Real Estate December 2019
This month we provide an update on our recent activity in the Student Accommodation, Office and Build to Rent sectors. Our special focus is on the topic of the Rent Freeze Bill, the consequences of rent control, and what this means for institutional investors.
In light of our recent Galway acquisitions, below is a link to a special report by CBRE entitled ‘The Case for Galway’ which outlines Galway as an investment case.
Seán Blank is a Manager on the Elkstone Real Estate team
ELKSTONE REAL ESTATE MARKET OVERVIEW
We recently closed the purchase of 98 student beds and six ancillary commercial units in Galway. We have strong confidence in the Galway PBSA market and view the supply/demand dynamics as very favourable. This investment is a compelling pure income play offering clients a strong cash on cash yield predicated on conservative rental assumptions and an unrivalled location.
We also recently closed the purchase of a 13,000 sq ft office in Galway City Centre. The Galway office market for the past number of years has been defined by severe lag in supply. According to Cushman & Wakefield, just 1,600 sq m of Grade A stock in the city centre was available as of the end of Q1 2019. Therefore the supply demand mismatch of office space in Galway makes it an attractive investment market.
Build to Rent
A pre-application meeting has been held and we are in the process of submitting an application through the SHD process with An Bord Pleanála for 125 Build to Rent units.
The development will be a high specification and includes a number of amenities for residents. It is one of a number of developments that we are taking through planning in both Dublin and Galway.
SPECIAL FOCUS THIS MONTH: THE RENT FREEZE BILL
A Bill to freeze rents across the country for three years has been put before the Dáil. This is in addition to the Rent Pressure Zones introduced in January 2017 which limit annual rental inflation to 4%.
What are the odds of the Rent Freeze Bill being signed into law?
The Bill has been initiated and is currently being debated by the Dáil. A vote is scheduled for Thursday the 12th of December which, if passed, would see the Bill going to the third (committee) stage of the Dáil. It is likely go to committee stage as Fianna Fail have intimated that they are likely to support it to committee stage only, therefore, it is unlikely to go any further.
What are the consequences of rent control?
While rent controls can been seen as a quick win for government who are overseeing a housing crisis, the overwhelming majority of research papers conclude that rent controls actually make a housing crisis much worse. A paper analysing the impact of rent controls on the San Francisco housing market (written for the American National Bureau of Economic Research (NBER) by the University of Standford – Rebecca Diamond, Timothy McQuade and Franklin Qian) outlined the following:
“Taken together, we see rent control increased property investment, spurred the demolition and reconstruction of new buildings, generated conversion of rental units to owner occupied housing, and caused a decline of the number of renters per building. All of these responses lead to a housing stock which caters to higher income individuals. Rent control has actually fuelled the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”
Paul Krugman, a Nobel Prize winning economist, wrote in a 2000 New York Times article:
“The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.”’
Another example of the unintended consequences of rent controls is the city of Boston, MA. Boston maintained rent controls until the 1990s and during the control period rental apartment blocks in desirable areas became economically unviable and were converted into luxury apartment blocks. The effects of the policy was not only to reduce available rental stock but also to gentrify the rent control areas into places where only wealthier owner-occupiers could afford to live.
Typically the longer rent controls are held in place, the greater the gap between rent-controlled rents and the market rents. The consequent effects are to disincentivise landlords to maintain current rental stock or developers to build new rental stock. The overall impact is a reduction in the quality and quantity of rental stock.
What does this all mean for institutional investors?
There are many obvious negative impacts of rent controls on institutional investors. The share price of IRES Reit, for example, dropped by 6% after the announcement of the Rent Freeze Bill.
To conclude, it is unlikely that the Rent Freeze Bill will be enacted. However, it is interesting to note that just three years on from the Rent Pressure Zone (RPZ) legislation being enacted and the clear exodus of private landlords from the rental market as a direct consequence, we now have the Government facing down cries for more onerous rent control. Ultimately, this will benefit no one but short-term poll ratings.
Update: Since writing this article, the Dáil voted in favour of the Bill passing the second stage. However, the Bill is unlikely to go any further given the Government will not act on the Bill.
Real Estate Article
In light of our recent Galway acquisitions, our article of the month is CBRE’s ‘The Case for Galway’ which outlines Galway as an investment case Read more here.