, increasing by over 100% in the Dublin region since 2002, as do rents. Most importantly, however, the collapse of the mortgage market means yesterday’s ‘first time buyers’ are today’s ‘top end renters’. The new class of landlord is chasing the high rents paid by a new class of renter, e.g. two income professional couples who are renting long term.
The business strategies of all the new institutional landlords thus work around these three axes: using global sources of capital to buy discounted Irish assets and rent them to relatively well-off renters. Let’s look in a little more detail at just what they’re up to.
I.RES (Irish Residential Real Estate Investment Trust) has spent around €400 million in the last year or two acquiring 1,200 apartments in Dublin. They hope to expand their portfolio to around 3,000 apartments. The company claims it “is focused on consolidating the fragmented Irish rental market by targeting high quality property assets … To deliver superior customer service, enhance tenant retention, and deliver quality homes.” They have been widely reported to be seeking rent increases of up to 20% across their portfolio this year. They are also considering expanding into affordable housing, social housing and student residence, all of which are potential new asset classes for global property investment in Ireland. You can read more about their plans in their investment brochure.
Oxley Holdings are also pursuing high end renters, but are even more focused on the top of the market. The Singapore based developer describes itself as “a lifestyle property developer that caters to the upwardly mobile homebuyer and entrepreneur” and is building 200 apartments at 72 – 80 North Wall Quay in Dublin’s Docklands, bought from NAMA last year.
Hines, which opened its Irish office last year, articulated its motivation for entering the Irish property market as follows:
“The firm made the decision to set up in Dublin to acquire single assets, portfolios, or debt; to enter into joint venture arrangements where appropriate; and to look at opportunities emerging from the de-leveraging in Ireland.”
In two years they have acquired over €1 billion in commercial, retail and residential property. As mentioned they look set to become a huge landlord under the Cherrywood development and are also building apartments in the Docklands, where they are completing the Spencer Dock development in conjunction once again with King Street Capital. Hines also sees themselves as a targeting the high end of the market and providing the high quality rental property. Their developments will also include special facilities and property management.
Finally, LA based Kennedy Wilson has aggressively entered Ireland chasing distressed assets but also developing major projects. While they have only a small residential portfolio (mainly investing in offices) they have snapped up around five apartment blocks in Dublin and are building the Clancy Quay complex near Island Bridge. KW have also entered a joint venture with NAMA to develop the Capital Docks project on Sir John Roggerson’s Quay in the Docklands. They submitted planning application in April 2014 for a major development on the 5 acre site. One of the buildings will be a nineteen story tower while overall the development will provide 300,000 sq. ft. of office space and 204 apartments (check out the commercial brochure for more details ). Interestingly, Deutchse Bank issued the first Commercial Mortgage Backed Security backed by Irish rental properties in 2015. The MBS was backed by loans linked to KW’s apartment investments.
But what does this all mean for tenants and for housing more generally? While it’s too early to say, international research certainly gives cause for concern. The pioneering work of Desiree Fields has documented the impact of private equity firms on residential rental properties in New York and elsewhere. Issues include high rents, high rates of tenant turnover and other aggressive business strategies which hit tenants hard. In the Irish case, given that institutional landlords are focused on relatively well-off tenants, we might be tempted to think that their impact will be negligible. Given the chronic lack of affordable rental accommodation, however, we should certainly be concerned about the opportunity cost associated with this new form of investment. Every apartment block or development site snapped up by global companies with significant financial fire power is a lost opportunity for affordable housing. From the point of view of the city as a whole, it would have been better to see heavily discounted apartment blocks and cheap development land being bought by local authorities and housing associations. Instead, affordable housing is being crowded out by a few large players whose only interest is in ‘top end’ tenants. Thus, while the possibility of professionalization raised by institutional investors has been welcomed in some quarters, the early indications are that they will do little for the majority of tenants.
Mick Byrne is an IRC postdoctoral researcher in NIRSA NUI Maynooth. He is also an activist involved in various housing issues, including the Dublin Tenants Association.