While the Government should be commended for its efforts to address the issue of affordability through the introduction of the cost-rental and shared-equity schemes contained within the Affordable Housing Bill announced in Budget 2021, the €110 million of allocated funding is a proverbial drop in the ocean compared to the more than €15 billion that transacted in Ireland’s residential market in 2020 alone.
Unfortunately, the capacity for the Government to increase funding beyond this level is constrained by the funding pressures coming from other sectors of society such as health and social welfare. Furthermore, with the pandemic increasing government debt by €19 billion in 2020 alone, the availability of funds for housing is not likely to improve in the short to medium term.
Notwithstanding, an urgent solution is required to address the worsening affordability crisis as the pandemic is likely to further exacerbate existing stresses within the residential sector. In the decade since the housing crash we have consistently failed to deliver the supply that the residential market badly needs, despite being Europe’s best-performing economy over the period. With the residential construction sector broadly shut down for the first quarter of this year, the availability of affordable accommodation will degrade further. In short, with both Government funds and new housing supply remaining scarce, alternative solutions are required to ensure this basic human necessity is delivered for those in need.
This dynamic is not unique to Ireland, with a European Union report identifying a funding gap to social and affordable housing of €7 billion in Europe. To bridge this gap, European countries are increasingly looking to the private sector to fund this deficit.
Institutional investors
Internationally, the affordable housing sector has become increasingly popular among institutional investors in recent years by satisfying their need for a consistent cash flow underpinned by low and stable vacancy rates. This is achieved because tenants pay below-market rents, which means they stay in this housing for longer than in the private rental sector. Furthermore, where these projects are backed by a state-linked entity, they provide a very secure covenant from an investor’s point of view and create large investor demand for the sector. It also represents a win for the State as it allows the private sector to shoulder the burden in supplying the up-front capital required to build out the affordable sector in Ireland at a time when the public purse is constrained. Taken together, it creates a win-win situation for the tenant, the investor and the Government.
The challenge for the Government is in creating the right conditions to unlock these reservoirs of private-sector funding so they can flow into Ireland’s affordable housing sector.
In this regard, significant strides have been made with the forthcoming statutory regulation of approved housing bodies (AHBs) offering an important conduit through which private investors can channel capital. Legal & General, an established investor in the sector internationally, is backing Clúid Housing in the delivery of more than 200 social homes in a move that could be a sign of things to come. The Land Development Agency is also set to make leaps in the sector, particularly with new legislation clarifying its status as a designated-activity company, which will allow it to borrow funds and establish subsidiaries to carry out its functions. The area is not without its challenges, however. For example, the majority of capital for AHBs is currently sourced from State financing. This on-government-balance-sheet nature of the AHBs limits the private sector's ability to invest in them. Nevertheless, creative thinking should allow for these issues to be addressed and overcome.
To conclude, while both political and institutional agendas are aligned in recognising the need to address the affordable housing market shortage, the State is constrained in its ability to provide sufficient financing to the sector. However, by leveraging the experience of European countries, we can see that privately-sourced financing – in conjunction with AHBs – has the potential to solve the undersupply of affordable housing in Ireland.
Ebba Mowat is a divisional director at Savills Ireland
