The Dublin build-to-rent market has been one of the safest investment bets in Europe for the past five years. But in 2023, that bet is not so certain. The city’s residential market has seen soaring demand continue to outpace supply, meaning rents and values have risen dramatically, and led BTR to briefly overtake office as the city's biggest investment sector.
But housing shortage or not, the Irish capital has not been able to remain completely immune from global economic woes and soaring inflation and costs leading to higher interest rates.
In Dublin specifically, there is the unknown of the impact of mass layoffs across the digital and technology giants, all of which have combined to create a volatile and unpredictable scenario.
That is leading to potential price declines, fewer investors in the market and new developments being put on hold.
“The fundamentals are not in doubt because demand continues to outstrip supply," CBRE Director Colin Richardson said.
"However, there will likely be a higher proportion of standing product transactions, as opposed to forward-fund and forward-commitment deals. Yield expansion or pricing declines combined with elevated input costs will put pressure on structuring these trades.”
According to CBRE’s latest market outlook, occupancy and rental growth trends in the multifamily market accelerated through 2022. The number of units available to rent in Dublin fell to historic lows, and rental levels for new multifamily stock continued to trend higher.
A total of €2B was invested in the residential sector in Ireland in 2022, with over 70% of this capital focused on multifamily housing stock in the Dublin region, with the remaining balance focused on purpose-built student accommodation and social housing investment, CBRE said.
Dublin apartment completions in Q2 and Q3, many delivered with the support of institutional capital, failed to keep up with demand, and the cumulative undersupply is unlikely to be rectified in the near or medium term.
But despite an environment that creates upward pressure on rents, as challenges emerged in the investment and financing markets as the year progressed, a number of schemes stalled or were withdrawn, and CBRE said that the viability of new apartment development is a key concern for 2023.
Planning Approvals Stall
Ireland’s Central Statistics Office's latest planning approvals figures, released 9 December, showed there was an annual decrease of 41% in the total number of dwelling units approved at 6,743 units in Q3 2022, short of the 11,428 units approved in Q3 2021.
However, the number of houses granted planning permission (65% of all dwelling units approved) fell only marginally by 0.1% on an annual basis to 4,396 housing units. In contrast, there was a large decline of almost 67% in apartment approvals to 2,347 units.
Richardson said yields are moving out, but to date those movements have been relatively modest.
Guideline yields on both prime forward-commitment and standing stock transactions converged at 4% in Q4 of last year, and a further small outward shift is likely in 2023, meaning “we are likely to revisit those numbers because of modest upside pressure”, Richardson said.
Dublin remains high on the list of European locations for residential investors, CBRE said in its market outlook. Indeed, many of these investors raised money in early 2022 with the intention of deploying in Ireland, but ultimately failed to do so, with many investment committees on pause. This capital will circle the market for opportunities in 2023, the broker added.
Residential Rose To Top
While BTR investment in Dublin amounted to €273M in 2016, representing 6% of total real estate turnover, by 2019 it peaked at €2.7B and 45% of total turnover, making it the top performing investment asset class for the first time, Colliers Head of Research Kate Ryan said.
Since then Colliers estimated that residential investment reached €1.3B (42%) in 2020, €2.3B (41%) in 2021 and €1.8B (41%) in 2022.
“Investment in the residential sector has been rising sharply, but in recent years we have seen increased investment in social and affordable assets, typically apartment blocks sold with long-term leases in place to local authorities/approved housing bodies and therefore seen as more secure," Ryan said.
For some investors, social housing provides them with the opportunity to fulfil ESG commitments, which are increasingly being built into investment strategies, and many have set up specific social housing funds, she added. Large global funds are now using benchmarking standards such as GRESB to measure and report the impact of ESG strategies to investors, and this is driving this trend.
However, she said sharp increases in build costs, rising interest rates and market uncertainty saw a number of private BTR transactions fail to conclude last year, such as the €200M Newmarket Yards, which was due to be sold to IRES REIT.
This month The Irish Independent reported that developer Eagle Street paused construction work at a major development site for more than 700 BTR apartments of up to 18 storeys on the former Castleforbes Business Park site on Sheriff Street Upper in the city’s docklands.
Its international funder, U.S. asset manager Nuveen, is understood to be reviewing construction costs in the high interest rate environment, although Eagle Street responded that there will be no delay to the project, but it was “taking time” to make design amendments.
“Yields are pushing out, too, but since the market is so small it is hard to say to what extent just yet,” Ryan said. “Institutional investors have been instrumental in the delivery of new housing stock to the Irish housing market, and if funding is not available then the apartments just won’t get built.”
Government To Budge Viability Gap?
Much of the government's focus is now on supporting internal agencies to achieve targets as laid out under its Housing For All programme, and the government is now considering the possibility of “advance purchasing” large numbers of private sector apartment blocks that already have planning permission but have not yet been built.
The ballpark estimate is that developers have accumulated planning permission for at least 70,000 residential units, the vast majority of them apartments, granted by An Bord Pleanála or local authorities over the past four years.
The high-rise, high-density model — predominantly for exclusively BTR schemes — has turned out to be costly because of the multiplicity of smaller apartment units, each of which requires kitchen and bathroom facilities, as well as extra fire safety precautions such as sprinkler systems.
The Department of Housing has also revoked the “specific planning policy requirements” introduced in 2018 to permit lower design standards for BTR schemes. In a circular issued to all planning authorities on 22 December, it said “all apartment developments shall now adhere to the same standards ... regardless of the development type”.
“These new development plans are also seeking to limit and control the development of BTR schemes, while co-living is still essentially banned,” Ryan said. “These factors along with rising build costs are sure to lead to a reduction in the number of apartments being delivered.”
Projects are still being delivered. In September 2022, Kajima secured a green finance loan from Allied Irish Bank for the 258-unit O’Neill Court, a BTR scheme in Belmayne, Dublin. The €100M-plus scheme will be delivered by a joint venture between Kajima and Bartra after Kajima acquired the site in 2021, marking its entrance into the Irish BTR market.
Hammerson is developing The Ironworks on behalf of Dundrum Retail LP, a 50-50 Allianz and Hammerson joint venture that owns and operates Dundrum Town Centre. Located on the Sandyford Road entrance to the Dundrum Estate and spread across 27 acres, it forms part of the proposed redevelopment of the Dundrum Shopping Centre.
Due to be completed by 2025, the scheme comprises 122 BTR apartments, coworking space, a residents lounge, a gym, a terrace and a new coffee shop.
Meanwhile, Union Investment bolstered its position in the Irish residential market with the acquisition of the 140-unit Newtown Gardens, a development in Blackrock, in Dublin’s south suburbs, from Glenveagh Homes.
The Hamburg-based real estate investment manager entered the Irish residential market in 2021 with the acquisition of the residential development 8th Lock in north-west Dublin, which is under construction, and both sit within its open-ended public real estate fund UniImmo: Deutschland. This is the fourth major residential investment for the fund.
"Due to the structural shortage of high-quality rental accommodation in affluent areas, we expect demand to remain strong in future,” Union Investment Head of Investment Management Residential Friedrich Georg Warmbold said of its strategy.
Investors Still Active
Perhaps the most important factor for the BTR market in terms of investment volumes in 2023 will be less the economic mood music and more the types of players active in the market.
A number of players remain active, including IRES REIT, Greystar, Ardstone, Patrizia, Avestus, Union Investment and DWS/SW3 Capital, and “these are well capitalised and experienced companies who are not reliant on debt pricing”, CBRE's Richardson said.
And he said that the Irish government is increasingly likely to try and drive development through its official bodies, such as the Land Development Agency, plus use tax breaks to try and “budge the viability gap” as developers juggle with costs and returns.
Right now, the swathe of investors hovering around Dublin’s BTR market is less numerous, as the city’s reputation as a no-brainer for residential investment calms, but those already in the market remain active due to one fact — Dublin needs more homes.