PRS and the Irish Rental Market - AIB Real Estate Finance Pat O'Sullivan Head of Real Estate Research
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PRS and the Irish Rental Market AIB Real Estate Finance Pat O’Sullivan Head of Real Estate Research Rory McGuckin Real Estate Economist July 2019
Contents
Executive summary 1
1. Tenure status in Ireland – rental accommodation growing in importance 3
2. Apartment numbers low by European standards, but supply
is on the rise 6
3. Strong rental growth, although moderating 8
4. Rental affordability – primarily an issue for Dublin and
lower income households 11
5. Growing presence of the non-household sector in the residential market 14
6. Viability – still a significant barrier to large-scale standalone
apartment developments 16
7. PRS as an asset class – remains attractive to institutional investors 19
Conclusion 21
Appendix 22
PRS and the Irish Rental Market – July 2019Executive summary
The demand for rental accommodation in Ireland, primarily in the main urban centres, has shown no signs of abating over
the past 12 months. In Q1 2019, there were 356,500 dwellings privately rented in Ireland, an increase of 14,900 from the
same period last year. The increase was concentrated in Dublin, where the number of dwellings rented privately increased
by 13,800 between Q1 2018 and Q1 2019.
Strong growth in non-Irish national workers underpinning increased demand for rental
accommodation
One of the key drivers of the increased demand for rental accommodation is the continued growth in the numbers employed
and the composition of the labour market, in particular the large numbers of non-Irish national workers in the labour force.
The numbers of non-Irish national workers has risen sharply and are currently above previous peak levels, with 375,300
non-Irish national workers now accounting for 16.3% of total employment in Ireland.
Lack of density, a critical problem
A persistent and well-flagged problem is the lack of residential density in Dublin, with a very low proportion of apartments,
and a very high proportion of houses, that make up the stock of residential units in the capital. A report by Eurostat1 shows
that houses account for 60.4% of all dwellings in the Dublin City Council local authority area (that is, excluding the other
three local authority areas: Dun Laoghaire-Rathdown, Fingal and South Dublin). By contrast, the proportion of houses in
the city of Edinburgh and Berlin are 32.4% and 10.3%, respectively, and
as little as 1.3% in the City of London.
There are, however, tentative
he percentage of houses increases to around 75% if the wider definition
T
signs of an increased supply of of Dublin is used to incorporate all four local authorities. This is a very
new apartments in the capital, particular problem for Dublin that needs to be rectified over time, and
both in terms of units built and places Dublin at a significant disadvantage to peer capitals across
units in planning, with apartment Europe. There are, however, tentative signs of an increased supply of
supply now starting to outpace new apartments in the capital, both in terms of units built and units in
the supply of single-family planning, with apartment supply now starting to outpace the supply of
dwellings. single-family dwellings. However, progress remains slow and the actual
number of apartments being constructed still falls well short of what is
required, due to viability issues.
Viability – still a significant barrier to large-scale standalone apartment developments
The viability of apartment construction remains challenging in many parts of Dublin and this continues to constrain the
supply of new residential units in the capital. Currently, the construction of large-scale apartment schemes outside of Dublin
is not, for the most part, viable. Essentially, the cost of developing medium- to high-density apartments is still too high,
which in turn limits their viability to a small number of locations and to a limited pool of purchasers.
In 2017, the Society of Chartered Surveyors Ireland (‘SCSI’) published a
report2 analysing the construction costs of apartments. It found that the
The presence of institutional
costs of building a medium-rise apartment development ranged from
buyers in the residential market
€400,000 per unit (excluding VAT) in a suburban location to €578,000 per
unit (excluding VAT) in an urban location. With such costs and prospective
is the primary reason large-scale
sales prices, this rules out the ability of the first-time buyer market to standalone apartment blocks are
afford these type of apartments. In the main, the only prospective buyers being built.
of suburban and urban apartment blocks are institutional buyers, in
particular the investment, pension and property funds which are seeking
to acquire apartment blocks for the private rented sector (‘PRS’). Moreover, the presence of institutional buyers in the residential
market is the primary reason why large-scale standalone apartment blocks are actually being built.
1
Urban Europe – Statistics on cities, towns and suburbs – housing in cities, Eurostat, 2014
2
The Real Costs of New Apartment Delivery: ANALYSIS OF AFFORDABILITY AND VIABILITY, October 2017
1 PRS and the Irish Rental Market – July 2019Continued strong growth in rents
ccording to the most recent data available from Eurostat, Dublin is the
A
fourth most expensive city in a survey of 53 global cities in which to The lack of supply - which is being
rent an apartment, up from the sixth most expensive in 2017. Rents in constrained by construction costs
Ireland have outpaced many of its European counterparts over the past
- and underlying demand are the
decade or more. From January 2006 through April 2019 Irish rents have
reasons why rents are so high in
increased by close to 60%, whereas rents in Germany, France and the
UK have made more modest gains of 18%, 19% and 33%, respectively,
Dublin.
and rents in the European Union (‘EU’) as a whole have increased by
25%. The lack of supply - which is being constrained by construction
costs - and underlying demand are the reasons why rents are so high in Dublin.
Supply the only viable, long-term solution
Ultimately, it is increased supply that will provide a sustainable and long-term solution to high rents in Dublin. Currently, only
the presence of institutional buyers makes the prospect of increased supply of large-scale standalone apartments viable.
Without the presence of institutional buyers of apartment blocks in the PRS sector, the viability issue would be even more
pronounced and the supply of new apartments would be even lower.
PRS and the Irish Rental Market – July 2019 21. Tenure status in Ireland – rental accommodation growing in importance
In Q1 2019, there were 356,500 dwellings privately rented in Ireland, an increase of 14,900 from Q1 20183 . Privately rented
dwellings now account for 19.1% of total dwellings nationwide, a percentage that has broadly held steady over the past
year. However, this figure has risen sharply since 2004, when only 8% of dwellings were rented privately. The total number
of people (as opposed to dwellings) renting was 910,300 in Q1 2019.
Figure 1: Percentage of Irish dwellings renting privately –
significant increases
25%
20%
15%
% of total
10%
5%
0%
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Source: CSO
Higher concentration in Dublin
In Dublin, the figure is significantly higher, with 25.9% of dwellings rented privately, up from 24% in Q1 2018. The actual
number of people (as opposed to dwellings) renting privately in Dublin in Q1 2019 was 344,500, an increase of 26,800 in
the space of 12 months.
Over the longer-term, the number of people in Dublin renting privately has increased by 95,000 between Q1 2012 to
Q1 2019. By contrast, the number of people in owner-occupied homes increased by only 56,100, which highlights the
significant growth in private rented accommodation in the Dublin region in particular.
Figure 2: Dublin households tenure status (%) Figure 3: Number of occupants renting
80%
privately in Dublin
% of total households
60% 400
40% 350
20% 300
‘000
0% 250
200
150
Owner occupied Local authority
Private rented
Source: CSO
3
Occupancy of dwelling by Dublin or non-Dublin NUTS3 Region, Central Statistics Office, Q1 2019
Figure 5: Change in numbers of non-Irish nationals employed by sector
Q1 2008 vs Q1 2019
100.0%
3 PRS and the Irish Rental Market – July 2019
80.0%
60.0%Non-Irish workers, a key source of PRS demand
Strong employment growth, especially employment of non-Irish national workers, has been a key driver in the demand
for PRS accommodation. Prior to the financial crisis, the number of non-Irish national workers in employment peaked
at 355,900 in Q1 2008, accounting for 16% of total employment. Following a fall-off in the number of non-Irish national
workers post-2008, numbers have again risen sharply and are currently above previous peak levels, with 375,300 non-Irish
national workers now accounting for 16.3% of total employment in Ireland
Figure 4: Non-Irish workers as a % of total
17.0%
16.5%
16.0%
15.5%
% of total
15.0%
14.5%
14.0%
13.5%
13.0%
20
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
20 1
20 3
06
07
07
08
08
09
09
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q1
Source: CSO
The importance of international workers for PRS, and particularly for high-end Dublin rental accommodation, has been
highlighted in a report on the Dublin Docklands4. In 2018, Irish tenants accounted for just 19% of renters in the Dublin
Docklands, while 44% of tenants were Europeans and non-Europeans accounted for a further 29%. The remaining 8% of
tenants were corporate, double the figure of 4% in 2017. This is a market which had an average rent in 2018 of €2,392,
almost 80% above the national average rent.
With rents far in excess of both the national and Dublin averages, it is not
surprising that tenants’ incomes in this area were also significantly higher It is likely that the demand
than the average – Docklands tenants in 2018 had an average salary for high-end and well-located
of €117,095. It is likely that the demand for high-end and well-located apartments will be driven by
apartments will be driven by high-earning skilled international workers,
high-earning skilled international
particularly in the ICT sector, with companies such as Google, Facebook,
workers, particularly in the ICT
and LinkedIn all within walking distance of the Docklands.
sector, with companies such as
According to the Central Statistics Office (CSO), average weekly earnings Google, Facebook, and LinkedIn
in the ICT sector were €1,257 in Q1 2019, the second highest of any sector,
all within walking distance of the
and 63% above the all sector average of €774. Furthermore, ICT weekly
Docklands.
earnings continued to grow strongly in Q1 2019, increasing by 5.2% in
year-on-year terms.
Changing composition of the Irish workforce
Since employment rates in Ireland bottomed out in Q1 2013, the number of people working in the ICT sector has increased
by 29% nationally, with 118,000 now employed in the sector. Between Q1 2013 and Q1 2019, the number of non-Irish
nationals working in this sector increased by 83.3% to 33,000.
4
The Docklands Residential Report, Owen Reilly, 2019
PRS and the Irish Rental Market – July 2019 4Figure 2: Dublin households tenure status (%) Figure 3: Number of occupants renting
80%
privately in Dublin
% of total households
60% 400
40% 350
20% 300
‘000
0% 250
200
150
Indeed, since theOwner
previous peak in Local
occupied employment
authority rates in early 2008, the composition of the Irish workforce has changed
dramatically, specifically in terms of the numbers of non-Irish national workers. The ICT sector has seen the biggest change,
Private rented
with an additional 14,400 non-Irish nationals in employment, an increase of 77.4% – the largest of any sector. In sharp
contrast, the construction sector has seen the biggest decline, with employment figures for non-Irish nationals now 19,100
lower than at the peak in early 2008, a decline of 53.1%. Source: CSO
Figure 5: Change in numbers of non-Irish nationals employed by sector
Q1 2008 vs Q1 2019
100.0%
80.0%
60.0%
40.0%
% change
20.0%
0.0%
-20.0%
-40.0%
-60.0%
Source: CSO
Figure 10: Stock available to rent, May 2019
These trends are supportive for PRS demand in Ireland, both as a result of European and international preferences for rental
9,000
over ownership, and the strong growth of workers in the high-paying ICT sector.
8,000
7,000
6,000
No. of units
5,000
4,000
3,000
2,000
1,000
0
Dublin (RHS) Leinster (RHS) Munster Connacht-Ulster
Source: Daft.ie
5 PRS and the Irish Rental Market – July 20192. Apartment numbers low by European standards, but supply is on the rise
A persistent and well-flagged problem is the lack of residential density in Dublin, coupled with the very low proportion of apartments,
and the very high proportion of houses, that make up the stock of residential units in the capital.
A detailed study5 by Eurostat listed the number of dwellings by type for over 1,000 European towns and cities. With 144,817 houses, the
Dublin City Council local authority area (i.e. excluding the other three local authority areas: Dun Laoghaire-Rathdown, Fingal and South
Dublin) finds itself an outlier, not just among capital cities, but also among smaller regional cities around Europe. An analysis of the data
shows that houses account for 60.4% of all dwellings in Dublin city. This compares with 32.4% in the City of Edinburgh, 10.3% in Berlin,
and as little as 1.3% in the City of London. However, if the wider definition of Dublin is used to incorporate all four local authorities, then
houses account for around 75% of all dwellings in the city.
Figure 6: Houses as a proportion of all dwellings (%)
Doncaster
100%
90% Waterford
80% Henin - Carvin
70% Sankt
Odense Augustin
60% Dos
Kecskemet Hermanas
50% Dublin
%
Zlin
40% Kalamata Jyvaskyla Maribor
Nitra Jelgava
30% Arhus Kaunas Tartu Winterthur
Budapest
20%
Glasgow Paris Most Ljubljana Riga
10% Thessaloniki Cadiz Narva Geneva
Helsinki Bratislava
0% Berlin Klaipeda
Un
Fr
Ire
De
Ge
Hu
Gr
Sp
Cz
Fin
Slo
Slo
La
Lit
Es
Sw
an
to
tv
ec
ee
ai
hu
la
nm
rm
ng
ite
itz
lan
ve
va
ia
n
ni
ce
nd
h
ce
an
ar
er
ni
kia
d
an
ar
d
a
Re
a
y
Ki
lan
ia
k
y
pu
ng
d
b
do
lic
m
Highest share among core cities Lowest share among core cities
Source: Eurostat
Tentative signs of increased supply
There are tentative signs of an increased supply of new apartments in the capital. There were 942 new apartments built in
Dublin city in 2018, a 32.9% increase on the 709 completed in the previous year, making apartments the most dominant
type of new build. Indeed, 51.3% of all new dwellings in Dublin city last year were apartments, almost four times the national
figure of 13.9%.
Figure 7: Apartments as a percentage of new dwelling completions,
2018
60%
Apartments as a % of total completions
50%
40%
30%
20%
10%
0%
Du
D L n ci
Ki
Ro nny
Al mm
O f ca l n
Co y
Fin ity
Sli l
W
Ga rfo
La ay c
Ke
W
Lo m e
Li m
Ti ick
Le rar
Do m
C a g al
Ga n
W ay c
M low nty
Ca agh
Ki w
W re
So ord
M Du
Lo
M ford
Cl
pp
lke
ld
ar
l lo o
on
ea b
ay
at
oi ity
es
ick ou
ex
go
itr y
fa au
ut ath
ng
ut
rry
va
rlo an
R ty
rk
sc
lw rd
lw
bl
ne
ga &
er
a
e
s
e
l
t
e
h
o
i
f
th lin
h
i
o
c
th
co
or
Source: CSO
un
iti
ty
es
5
Urban Europe – Statistics on cities, towns and suburbs – housing in cities, Eurostat, 2014
PRS and the Irish Rental Market – July 2019 6The trend is also evident in the Dun Laoghaire-Rathdown local authority area, where 44.8% of new builds were apartments.
Apartments look set to become even more prominent in the capital in the coming years, with the numbers of units approved
for planning permission in the city heavily balanced towards this type of dwelling. Of the 2,337 units granted planning
permission in Dublin city in 2018, 1,914 were apartments, which accounted for 82% of all units. It should be noted that while
the growth rates look very impressive, they are coming from a very low base and much more progress needs to be achieved
in the development and supply of apartments in Dublin, particularly in the Dublin City Council local authority area and along
key transportation nodes.
Figure 8: Apartments as a percentage of total units granted planning
permissions, 2018
Apartments as a % of total units approved
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Du
D L n ci
Lo
Fin
Ga l
St ay c
So
Co Du
Ki city n
Lo e
Ki ford
W nny
Ga m e
W ay
M low
Ke h
Li m
Ca rick
M w
Sli agh
Ro
Ti mm
D o ar
W g al
Of rfo
W y
Le ord
M m
Ca
La n
Cl
pp
ld
lke
ar
at i t
ea
on
ay
es
ick
at
ex
oi
go an
itr
ut
ng
fa rd
ut
rry
rlo
va
R ty
rk bl
sc
lw
l w at h
bl
ne y
ga
e
ar & c
e
e y
s
e
l
t
er on
h
o
t
f
i
h
i
o
i
ou
Source: CSO
nt
y
It should be noted that while Figures 7 and 8 appear to show that apartment construction is evident in most counties across
Ireland, these are not standalone large-scale apartment blocks. Rather, they are duplexes or low-rise apartments that are
part of traditional housing schemes and cost much less to develop than the classic medium- to high-rise apartment blocks
found in urban centres – and by definition are low-density units as well. In any event, they constitute a much smaller
proportion of new units built, or planned to be built, than what prevails in the key urban centres and the Greater Dublin area.
7 PRS and the Irish Rental Market – July 2019Figure 2: Dublin households tenure status (%) Figure 3: Number of occupants renting
80%
privately in Dublin
% of total households
60% 400
40% 350
3. Strong rental growth, although moderating
20% 300
‘000
0% 250
200
Rents in Ireland have continued to grow strongly over the past year, although the pace of growth appears to have moderated.
150
Private rents, as Owner
reported by the CSO,
occupied Localhave increased by 5.7% on an annual average basis in the five months to May 2019
authority
which is down from anrented
Private average annual rate of growth of 6.4% in 2018 and 7.2% in 2017.
Figure 9: Irish private rents remain robust Source: CSO
15
10
5 Figure 5: Change in numbers of non-Irish nationals employed by sector
%, annual average
Q1 2008 vs Q1 2019
100.0%
0
80.0%
-5
60.0%
40.0%
% change
-10
20.0%
0.0%
-15
-20.0%
-20
-40.0%
-60.0%
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
*
* to May 2019 Annual average rates of inflation (%) Source: CSO
Rental supply still constrained, with vacancy at record lows
The persistently strong growth in rents is due to a strong economy, low unemployment and, critically, the lack of properties
Source: CSO
to rent. For example, on May 1 2019 there were just 2,700 properties available to rent nationwide on Daft.ie, the lowest ever
reported figure for stock on the Irish market, in a series that dates back to the beginning of 2007.
Figure 10: Stock available to rent, May 2019
9,000
8,000
7,000
6,000
No. of units
5,000
4,000
3,000
2,000
1,000
0
Dublin Leinster Munster Connacht-Ulster
Source: Daft.ie
PRS and the Irish Rental Market – July 2019 8The strong growth in rents in Ireland has outpaced many of its European counterparts, as can be seen in Figure 11. From
January 2006 through April 2019, Irish rents have increased by almost 60%, whereas rents in Germany, France and the UK
have made more modest gains of 18%, 19% and 33%, respectively, and rents in the EU as a whole have increased by 25%.
Figure 11: Actual rents for housing, index (100 = Jan 2016)
170
160
150
140
130
Index
120
110
100
90
80
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
06
07
08
09
10
11
12
13
14
15
16
17
18
19
European Union Germany Ireland
Source: Eurostat
Eurostat rent index – Dublin in the upper echelon of rental markets globally
Not only are rents growing very strongly in Ireland, but rents, particularly in Dublin, are at elevated levels compared with
its peer cities across the globe. According to the Eurostat 2018 Current Market Rents report (see Appendix 1 for background
information on the report) Dublin had the fourth highest rental levels for a two-bedroom apartment in a survey of 53 cities
in 2018, behind Tokyo, New York and London, up from sixth in the previous year.
Figure 12: Comparison of average rent levels for flats (Brussels = 100)
500
450
400
350
300
Index
250
200
150
100
50
0
London
Dublin
Copenhagen
Stockholm
Paris
Luxembourg
Helsinki
Reading
Munich
Oxford
Madrid
The Hague
Lisbon
Berlin
Vienna
Prague
Valleta
Rome
Lyon
Budapest
Tallinn
Vilnius
Brussels
Karlsruhe
Ljubljana
Bonn
Zagreb
Warsaw
Bucharest
Athens
Riga
Bratislava
Varese
Nicosia
Sofia
Reykjavik
Geneva
Oslo
Bern
Belgrade
Podgorica
Sarajevo
Tirana
Skopje
Ankara
New York
Washington
Ottawa
Montreal
Mexico City
Tokyo
Singapore
Seoul
Source: Eurostat
9
Figure 19: Residential sales by buyer Figure 20: Residential sales by buyer
PRS and the Irish Rental Market – July 2019
type – new homes type – existing homes
15,000 60,000It is interesting to observe how Dublin’s ranking on this index has changed over time, compared with the other cities which
complete the top four; London, New York and Tokyo. Since 2007, Tokyo has occupied the top spot as the most expensive
city in which to rent an apartment, while second and third position has been traded between London and New York over
this period, with London currently occupying second place ahead of New York.
Dublin, on the other hand, has occupied fourth place in both 2008 and 2018, but the ten years in between have featured
turbulence not experienced by the three cities ranked above it.
Figure 13: Eurostat rental index annual rankings
17
16
15
14
13
12
11
10
Ranking
9
8
7
6
5
4
3
2
1
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
London Tokyo New York Dublin
Source: Eurostat
Between 2008 and 2010, Dublin fell from being the fourth most expensive city to the 15th, before moving up to 14th in
2011, and falling again to a low of 16th the following year. In the intervening period, Dublin has slowly made its way back
to the top four ranking. This heightened level of volatility in Dublin rents does raise the question about the sustainability of
the high level of prevailing rents.
PRS and the Irish Rental Market – July 2019 104. Rental affordability – primarily an issue for Dublin and
lower income households
Given the strong growth in rents over recent years, rental affordability has become more of a challenge for certain locations in
Ireland and certain household cohorts in Ireland.
Rental payment as a percentage of tenant’s household disposable incomes6 is highest in Dublin, the surrounding Mid-East
region and Cork city. However, rental affordability is particularly challenging for lower-income households, and this is a problem
that has persisted over time.
Average rent was 29% of household disposable incomes in Ireland in 2016
According to the CSO, average rent accounted for 29% of tenants’ households’ disposable income in 2016, just below the
30% benchmark - beyond which affordability becomes increasingly challenging. However, South Dublin (33.3%), Dublin city
(32.0%), Dun Laoghaire-Rathdown (32.0%), Wicklow (31.7%), Fingal (31.6%) and Cork city (30.2%) have all breached the 30%
barrier. In fact, according to the CSO, the rent burden is 35% or higher in many locations7 in Dublin and has exceeded 40%
of disposable income of tenants in a small number of locations.
Figure 14: Average rent as a percentage of disposable income of tenants by county,
2016
35.0
30.0
% of disposable income
25.0
20.0
15.0
10.0
5.0
0.0
So
Du h D
DL in c lin
W at h
Fin low wn
Co l
Lo cit y
St h
Ki
Ga e
M ay
Li m t h
Co ick
W cou
Ca ford y
W w
Ke rfo
Ki
Ti nny
M erar
Sli o
La
Do
W g al
Of t m e
Ga y h
C l ay
Ro
M om
Le agh n
Ca im
Lo n
pp
ld
lke
a r co
at
ea cit
ay y
on mo
ick do
ex n
at
oi
es
go
itr an
ut
fa at
ng
ut
rlo
rry rd
va
-R ity
rk
rk
sc
lw
lw
bl ub
ne
ga
er
ar
e un
e
s
e
l
fo
rd
t
y
ty
Average rent as a % of household disposable income of tenants Source: CSO
Dublin - highest rent burdens
However, it should be noted that the higher rent-to-income burdens of 35% plus in Dublin are generally concentrated
in locations where average incomes are lower, rather than in prime locations where rents and incomes are generally
higher. Consequently, it is areas where households have lower average incomes that face some of the biggest
affordability challenges in Dublin. Households on lower incomes find higher rental costs more acute, as they have much
less residual income available to spend than higher-income households, even if both sets of households have the same
rent-to-disposable income ratios.
6
Disposable income -Tax and social insurance contributions were estimated and summed to household level and subtracted from the household
gross income in order to calculate the annual household disposable income. The components of household disposable income are household
gross income less:
• Employers social insurance contributions
• Tax (including USC) on income or profit
• Social insurance contributions
• Tax deducted at source from individual private pension plans
7
The CSO calculated the rent burden for all electoral divisions (‘EDs’) in Ireland that have at least 20 properties with active tenancies registered
with the RTB dataset in 2016. This amounted to 3,409 EDs. EDs are the smallest legally defined administrative areas in the State.
11 PRS and the Irish Rental Market – July 2019Rental cost burden varies strongly across the income distribution for households
The rental cost burden varies strongly across the income distribution for households. In other words, rental payment as
a percentage of disposable income is substantially higher for lower income households. However, this is not a recent
phenomenon; rather, it is a longstanding problem. In addition, it is more structural than cyclical in nature, and the rise in
rents in recent years has further exacerbated the problem.
According to recently published research8, ‘the average rent-to-income (‘RTI’) ratio for households in the bottom income
quartile was just over 40% in 2016. This was around 10 percentage points above the figure for the second quartile. The
households in the third and fourth quartiles of the income distribution have average RTI ratios of approximately 22% and
17% respectively.’ Figure 15 captures the trends in average RTI ratios over time and it is clear that the burden on lower
income households is significantly greater than for higher-income households. Furthermore, there has been an increase in
the average RTI ratio for the two bottom income quartiles between 2014 and 2016, whereas the average RTI ratio for the
higher-income quartiles has remained broadly unchanged.
Figure 15: Average rent-to-income ratios by income quartile
45%
40% Low
35% income
households
% of net income
30%
25%
High
20%
Income
15% households
10%
5%
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Income quartile 1 Income quartile 2 Income quartile 3 Income quartile 4
Source: Exploring affordability in the Irish housing market
8
The Economic and Social Review, Vol. 5, No. 1, Spring 2019, pp. 119-157 - Exploring Affordability in the Irish Housing Market. Corrigan et. al.
PRS and the Irish Rental Market – July 2019 12Rental affordability, a more pressing issue in secondary locations
As already mentioned, rental affordability is most pressing for lower-income household quartiles in Ireland and is much less
of an issue for higher income households, even in prime locations where average rents tend to be higher.
Figure 16: Narrow spread between lowest and highest rents in Dublin
4
Top quartile vs. bottom quartile multiple
3.5
3
2.5
2
1.5
1
0.5
0
Dublin Toronto San Tokyo Milan Amsterdam London New York Paris
Francisco
Source: Goodbody Stockbrokers
his would suggest that rents for prime PRS in the very best locations
T
are affordable by higher income cohorts (absent an economic shock
In our view the pinch point may
that would see incomes fall), but it does indicate that the high levels of
not be the high-end prime PRS rents outside the prime locations are probably not sustainable. Recent
schemes in Dublin but rather analysis by Goodbody Stockbrokers9 highlighted the fact that Dublin
those schemes that may not be has a narrower spread of rental values from the highest to the lowest,
located in prime areas but are compared with a number of cities across the globe (see Figure 16).
charging prime rents. As the Goodbody analysis states, ‘this highlights the lack of depth of
affordability across the city’. In our view the pinch point may not be the
high-end prime PRS schemes in Dublin but rather those schemes that
may not be located in prime areas but are charging prime rents.
9
Irish PRS Residential, Goodbody Stockbrokers, April 2019
13 PRS and the Irish Rental Market – July 20195. Growing presence of the non-household sector in the residential market
The non-household (institutional) sector is defined as private companies, charitable organisations and state institutions. This
definition constitutes a broad range of institutions ranging from REITs, to pension funds, to approved housing bodies (‘AHB’)
and to local authorities.
Non-household (institutional) buyers are an increasingly important component of the housing market in Ireland, accounting for
16% of all transactions in 2018, up from 3% in 2010. This trend has continued in the first quarter of 2019, with non-household
(institutional) buyers responsible for 14.5% of all transactions. The presence of non-household (institutional) buyers is even
more pronounced in the Dublin market, where they accounted for 21% of all transactions last year compared with 4% in 2010.
Figure 17: Share of residential purchases by non-household (institutional)
buyers (%) - new and existing residential units
25%
% of residential purchases
20%
15%
10%
5%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Institutional buyers - Ireland Institutional buyers - Dublin
Source: CSO
The presence of non-household (institutional) buyers is even more pronounced in the new homes market, accounting for
nearly a quarter of all new homes transactions in 2018, compared with 14% in the second-hand homes market.
Figure 18: Share of residential purchases by non-household (institutional)
buyers (%) - new residential units only
45%
% of new residential purchases
40%
35%
30%
25%
20%
15%
10%
5%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Institutional buyers - Ireland Institutional buyers - Dublin Source: CSO
Although the share of new homes acquired by the non-household (institutional) sector has increased over the past seven
years, it should be seen in the context of a market where the total number of transactions has grown strongly.
PRS and the Irish Rental Market – July 2019 14300
Index
250
200
150
100
50
0
The non-household (institutional) sector accounted for the acquisition of 3,071 new residential units in the 12 months to
London
Dublin
Copenhagen
Stockholm
Paris
Luxembourg
Helsinki
Reading
Munich
Oxford
Madrid
The Hague
Lisbon
Berlin
Vienna
Prague
Valleta
Rome
Lyon
Budapest
Tallinn
Vilnius
Brussels
Karlsruhe
Ljubljana
Bonn
Zagreb
Warsaw
Bucharest
Athens
Riga
Bratislava
Varese
Nicosia
Sofia
Reykjavik
Geneva
Oslo
Bern
Belgrade
Podgorica
Sarajevo
Tirana
Skopje
Ankara
New York
Washington
Ottawa
Montreal
Mexico City
Tokyo
Singapore
Seoul
March 2019, while the household sector acquired 8,821 in the same period.
Source:
In terms of the existing homes market, the household Eurostat
sector acquired 44,466 in the 12 months to March 2019 compared
with 7,445 units acquired by the non-household (institutional) sector.
Figure 19: Residential sales by buyer Figure 20: Residential sales by buyer
type – new homes type – existing homes
15,000 60,000
50,000
10,000 40,000
5,000 30,000
20,000
0 10,000
0
All buyer types Household buyer - All All buyer types Household buyer - All
Non-household buyer Household buyer - FTB - OO Non-household buyer Household buyer - FTB - OO
Source: CSO
While private institutional capital (such as pension funds, investment funds and REITs) – are major purchases of residential
units in the Irish market, public capital in the form of Part V acquisitions, AHBs and local authorities are also very significant
buyers of residential property.
15 PRS and the Irish Rental Market – July 20196. Viability – still a significant barrier to large-scale standalone
apartment developments
The viability of apartment construction remains challenging in many parts of Dublin and this continues to constrain the supply
of new residential units in the capital. Moreover, the viability of large-scale apartment construction outside of Dublin does not,
for the most part, currently exist.
Development costs the persistent problem
In 2017, the SCSI published a report10 analysing construction costs of apartments and compared them with prevailing
sales prices, thereby highlighting the viability or otherwise of apartment development. It found that the costs of building a
medium-rise apartment development ranged from €400,000 (excluding VAT) in a suburban location to €578,000 (excluding
VAT) in an urban location.
These cost estimates were calculated before the design standard changes introduced by the Minister for Housing, Planning
and Local Government in March 2018. The design standards would have helped to improve the viability of apartment
developments, especially those located in close proximity to key transport nodes, as the car parking requirements have
been significantly reduced, if not eliminated. However, these guidelines, while improving the viability of apartments, did not
make apartment construction universally viable, as the costs were (and continue to be) in excess of what the average owner-
occupier household could afford to borrow based on the loan-to-income (‘LTI’) rules. Furthermore, with construction cost
inflation running at approximately 5% to 6% per annum and the introduction of the nZEB11 regulations, we estimate that the
costs of medium-rise apartment developments have returned to levels indicated in the SCSI 2017 report.
Institutional (non-household) buyers vital to increased supply of standalone apartments
Generally, given the above construction costs, the only prospective buyers of suburban and urban apartment blocks are
institutional investors such as REITs, pension funds and property funds. These institutional investors are able to afford the
higher cost of such acquisitions, as they can generate a sufficiently high
yield based on the underlying rental income.
In the majority of cases, the construction of apartment blocks is only
Essentially, the institutional
viable because investment funds have the capacity to pay the high investors in PRS can afford to pay
costs involved. It is not the case that these apartment blocks would have a sufficient premium to the break-
been built in any event. This is because the average household/owner- up value of the apartment blocks
occupier would not be in a position to pay a price high enough to cover to warrant their development in
the construction costs of standalone suburban and urban apartment the first place.
blocks. Essentially, the institutional investors in PRS can afford to pay
a sufficient premium to the break-up value of the apartment blocks to
warrant their development in the first place.
10
The Real Costs of New Apartment Delivery ANALYSIS OF AFFORDABILITY AND VIABILITY, October 2017
11
The European Energy Performance of Buildings Directive Recast 2010 (EPBD) requires all new buildings to be nearly Zero Energy Buildings
(‘nZEB’) by 31st December 2020 and all buildings acquired by public bodies by 31st December 2018. ‘Nearly Zero Energy Buildings’ means a
building that has a very high energy performance. The nearly zero or very low amount of energy required should be covered to a very significant
extent by energy from renewable sources, including energy from renewable sources produced on-site or nearby.
The nZEB regulations will come into force on 1st November 2019. This means that any dwelling receiving planning permission after 1st
November should meet the nZEB standard. Substantial completion must have been achieved by 1st November 2020. After 2020 all homes
irrespective of when they received planning permission should achieve the new standard.
PRS and the Irish Rental Market – July 2019 16Limited number of locations are actually viable
Even allowing for the higher price that PRS investors are willing to pay, there are still only a limited number of locations
within Dublin where it is viable to construct standalone apartment blocks. The following charts estimate both the prevailing
price12 per unit that a PRS investor would be willing to pay and the associated costs of development in various locations in
Dublin. An estimate of €450,000 as a unit cost of development is used for illustrative purposes, but the true costs will be
slightly higher or lower, depending on the location and the site value. Nevertheless, it is a reasonable approximation and
highlights the fact that viability for the development of standalone apartments is limited to a number of locations within
Dublin.
Figure 21: Viability of standalone apartment development still challenged in Dublin
Analysis by Dublin postcode – Gross yield 5%
600,000
500,000
400,000
Euros
300,000
200,000
100,000
0
Estimated PRS value Viability at €450,000 Source: AIB
Without the presence of institutional buyers of apartment blocks in the
PRS sector the viability issue would be even more pronounced and the
Currently, only the presence of supply of new apartments would be lower. Ultimately, it is increased
institutional buyers makes the supply that will provide a sustainable and long-term solution to high
prospect of increased supply rents in Dublin. Currently, only the presence of institutional buyers makes
of large-scale standalone the prospect of increased supply of large-scale standalone apartments
apartments viable.Figure 22: Viability
viable.still challenged in Dublin
Analysis by Dublin location – Gross yield 5%
700,000
600,000
500,000
400,000
Euros
300,000
200,000
100,000
0
Grand Canal Dock, Dublin 2
Ballsbridge, Dublin 4
Spencer Dock, Dublin 1
Milltown, Dublin 6
Goatstown, Dublin 14
Rathgar, Dublin 6
I.F.S.C., Dublin 1
Dun Laoghaire, Dublin
Leopardstown, Dublin 18
Donnybrook, Dublin 4
Pembroke, Dublin 4
Islandbridge, Dublin 8
Ringsend, Dublin 4
Dundrum, Dublin 16
Ranelagh, Dublin 6
Clonskeagh, Dublin 14
Parnell Street, Dublin 1
Sandyford, Dublin 18
Terenure, Dublin 6W
Dundrum, Dublin 14
Blackrock, Dublin
East Wall, Dublin 3
Stillorgan, Dublin
Carrickmines, Dublin 18
Smithfield, Dublin 7
Merrion, Dublin 4
Ballinteer, Dublin 16
Monkstown, Dublin
Clontarf, Dublin 3
Malahide, Dublin
Drumcondra, Dublin 3
Kilmainham , Dublin 8
Rathfarnham, Dublin 16
Rathmines, Dublin 6
Castleknock, Dublin 15
Drumcondra, Dublin 9
Kimmage, Dublin 12
Stepaside, Dublin 18
Raheny, Dublin 5
Drimnagh, Dublin 12
Fairview, Dublin 3
Ashtown, Dublin 15
Portmarnock, Dublin
Inchicore, Dublin 8
Clonsilla, Dublin 15
Lucan, Dublin
Santry, Dublin 9
Beaumont, Dublin 9
Blanchardstown, Dublin 15
Royal Canal Park, Dublin 15
Tallaght, Dublin 24
Saggart, Dublin
Shankill, Dublin
Glasnevin, Dublin 11
Greystones, Wicklow
Clondalkin, Dublin 22
Swords, Dublin
Citywest, Dublin 24
Donaghmede, Dublin 13
The prevailing price per unit that a PRS investor would be willing to pay is calculated by annualising the monthly asking rent in each location
12
and capitalising it by using a gross yield of 5%. The source of the rent prices is the Residential Tenancies Board (RTB). These rents are for the
most part passing rents, and in order to ascertain asking rents, they are increased by 15%.
Estimate PRS value Viability at €450,000 Source: AIB
17 PRS and the Irish Rental Market – July 2019Source: AIB
Donaghmede, Dublin 13
Citywest, Dublin 24
Source: AIB
Swords, Dublin
Clondalkin, Dublin 22
Greystones, Wicklow
Glasnevin, Dublin 11
Shankill, Dublin
Saggart, Dublin
Tallaght, Dublin 24
Royal Canal Park, Dublin 15
Blanchardstown, Dublin 15
Beaumont, Dublin 9
Santry, Dublin 9
Lucan, Dublin
Clonsilla, Dublin 15
Inchicore, Dublin 8
Viability at €450,000
Portmarnock, Dublin
Ashtown, Dublin 15
Fairview, Dublin 3
Analysis by Dublin location – Gross yield 5%
Figure 22: Viability still challenged in Dublin
Drimnagh, Dublin 12
Raheny, Dublin 5
Stepaside, Dublin 18
Kimmage, Dublin 12
Drumcondra, Dublin 9
Castleknock, Dublin 15
Rathmines, Dublin 6
Rathfarnham, Dublin 16
Kilmainham , Dublin 8
Drumcondra, Dublin 3
Malahide, Dublin
Clontarf, Dublin 3
Monkstown, Dublin
Ballinteer, Dublin 16
Merrion, Dublin 4
Smithfield, Dublin 7
Estimate PRS value
Carrickmines, Dublin 18
Stillorgan, Dublin
East Wall, Dublin 3
Blackrock, Dublin
Dundrum, Dublin 14
Terenure, Dublin 6W
Sandyford, Dublin 18
Parnell Street, Dublin 1
Clonskeagh, Dublin 14
Ranelagh, Dublin 6
Dundrum, Dublin 16
Ringsend, Dublin 4
Islandbridge, Dublin 8
Pembroke, Dublin 4
Donnybrook, Dublin 4
Leopardstown, Dublin 18
Dun Laoghaire, Dublin
I.F.S.C., Dublin 1
Rathgar, Dublin 6
Goatstown, Dublin 14
Milltown, Dublin 6
Spencer Dock, Dublin 1
Ballsbridge, Dublin 4
Grand Canal Dock, Dublin 2
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
Euros
PRS and the Irish Rental Market – July 2019 187. PRS as an asset class – remains attractive to institutional investors
PRS has seen extremely strong growth as a sector in Ireland in the past year, with over €114 million of residential transactions
completed during the first three months of 2019 alone13. Since 2012, there have been more than 130 residential investment
transactions of €1 million or more, and 2018 was the strongest year so far. PRS investment has been largely focused on Dublin,
with 81% of transactions in excess of €1 million occurring within the capital.
Figure 23: Residential invesment transactions in Ireland 2012 - Q1 2019
€1,400,000,000
€1,200,000,000
Transaction volumes (€)
€1,000,000,000
€800,000,000
€600,000,000
€400,000,000
€200,000,000
€0
2012 2013 2014 2015 2016 2017 2018 Q1 2019
Source: CBRE
According to CBRE, the volume of institutional equity targeting the residential investment sector in Ireland now exceeds €6.3
billion, with considerable interest from European, Canadian, UK, and US investors. As a result of this strong demand, prime PRS
yields have fallen. Prime residential yields in Dublin currently stand at 3.85%, having compressed by 40 basis points in the past
12 months and by approximately 100 basis points over the past two years.
Figure 24: Dublin prime residential yields (%)
5.5
5
4.5
%
4
3.5
3
Se
No
Ja
M
M
Ju
Se
No
Ja
M
M
Ju
Se
No
Ja
M
M
Ju
Se
No
Ja
M
n-
n-
n-
n-
ar
ay
l-1
ar
ay
l-1
ar
ay
l-1
ar
p
p-
p-
p-
v-
v-
v-
v-
-1
16
17
18
19
-1
-1
-1
-1
-1
16
-1
17
-1
18
6
7
8
15
16
17
18
5
6
7
8
9
6
7
8
Source: CBRE
13
Ireland Residential Investment Market View, CBRE, Q1 2019
19 PRS and the Irish Rental Market – July 2019However, despite this yield compression, Dublin PRS is still attractive on a relative basis when compared with many of its
European peers. For example, prime PRS net yields are in the region of 3% or less in a number of cities in Germany, France
and Sweden.
Figure 25: Prime residential net yields (%), European comparison
5
4
3
%
2
1
0
Source: JLL
Benign interest rate environment the anchor for property yields
n a unilateral basis, 3.85% yields are demanding but in an environment
O
where long-term interest rates in Ireland are close to zero, current
prime PRS yields are justified. The prevailing low level of yields, on not
The obvious risk to property
just PRS, but all property sectors are anchored by this benign interest values is the impact of possible
rate environment. The obvious risk to property values is the impact of interest rate increases in the
possible interest rate increases in the future. However, there does not future. However, there does not
appear to be any imminent risk of higher interest rates over the coming appear to be any imminent risk
year given the fact that, as the ECB has stated, ‘…interest rates (are) to of higher interest rates over the
remain at their present levels at least through the first half of 2020, and coming year
in any case for as long as necessary to ensure the continued sustained
convergence of inflation to levels that are below, but close to, 2% over
the medium term14.’ The ECB has forecast annual inflation rates of 1.3%
in 2019, 1.4% in 2020 and 1.6% in 2021. If these inflation forecasts prove to be correct, then the prospect of significantly
higher interest rates is remote.
14
ECB Governing Council Meeting - 6 June 2019 press release
PRS and the Irish Rental Market – July 2019 20Conclusion The demand for rental accommodation in Ireland, particularly in Dublin, has shown no signs of abating over the past 12 months. Along with other demographic factors, one of the key drivers of the increased demand for rental accommodation is the large numbers of non-Irish national workers in the labour force, who inherently have a preference to rent. However, a persistent and well-flagged problem is the lack of residential density in Dublin, with a very low proportion of apartments, and a very high proportion of houses, that make up the stock of residential units in the capital. There are, however, tentative signs of an increased supply of new apartments in the capital, both in terms of units built and units in planning, with apartment supply now starting to outpace the supply of single-family dwellings. Nevertheless, progress remains slow and the actual number of apartments being constructed still falls well short of what is required. As a consequence of strong underlying demand and relatively sluggish supply, rents grew strongly again last year, with Dublin rents now the fourth most expensive in a survey of 53 global cities in which to rent an apartment, up from the sixth most expensive in 2017. Given the strong growth in rents, rental affordability has become more of a challenge for certain locations in Ireland and certain household cohorts in Ireland. Rental payment as a percentage of tenants’ household disposable incomes is highest in Dublin, the surrounding Mid-East region and Cork city. Rental affordability is particularly challenging for lower-income households, but much less so for higher income households. This would indicate that rents for prime PRS in the very best locations are affordable by higher income cohorts (absent an economic shock that would see incomes fall), but it does indicate that the high levels of rents outside the prime locations are probably not sustainable. What is further compounding the problems of supply and affordability is the fact that the viability of large-scale apartment construction remains challenging in many parts of Dublin and generally non-existent outside of Dublin. Essentially, the costs of developing medium- to high-density apartments are still too high, which in turn limits their viability to a small number of locations and to a limited pool of purchasers. In the majority of cases, the construction of apartment blocks is only viable because investment funds have the capacity to pay the high costs involved. It is not the case that these apartment blocks would have been built in any event. This is because the average household/owner-occupier would not be in a position to pay a price high enough to cover the construction costs of standalone suburban and urban apartment blocks. Essentially, the institutional investors in PRS can afford to pay a sufficient premium to the break-up value of the apartment blocks to warrant their development in the first place. 21 PRS and the Irish Rental Market – July 2019
Appendix 1
Eurostat 2018 Current Market Rents
The rent data in the Eurostat 2018 Current Market Rents publication are part of a wider programme of work,
the objective of which is to compare the relative cost of living of international civil servants, in any place of
employment, with that of Brussels, the reference city. The work is carried out by the International Service for
Remunerations and Pensions (ISRP) at the OECD and Eurostat, with the assistance of National Statistical Offices.
ACCOMMODATION
Real estate agents are asked to provide the monthly rent for various types of accommodation, excluding charges
and utilities, for an unfurnished property. The quality of the accommodation should be good to very good, but
not luxurious.
TYPES OF DWELLINGS SURVEYED:
Five different types of dwellings are surveyed:
• Three-bedroom flats
• Two-bedroom flats
• One-bedroom flats
• Non-detached houses
• Detached houses
GENERAL CHARACTERISTICS:
Location: Residential area of good quality
Year of construction or major modernisation: Within the last 10 years
Situation: Middle floor
Outlook: In good, well-lit position
Finish: Floors, walls, sanitary fittings, doors, etc. of good quality
Living area: Total internal habitable area, excluding garage and terraces
DETAILS ON THE NEIGHBOURHOODS
Special attention is given to the neighbourhood, which is a most important determinant for rent level. Since the
aim of the entire exercise is to compare like with like, the neighbourhoods surveyed may not necessarily be in
those areas where expatriates actually live, but comparable with those actually occupied by officials in Brussels.
These neighbourhoods are described as residential areas of good quality, favoured by expatriates and
professional people such as international civil servants, university staff, doctors, managers, etc., who pay their
rent themselves (i.e. not paid by their employers).
DETAILS ON THE SURFACE AREA
Within each of the types of accommodation, there are different sizes for total living space, depending on the
housing commonly found in each of the different cities. Rental prices for dwellings surveyed in each city are
compared with the rent of dwellings (having the same characteristics and the same surface area) found in
Brussels, where a larger sample of housing sizes is considered.
Source: 2018 Current Market Rents, Eurostat and iSRP
PRS and the Irish Rental Market – July 2019 2223 PRS and the Irish Rental Market – July 2019
Disclaimer This publication is for information purposes and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This publication is not to be reproduced in whole or in part without prior permission. In the Republic of Ireland it is distributed by Allied Irish Banks, p.l.c. In the UK it is distributed by Allied Irish Banks, p.l.c. and Allied Irish Bank (GB). In Northern Ireland it is distributed by First Trust Bank. In the United States of America it is distributed by Allied Irish Banks, p.l.c., New York Branch. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Allied Irish Bank (GB) and First Trust Bank are trade marks used under licence by AIB Group (UK) p.l.c. (a wholly owned subsidiary of Allied Irish Banks, p.l.c.), incorporated in Northern Ireland. Registered Office 92 Ann Street, Belfast BT1 3HH. Registered Number NI018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In the United States of America, Allied Irish Banks, p.l.c., New York Branch, is a branch licensed by the New York State Department of Financial Services. Deposits and other investment products are not FDIC insured, they are not guaranteed by any bank and they may lose value. Please note that telephone calls may be recorded in line with market practice. PRS and the Irish Rental Market – July 2019
Patrick O’Sullivan
Head of Real Estate Research
pat.p.o’sullivan@aib.ie
Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland.
26 PRSthe
AIB/PRS and andIrish
the Irish Rental
Rental MarketReport
Market – July 2019
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