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INTRODUCTIONInvestor sentiment towards the Private Rented Sector (PRS) is increasingly positive internationally, with Dublin well-positioned to capitalise on this trend.
The internationalisation of real estate coupled with its segmentation into alternative investment specialisations – student housing, retirement living and PRS – means there is a supply of specialist global capital to deploy to the right markets. The interest in PRS has primarily been driven by pension funds, who are looking to take advantage of the fact that real wages and residential rents are highly correlated – a relationship they use to offset future liabilities. More generally, a wide spectrum of investors are attracted to having an element of PRS in their portfolio as it exhibits unique risk-return characteristics thus offering
portfolio diversification benefits. However,
the real potential of PRS lies in the
Built-to-Rent model. This is where
investors fund the developments and hold
for the long-term, with an estimated
weight of capital of between three to five
billion euros chasing these opportunities
in Dublin.
The transition from a buy-to-rent to a
Build-to-Rent market will be driven by the
drying-up of standing investment
opportunities coupled with the positive
market fundamentals that BTR investors
seek. For starters, Dublin is undergoing a
population boom with the United Nation’s
THE DUBLIN PRS REPORT RESEARCH
SUMMARY
1. Dublin is witnessing a large increase in investment in the Private Rented Sector
2. The next wave of investment activity will concentrate on Build-to-Rent opportunities
3. There has been a move away from home ownership to PRS, with 60% of under 35’s now renting in Dublin
4. Ireland compares very favourably with other European nations regarding PRS market fundamentals
5. Design standards introduced by the Government in 2018 will help increase the viability of the Build-To-Rent model in Ireland
forecasting that it will be the fastest growing of any of the 162 cites in Europe with a population greater than 300,000 people between now and 2035, undergoing an expected expansion of 18% over the period.
Furthermore, tighter mortgage underwriting standards has seen bank lending fall to a fifth of the peak in 2006, resulting in a growing cohort of lifetime renters. Finally, there has been a cultural
shift in attitudes towards renting in recognition of the flexibility it offers, with this demand particularly strong from the young, internationally mobile professionals working in the tech and finance sectors.
That is not to say that the sector is without its challenges. Despite rents reaching record levels, the costs of construction remain high relative to other European markets, although the Government has introduced a set of design standards to
address these challenges. Furthermore,
there is limited public data in relation to
management/operational costs on which
new entrants to the market can base
investment decisions. However, with
increased interest and confidence in this
space, we see PRS continuing to grow in
importance and looks set to play a crucial
role in relieving the lack of residential
supply that has emerged over the last
number of years.
BUILD-TO-RENT DEAL STRUCTURING
Landpayment
Practical Completion:– Profit Payment
– Developer Exit / Refinance
DEVELOPMENT PHASE(18 - 24 Months)
CONSTRUCTION PAYMENTS
HOLD PERIOD(15+ years)
STABILISATION PERIOD(+ 12 Months)
ExitSale
• Investment value of between €450 to €800 psf
• Need for scale, ideally with
150 plus units and €50 million
plus ticket deal size
• Prime locations or those near
good transport links
Forward funding
• 100% funding solution with payments staggered as milestones of project reached and covenants satisfied
• Improves Return on Capital Employed (ROCE)
• Stamp Duty savings are possible
• Buyers are institutional investors
Forward commitment
• No up-front funding, fixed price agreed to be paid on practical completion
• De-risked disposal at practical completion
• Stamp Duty on full cost
• Less risky, wider opportunity set of capital available 5-6%
UNGEARED IRR
7-9%GEARED IRR
6-7%UNGEARED IRR
8-10%GEARED IRR
DeveloperScheme requirements
• PRS investors implement forward funding and forward commitment structures with developers and illustrate a willingness to pay a premium when transacting with well-funded developers
• Funding new BTR stock rather than purchasing existing apartment stock allows greater scope for maximising operational efficiencies as well as future proofing assets
• Net prime entry yields range between 4.00% and 5.00%, with expected returns over a 15-year horizon given below:
Investor
FIGURE 1
Dublin PRS investment volumes
0
€100,000,000
€200,000,000
€300,000,000
€400,000,000
€500,000,000
€600,000,000
€700,000,000
Q2Q1 Q4Q3 Q2Q1 Q3Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q12014 2015 2016 2017 2018 2019
INVESTMENT MARKET ACTIVITY
Date
Property
Type
Buyer
Units (1-bed/2-bed
/3-bed)
Average price psf
Average price/unit
Est. price millions
Est. net yield
Q3 2019
The Benson Building, Dublin 2
New Build
Patrizia72
(14/43/15)€€821 €€729,167 €52.50 3.95%
Q2 2018
6 Hanover Quay, Dublin 2
New Build
Carysfort Capital
120 (24/74/22)
€€807 €€841,667 €€101.00 4.00%
Q3 2019
Dublin Landings, Dublin 1
New Build
Greystar268
(82/146/40)€€740 €€654,851 €€175.50 4.00%
Q2 2018
Fernbank, Dundrum, Dublin 14
New Build
Irish Life261*
(56/188/17)€€596 €€523,946 €€138.50 4.00%
Q3 2019
Mount Argus, Harold’s Cross, Dublin 6
New Build
Patrizia179
(25/128/26)N/A €€519,553 €€93.00 4.00%
Q3 2018
The Grange, Stillorgan, Co. Dublin
Existing Stock
Kennedy Wilson
274 (74/175/25)
€€539 €€459,854 €€126.00 3.70%
Selection of recent transactions (arranged by price psf)
Source: Knight Frank Research
Source: Knight Frank Research
Institutional investment in Dublin’s PRS market is growing rapidly with allocations to the sector expected to reach €1.5 billion in 2019, which would represent an increase of 61% on 2018 and 570% compared to 2017.
There is a wide variety of capital sources active in the market, with Irish, European and United States funds all competing for acquisitions. German fund Patrizia have been particularly active, purchasing both The Benson Building and Mount Argus for €52.5 million and €93.0 million respectively. Meanwhile, Greystar bought Dublin Landings for €175.5 million, which represented the largest single asset transaction witnessed thus far in the PRS market.
Prime yields have been firmly established at 4.00% with a number of transactions providing evidence at this level, although we may see further tightening as the ECB embarks on another round of quantitative easing which will put further downward pressure on yields.
150+ units
€450 to €800 psf
*261 apartments, excluding one listed building on site that must be retained as a single-use dwelling. Estimated valuation adjusted for this.
4
FUNDAMENTAL DRIVERS
450
500
550
600
650
700
750
80020
40PR
OJEC
TED
2019
2018
2017
2016
2015
2014
2013
2012
FIGURE 2
Employment in Dublin 000’s
Source: CSO, ESRI
Source: CSO
KEY MARKET INDICATORSDublin apartment prices Dublin apartment prices have doubled since the bottom of the market in 2012, however they remain 29% below their previous peak.
Tenure
In Ireland, home ownership has traditionally been the aspiration for most people. Increasingly, however, there is an ongoing shift towards renting with 25% doing so in Dublin according to the 2016 Census, over double the 12% recorded in 1991.
Private renting is the most frequent tenure of households under 35 years of age – 60% of this cohort privately rent, while only 14% of over 35’s privately rent. However, it should be noted that in absolute numbers these are of similar sizes – there are almost 60,000 who privately rent aged under 35 and there are almost 55,000 households who privately rent aged over 35 years old.
Dublin apartment rents
Apartment rents in Dublin have hit their highest level since records began in 2007. Rents have been more stable than prices having fallen by 28% in the aftermath of the financial crisis compared to 65% for prices.
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
201920182017201620152014201320122011201020092008
Inde
x, Q
3 20
07=
100
Share of mortgage market
Non-professional individual buy-to-let
investors have traditionally been the providers
of rental accommodation in Ireland. In fact, at
one stage during 2008, the BTL share of the
mortgage market exceeded the FTB share,
which was an indication of the unsustainable
credit boom that fuelled the market at the time.
However, these individual investors have been
exiting the market due to the onerous tax
burden of approximately 50% on rental
income. Their exit is an opportunity for
professional PRS investors to fill.
Mortgage drawdowns
A lack of mortgage financing is channeling households into PRS across all household ages in Dublin. For example, the number of PRS households in the over 35 age group grew at a rate of 4% per year, the number of outright owners grew at half this rate at only 2%. The number of households who own with a mortgage grew at an even slower rate of 0.4% per annum, illustrating the lack of mortgage financing in the market.
Dublin new residential delivery
Although output has been rising in Dublin during the last number of years – growing from 964 units at the bottom of the market in 2011 to a forecast 8,000 units for 2019 – completion levels have remained consistently below the required annual demand of 11,000 units as identified by our research.
TENURE AND THE AFFORDABILITY GAP
new units will be delivered in Dublin in 2019
8,000
Dublin properties to rent The number of properties listed as available for rent on Daft.ie is less than a fifth of the peak of 8,264 recorded in Q2 2009.
Source: Daft.ie
Source: BPFI
Economy The Irish economy has been the fastest growing economy in Europe for the last five years. Dublin is the main engine of economic growth and has seen office take-up expand for six consecutive years to set a new record in 2018 with 3.9 million sq ft transacting. Though it may not quite reach these heights, 2019 is on course to be another very strong year for the Dublin office market. The tech sector is the main driver of the market, accounting for 46% of activity over the last five years. In fact, Google, Amazon, Facebook, LinkedIn and Microsoft have a total office footprint of 2.3 million sq ft in Dublin, ahead of the 2.2 million sq ft these companies collectively occupy in London.
This growth has led to employment surpassing its pre-crisis peak with 716,700 people now employed in Dublin according to the Central Statistics Office (CSO), a figure which is expected to rise to 795,900 by 2040 according to the ESRI. In addition, Dublin is well-hedged against Brexit, with our research showing that Dublin is the leading European city for Brexit-related office moves having received 86 announcements, ahead of Luxembourg (55), Paris (47), Amsterdam (47) and Frankfurt (41).
Population Ireland is experiencing a population boom, providing a natural long-term source of demand for housing. Over the period 1991-2016, the population grew by 35% compared to a growth rate of 7% for the EU as a whole. A high fertility rate in conjunction with low mortality rates has resulted in Ireland’s natural population growth being the highest in Europe at 6.1% in 2018, far ahead of the next highest of Cyprus which had an increase of 4.1%.
The high growth rate is set to continue with Eurostat forecasting that the population of Ireland will increase by 25.8% between 2020 and 2080, which compares with a -2.0% projection for the EU-28.
Due to trends in urbanisation, Dublin is set to benefit most from this population growth. According to the United Nations, 75% of people in Ireland will live in urban areas by 2050, up from just over 60% currently. Taking an average of population distribution scenarios produced by the CSO, 38% of growth will be concentrated in Dublin in the coming years. Furthermore, the commuter belt counties comprising the Mid-East region (Meath, Kildare, Wicklow) have the next highest potential accounting for 26% of projected growth. Clearly then, Dublin will be the focal point of future population growth which will underpin long-term demand for housing.
FIGURE 3
Components of Dublin’s population change by Census year (in thousands)
Natural Increase Net Migration
-40
-30
-20
-10
0
10
20
30
40
50
60
70
2016201120062002199619911986
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2019201820172016201520142013201220112010200920082007
0
10,000
20,000
30,000
40,000
50,000
60,000
Num
ber o
f loa
ns, I
rela
nd
20192018201720162015201420132012201120102009200820072006200520042003
PrivateRentedSector
1991
Owner Occupied
12%
Social Renting
2016
72%
25%
63%
15% 12%
THE DUBLIN PRS REPORT RESEARCH
5 6
Source: CSO
0
20
40
60
80
100
120
140
201920182017201620152014201320122011201020092008200720062005
Inde
x, 2
005
= 1
00
FIGURE 4
FIGURE 5
FIGURE 6
2019 (f)201820172016201520142013201220110
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Source: CSO
FIGURE 7
FIGURE 8
FIGURE 9
Source: BPFI
20192018201720162015201420132012201120102009200820072006200520042003
0%
10%
20%
30%
40%
50%
60%
70%First-time buyer Buy-to-let
FIGURE 10
Source: RTB
Source: CSO
87
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
LatviaFinland
MaltaCyprusFranceAustria
SwedenGermanySlovakia
IrelandPoland
SloveniaNetherlands
EU-28Estonia
ItalyPortugalCzechiaHungary
DenmarkBelgium
LuxembourgUnited Kingdom
SpainLithuania
CroatiaBulgariaRomania
Greece
0% 10% 20% 30% 40% 50% 60%
MaltaIreland
United KingdomBelgiumCyprus
LuxembourgNetherlands
CroatiaGermanyPortugalSlovenia
FranceGreeceEU-28
HungaryDenmark
AustriaItaly
RomaniaFinlandPoland
SwedenBulgariaCzechia
Slovakia Spain
LithuaniaEstoniaLatvia
-7% -5% -3% -1% 1% 3% 5% 7%
BulgariaLatvia
LithuaniaCroatia
HungaryRomania
GreeceItaly
PortugalGermany
FinlandSpain
EstoniaEU-28Poland
SloveniaCzechiaAustria
SlovakiaBelgium
NetherlandsDenmark
MaltaUnited Kingdom
FranceSweden
LuxembourgCyprusIreland
1.5 2.0 2.5 3.0
SwedenDenmarkGermany
EstoniaLithuania
FinlandFranceLatvia
NetherlandsAustriaEU-28
BelgiumBulgariaCzechiaGreece
ItalyHungarySlovenia
United KingdomLuxembourg
SpainMalta
PortugalIrelandCyprusPoland
RomaniaSlovakiaCroatia
FIGURE 13
Renting population paying overburdened rental level
FIGURE 14
Average household size
Source: Eurostat, data relating to 2017 Note: Percentage of the population living in a flat in a building with ten or more dwellings
FIGURE 11
Population living in apartments
FIGURE 15
Natural population growth
IRELAND
EU-28
6.1%
ANNUAL NATURAL POPULATION
CHANGE
25.8%
POPULATIONINCREASETO 2080
2.6
AVERAGEHOUSEHOLD
SIZE
12.5%5.4%
RENTING FROM A PRIVATE LANDLORD
LIVING IN APARTMENTS
-0.7% -2.0%2.320.0%23.9%
21.5%
PAYINGOVERBURDENEDRENTAL LEVEL
26.3%
IRELAND
EU-28
THE DUBLIN PRS REPORT RESEARCH
Source: Eurostat, data relating to 2018 Source: Eurostat, data relating to 2018 Note: The crude rate of natural change is the ratio of the natural change during the year (live births minus deaths) to the average population in that year.
Source: Eurostat, data relating to 2017 Note: Percentage of the population living in households spending 40% or more of their equivalised disposable income on housing
8 97
0% 5% 10% 15% 20% 25% 30% 35% 40%
RomaniaCroatia
LithuaniaBulgariaEstoniaPolandMalta
HungarySlovenia
LatviaSlovakia
IrelandPortugalFinland
SpainCyprus
CzechiaUnited Kingdom
ItalyBelgium
FranceEU-28
LuxembourgGreece
NetherlandsAustria
SwedenDenmarkGermany
FIGURE 12
Population renting from a private landlord
Source: Eurostat, data relating to 2017 Note: Percentage of the population renting at market prices
-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%
BulgariaLithuania
CroatiaPortugal
LatviaRomania
GreecePoland
SlovakiaItaly
EstoniaHungarySloveniaFinlandCzechia
GermanyEU-28
NetherlandsSpain
FranceAustria
BelgiumDenmark
United KingdomIrelandCyprus
MaltaSweden
Luxembourg
FIGURE 16
Forecast population growth 2020–2080
Source: Eurostat, 2019
IRELAND
EU-28
6.6%
ANNUAL NATURAL POPULATION
CHANGE
28.2%
POPULATIONINCREASETO 2080
2.7
AVERAGEHOUSEHOLD
SIZE
13.2%4.8%
RENTING FROM A PRIVATE LANDLORD
LIVING IN APARTMENTS
-0.4% 0.6%2.319.9%23.8%
19.6%
PAYINGOVERBURDENEDRENTAL LEVEL
28.0%
IRELAND
EU-28
IRELAND
EU-28
IRELAND
EU-28
IRELAND
EU-28
IRELAND
EU-28
PRS MARKET FUNDAMENTALS: IRELAND IN A EUROPEAN CONTEXT
TRENDS ANALYSIS OUTLOOK
INVESTMENT INSIGHT
DUBLINRESIDENTIAL MARKET ANALYSIS FOR INTERNATIONAL INVESTORS
BREXITUNDER PRESSURE #2
#2BREXIT
WHAT WILL ITS IMPACT BEON THE EUROPEAN
REAL ESTATE MARKETS?
Dublin Residential Market Analysis for International Investors
Dublin Office Market Overview
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK
RESEARCH
WITH SPECIAL FOCUS: WHO OWNS DUBLIN OFFICES?
DUBLINOFFICE MARKET OVERVIEW Q2 2019
Under Pressure #2
RESIDENTIAL CAPITAL MARKETS
James Meagher, Director [email protected]
Adrian Trueick, Director [email protected]
Peter Flanagan, Director [email protected]
Evan Lonergan, Director [email protected]
Ross Fogarty, Director [email protected]
Donal Courtney, Surveyor [email protected]
RESEARCH
John Ring, Head of Research [email protected]
Robert O’Connor, Research Analyst [email protected]
The Irish Government introduced a set of apartment design guidelines – ‘Design Standards for New Apartments – Guidelines for Planning Authorities’ – in 2018 which included measures aimed at boosting construction and investment in PRS as summarised below.
Asset class designationBTR is now a specific asset class. In order to be classed as BTR, certain covenants must be satisfied such as providing communal and recreational facilities. Perhaps most importantly are the stipulations regarding the holding and disposal of the asset in order to be designated as BTR: ‘the development remains owned and operated by an institutional entity and that this status will continue to apply for a minimum period of not less than 15 years and that similarly no individual residential units are sold or rented separately for that period’.
However, this does not prohibit the selling of the entire scheme to another institutional investor during this time.
Dwelling mixThere is no dwelling mix requirement for a BTR scheme under the new guidelines. This means that an entire scheme could theoretically be comprised of studios or one-bed units, although operators would generally prefer some mix of unit sizes.
Unit sizes Studios are included at a minimum size of 37 sq m. In addition, a new category of 2-bedroom apartment has been
DESIGN STANDARDSintroduced. While previously 2-bedroom apartments could only be designed for four people habitation with a minimum size of 73 sq m, the new standards introduce a 2-bed standard for three people at a reduced size of 63 sq m. Also, the requirement that the majority of all apartments in a proposed scheme exceed the minimum floor area standards by a minimum of 10% does not apply to BTR schemes.
Shared Accommodation is now permissible with minimum floor areas of 12 sq m for single rooms and 18 sq m for double or twin rooms.
Dual aspect ratios The dual aspect requirement for centrally located schemes has been reduced to 33% from 50%, with the 50% requirement remaining for intermediate and peripheral locations.
Floor-to-ceiling heights Minimum floor to ceiling heights remain at 2.4m (2.7m at ground) but a floor to ceiling height of 2.7m throughout is encouraged in locations where greater height is appropriate. There is no maximum number of permissible units per floor per core for BTR schemes.
Car parking BTR schemes have a default of ‘minimal or significantly reduced car parking provision on the basis that BTR development is centrally located and/or close to public transport services.’
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DUBLIN PRS TENANT SURVEY
RESEARCH
Market Dynamics | Tenant Survey Results | Analysis
Dublin PRS Tenant Survey