Elkstone Real Estate
This month we provide a special focus on the Private Rented Sector (PRS). The article of interest for this month offers further commentary around the PRS/’Build to Rent’ sector.
Simon English is a Manager on the Elkstone Real Estate team
SPECIAL FOCUS THIS MONTH: PRIVATE RENTED SECTOR (“PRS”) – TAKING STOCK
So much in the world has changed in recent weeks that one could be forgiven for feeling that the only certainty in the current COVID-19 environment is uncertainty. Phrases like ‘lock-down’ and ‘social distancing’ are unlikely to have been on most people’s minds as they rang in the new year on the evening of the 31st of December 2019.
What has happened in the interim has been beyond what many people could have comprehended and the effects are being felt across many walks of life, not least in real estate. Whilst there will be casualties, there are likely going to be varied impacts across different real estate sectors.
We consider that the Private Rented Sector (“PRS”) could be more resilient than other sub-sectors in the forthcoming ‘new normal’ environment.
PRS schemes are a relatively recent phenomenon in Ireland, which previously had a residential rental sector characterised by a high volume of private/personal landlords, many of whom held Buy-to-Let properties as part of their investment portfolios. This led to a proliferation of what had been coined as ‘amateur landlords’.
Post the 2008 economic crisis however, a new institutional class of landlord emerged in the form of large corporates investing in high quantities of properties for the sole purpose of renting. These companies consider the net income derived from those portfolios to be institutional grade recurring income, and with little risk attaching in areas such as Ireland where there was good latent demand for rental product. Notwithstanding this, Hooke & MacDonald research forecasts that there are only 11 landlords in the state with 300+ units, whilst 90% of landlords own less than three properties.
Population trends and supply dynamic
As a general rule of thumb, there has been a supply/demand dislocation of residential properties in Ireland, and in particular, the major urban centres, which has been well documented over the past number of years. The forecasts from various publications do vary, but in general are in agreement that as both (a) a legacy of nearly a decade of very limited residential construction post-2008; and (b) a rising population; the supply of residential (for sale & to rent) has not been able to match demand
Construction completion rates in recent years have only made a minor impact to date in recent years in addressing the present shortfall, let alone generating capacity to satisfy the future population growth forecast. Hooke & MacDonald estimate around 21,000 units were completed in 2019.
A further complication to add to this ‘perfect storm’ is rising construction costs which has made the viability of many schemes marginal, and which has undoubtedly had an impact on delivery of new stock.
Thankfully, a counter to some of these issues is the ‘Strategic Housing Development’ (aka ‘Fasttrack’) process introduced by the government, which is in place for An Bord Pleanála to directly determine planning applications for residential developments of 100+ units. This process is undoubtedly assisting in speeding up the delivery of residential units, albeit we consider that there will be a further period of time to pass before we see the true benefit of this legislation as more and more developments that have been approved come on stream.
Various other ‘micro’ factors within the market all feed into the evolution of the residential market going forward, including the likes of government policy on rent caps/freezes, and restrictions on existing stock presently being utilised as Air BnB properties rather than traditional rentals.
Where does PRS fit in?
PRS is a specific product which is designed with renters in mind, and with specifications and facilities that suit those who wish to rent and to benefit from such a bespoke product.
In general, ‘professional landlords’, i.e. specialist institutions, are the end buyer of entire completed developments, and which brings a high level service to tenants In tandem with this, the presence of such landlords helps to mitigate execution risk for developers seeking an end buyer for their product. In the period 2016 – Q1 2020, a total of 10,500 units traded, with a broadly 50:50 split between new stock and existing stock.
We see institutional demand for such product remaining resilient coming into an era where interest and treasury rates will remain low and investors seek yield commensurate with risk. PRS transactions accounted for 16% of all investment transactions in 2019 (2018: 15%) and the possibility exists that this proportion will increase into 2020 and beyond.
Whilst the current pandemic has had a devastating effect on economies globally, the provision of housing will still be a critical item on the national ‘To-Do’ list in the post COVID-19 environment, notwithstanding that it has been pushed off the front pages of the newspapers in recent months.
The importance of this has been evidenced in the current discourse around the possibility of construction sites re-opening ahead of the lifting of general ‘lock-down’ restrictions. At time of writing, the Department of Housing, Planning and Local Government had confirmed that construction could recommence on 35 social housing projects (across 14 counties) to ensure local authorities could continue to deliver accommodation.
The supply/demand imbalance that existed prior to the pandemic will still exist, and we consider that demand for rental product will remain broadly in line with the previous demand. There could be the possibility of demand remaining even more resilient than previously anticipated as people defer buying decisions that they may have previously been considering for 2020.
One of the key aspects that remains uncertain will be the effect that the current economic conditions will have on rents, and more specifically, affordability of rents. Only time (and the market!) will tell on this.
It is likely that there may be some disruption on transactional activity for Q2 2020, however total units traded (263) in Q1 2020 represented a 13.6% increase on the same period in Q1 2019 which indicates the growing importance of PRS as a sector. We would caution that 77% of the Q1 2020 units traded represented older existing stock (rather than new units) which underpins that the supply of new stock is of critical importance to satisfy investor demand into the future.
Undoubtedly, going into the ‘new normal’, PRS as a residential product has a role to play in both the quick, bulk delivery of stock, and onwardly satisfying occupier demand. As an investment class, we continue to view it favourably on a risk/reward basis.
Sources: ‘The Dublin Private Rented Sector Investment Report Q1 2020’ (Hooke & MacDonald –– April 2020)
REAL ESTATE ARTICLE
‘Dublin: rising to the build-to-rent challenge’ (source: Turner & Townsend – 10th March 2020). This (pre-lockdown) article resonates with us and offers further commentary around the PRS/’Build to Rent’ sector. Read the full article here.