12 March 2020
Institutional capital has become a significant component of both global and local markets. Thankfully Ireland has moved from a speculative, debt-based funding model to the current model, enabled by long-term institutional capital. These investors are vital to the delivery of the much-needed critical infrastructure within Ireland, and play a major part in the delivery of the required housing supply. Irish Institutional Property (IIP), launched last year, is the voice of the subsector seeking to increase the understanding of the positive role and impact of institutional capital in enabling economic growth and development. Critical in sustaining institutional investment is the need for public policy predictability and stability, as planning and investment decisions are based on a long-term view for such investors.
The mission statement of IIP is “to promote the development of a sustainable world class real estate sector in Ireland, which benefits members, the economy, communities and wider society”. This will be achieved by focusing on the following key objectives:
The Department of Housing, Planning and Local Government has prepared and published the finalised National Planning Framework under Project Ireland 2040. It will guide strategic planning and development for the country over the next 20+ years, so that as the population grows, the growth is sustainable (in economic, social and environmental terms).
The plan’s objectives are to sustain growth, including the promotion of compact growth in Irish cities to avoid urban sprawl, as well as goals for sustainable mobility and regional accessibility. Key aspects include:
In order to pay for this, significant public capital expenditure is required with €116bn earmarked for investment through to 2040. We note that the IIP estimates that private sector investment will need to be multiples of this (projected to be circa. €322bn) to provide the housing, office space, retail space and other amenities required. As such, it is vital to the future of our economy.
As noted above, institutional investors are playing a significant role in the delivery of much-needed housing supply, in particular within the rental market. It is a driving force behind the increase in the number of apartment units in planning and granted permission in Dublin. The recent change in planning regulations relating to build-to-rent (BTR) in Ireland has improved the viability. However, the viability of build-to-sell (BTS) is still under pressure, in particular for apartment development. Key reasons for this include:
The above, together with Central Bank borrowing limits and deposit requirements, means that actual sales at viable prices are very slow. All stakeholders must come together and focus on solving this problem.
It should be noted that the existence of institutional investors who are acquiring large blocks is facilitating the supply of apartments that may otherwise have been unviable to build. This is due to the fact that institutional investors can source finance at low rates, and also take a long-term view. The BTR model is a yield model, and is not reliant on sales to make it work.
Ireland is redefining the profile of its cities upwards, building and planning a new generation of taller buildings. This is necessary, against a backdrop of growing urban populations, increased traffic congestion and a shortage of development land.
The Department of Housing, Planning and Local Authority published its Urban Development and Building Heights Guidelines in August 2018. These guidelines “consider the role of building height as part of a broad strategy to increase housing delivery and choice, through more compact and diverse urban form, to assist in counteracting sprawl and promoting enhanced sustainability in meeting strategic development needs”.
In our ‘Building Taller in Ireland’ report, published in October 2019, Linesight outlined some of the planning policy problems encountered with tall buildings and the inflexibilities around same. Difficulties are also being encountered with local authorities providing appropriate zoning and planning along key transport hubs, such as the LUAS.
Institutional investors generally have both the funding models in place and the development pipeline to address the requirements of off-site manufacturing (OSM). Pre-COVID, they were focused on this and will be even more so post-COVID. OSM is a more efficient form of construction than traditional build, benefiting from digitization and leveraging available technologies to streamline the design and construction process.
Key benefits of OSM include:
At Linesight, we feel it is imperative that large developers embrace OSM.
In summary, and as outlined by the Department of Finance paper ‘Institutional Investment in the Housing Market’ in February 2019:
“The growth of institutional investment is the result of a structural change in the market. The change has come from a combination of post-crisis capacity constraints in the financial and construction sectors; long-term societal changes such as increasing urbanisation and changing tenure profile; and the desire to avoid previous mistakes by improving spatial and urban planning”.
Looking forward, it is imperative that Government policy facilitates the positive impact institutional investors have in Ireland.