Remove rent cap or supply of new properties will ‘fall away’, estate agent report finds

The rent cap needs to be removed or the supply of new rental properties from institutional investors is going to “fall away” in Dublin in the next 18 months, according to a new report.

Pointing to a “dearth” of transactions in the private rented sector (PRS) over the last 15 months or so, a new report from estate agent Hooke & MacDonald says that if supply is to increase again and rents stabilise, then “the 2 per cent increase cap needs to be removed”.

The report also highlights the increase in provision of funding for public sector housing, “the only option for largely unviable apartment sites”.

At a time when some 85,000 new homes a year will be needed to meet demand, according to a recent Davy report, retaining the rent cap, which limits annual increases to 2 per cent on properties in rent pressure zones, will jeopardise future investment, Hooke & MacDonald says, at a time when the demographic need for accommodation “has arguably never been more pronounced”.

Ken MacDonald, managing director of Hooke & MacDonald, says the biggest factors in the slow down of new builds in the private rental sector is construction costs, and the 2 per cent rent cap, which was introduced in November 2021. It has been a “self inflicted disaster”, he says.

“It was acceptable when it was at 4 per cent, but once it changed to 2 per cent, overnight the whole equation changed,” he says, arguing that the cap is proving to be damaging to investment transactions in the sector and consequently to the supply and cost of rental accommodation.

Noting that investment funding has “virtually ceased” in private sector/build to rent market in Dublin and other cities, MacDonald says a key limiting factor in attracting investment is the cap, and this lack of new builds could prove to be “disastrous for the future of the rental sector”.

This decline in new builds may impact on rents – as the report notes, the supply of new rental properties, mainly in the PRS, which Hooke & MacDonald puts at about 1,500 between February 2023 and February 2024, has “challenged rental levels” and increased supply is leading to a moderation of rents it says.

However, if supply stops, it may have an opposite impact on rents.

“Rents are definitely going to rise,” says MacDonald.

However, he is hopeful that Government may make a move on the sector, leading to the possible removal of the rental cap.

“I’d be hopeful that realism will provide some incentives,” says MacDonald.

If this was to happen, the report notes that it could lead to a “surge in funding for the rental sector”.

“The international and domestic capital that the Irish housing sector needs would again support housing supply”.

While funding for properties that are rented privately has diminished significantly, funding is still available for public sector housing, as builders and developers find it “economically advantageous” to cater to this demand, according to the report.

“In reality, it is the only option for largely unviable apartment sites. In the last 18 months the forward purchasers and funding in this area has increased substantially,” the report says.

The report shows that there was just €123 million spent across all assets in the first quarter of 2024 – a 26 per cent fall on the €470 million outlay a year earlier, representing “a dearth” in activity in comparison to previous years.

There was just one PRS deal – the €42 million achieved by Carysfort Capital/TPG Angelo Gordon through the sale of 104 stabilised Cairn built apartments at Shackleton Park, Lucan in west Dublin, to new capital from German investment fund KGAL, which Hooke & MacDonald advised on. The sale was a portion of a larger portfolio of 375 properties Carysfort and Angelo Gordon own in Shackleton. They are currently divesting out of this development as part of a medium term planned strategy.

The decline in investment follows the trend set in 2023, when just €1.35 billion was spent on investment transactions in the Greater Dublin Area. This was down by 66 per cent on the €4 billion spend in 2022, and is the lowest level in 10 years – and of this, just €290 million, or 21 per cent of the total, was on PRS.

The two largest residential investment transactions in 2023 were recorded in the first quarter of that year. The first was the sale by Carysfort Capital/TPG Angelo Gordon of Opus, Hanover Quay, Grand Canal Dock, Dublin 2. The sale comprised 120 apartments, which were completed by Cairn Homes in 2019, to Pontegadea at €101 million. This equated to a net yield of about 4.3 per cent. The second big deal was the forward sale of the 148 apartment scheme by Richmond Homes, at Eglinton Place, Donnybrook, Dublin 4, to M&G for €99.5 million. This equated to a net yield of about 4 per cent.

Just five of the 10 PRS transactions in 2023 were new build properties, indicating “the lack of viability in getting new build projects started in the sector, which also factors in a mismatch between returns available to investors” the report said.

Looking ahead, Hooke & MacDonald expect that there could be some PRS trades before 2024 year end, “with pricing in the mid to upper 4s on a net yield basis”, noting that the recent interest rate cut by the European Central Bank “will provide positive impetus to the market”.

Interest rates are also having a key impact on the market, given elevated costs of finance – and the rise in risk-free returns through higher deposit rates.

As a result, investors have been “reassessing what they could pay for properties in order to secure their required returns, and what their existing portfolios are valued at”.

The report also calls for the planned October 2024 review of the National Planning Framework to “start now”. It also suggests that the review be “anticipatory”, and is based on the projected 2026 population and expected employment, instead of the now dated April 2022 census out-turn.

Looking ahead, the reports points to a “definite lift” in sentiment across European real estate investment markets in the first quarter of this year.

“There is an expectation that there will be an increase in transactional activity in the coming months, but there is uncertainty regarding where pricing from prime real estate will arrive at”.