Is the Residential Rental Sector due a Rethink?

As life-long renting becomes a reality, is it time to re-think the residential rental sector? Niamh Manning, Research Analyst with JLL, explains how adopting a European model could be the key to a more secure and stable rental market.

April 11, 2018

An increasing proportion of people living in Ireland are renting rather than buying. 

We are in the midst of a 'generational shift' in terms of our attitude to home ownership, and our willingness to remain in the rental market for longer periods. 

The younger generation are making a conscious decision to maintain their higher cost lifestyles at the expense of getting a foot on the property ladder. Nostalgic attachment to home ownership is being shattered by the capital expenditure and day-to-day sacrifices required to purchase a property. 

Currently, about one quarter of people living in Dublin are in rental accommodation, with this forecasted to grow in the coming years. 

An increased proportion of renters in Dublin is also as result of an influx of overseas workers, particularly in the technology industry, who are opting to rent at higher levels for the flexibility this grants them.

As a result, pressure is mounting on the Irish rental sector. 

In 2017, rents grew nationally by 11.2 per cent to an average of €1,198 per month. In Dublin, rents increased by 15.5 per cent over the year to an average of €1,819 per month (Source: DAFT). In south county Dublin, the average rent has now reached approximately €2,000-€2,500 a month. With the current rental cap of 4 per cent set to expire in 2019, many tenants in rented homes at lower than market rent are set for huge rent increases unless this cap is extended.

With rising rates and reduced availability, is it time to rethink our approach to renting? 

The Private Rented Sector (PRS) model of residential real estate, popular in many European cities, looks set to take hold in Dublin. Sometimes referred to as 'Multi-Family Investments', PRS is relatively new to Ireland in terms of institutional investment but is forecast to be the most eagerly sought-after asset class in 2018. It refers to classification of residential units where multiple residential units are contained within one building or several buildings within one complex, held by the same operator/landlord, the most common form being an apartment building.

In 2017, over 12 per cent of volumes invested in the Irish property market was invested in the Private Rented Sector. A good example of this oncoming market change is the recent opening of the first CoLiving scheme operated by NOAD on Pembroke Street. Currently there are six major investment funds holding PRS assets in Ireland, amounting to approximately 7,000 units across the market and units are mostly held in 'pepper-potted' portfolios rather than large wholly owned schemes. Some examples of prime PRS schemes currently operational in Ireland include Honeypark in Dun Laoghaire, and Clancy Quay and the Vantage. Future PRS development looks set for areas such as Harold's Cross and Bluebell, as well as other central city locations and provincial cities.

According to Niamh Manning, Research Analyst, JLL, "The traditional European model of PRS lends itself to long-term and even life-long renters with much longer lease terms available and more stable rent levels than those that have become typical of the Irish residential market. Where private landlords are unable or unwilling to commit to long term lease agreements of 10 or more years, many institutional investors are happy to accept such terms, especially given the residential rents which are currently being achieved in the Irish market. Given the current generational shift in the market, more commonly referred to as Generation Rent, this new model of renting looks to be in high demand, both from investors and Irish renters."  

Players already invested in the Irish PRS market include IRES, Kennedy Wilson, Patrizia, Tristan/SW3, Cosgrave Group, Shannon Homes, Carysfort Capital and more. 

In 2017, over 1,200 PRS units in Cherrywood were sold for €450m to APG, advised by JLL. There is estimated to be a further €5 billion chasing this type of investment in Ireland, held back only by limited opportunities. 

As the prospect of life-long renters becomes ever more likely, serious questions need to be asked about the current levels of security of tenure for renters, and the type of landlords who will be willing and or capable to offer long term leases of 10 years or more on private residences.

"With stock levels at all-time lows and rental demand estimated at 7,000 homes per year, we anticipate the demand supply imbalance will take four to six years to stabilise, offering secure asset investment growth over the medium term," adds Conor O'Gallagher, Director of the JLL Ireland Residential team.

First published in the Sunday Business Post, 8th April 2018