The head of a major US multinational which employs more than 2,000 people in Dublin told me a year ago that the cost and scarcity of renting an apartment in the city was a “concern”. Despite the politest of corporate parlance used, the message was crystal clear: problems in the residential market were not a blocker of foreign direct investment yet but there are genuine fears that they will become one.
Since then, residential rents in the capital have increased by 12.3 per cent in the year to June, according to a daft.ie report, and are now more than 18 per cent (that’s €260 a month) higher than their previous peak in 2008. It costs nearly €3,000 a year more in Dublin and €1,500 a year more outside the capital to rent than a year ago. The same survey found average rents across the country reached an all-time high of €1,159 a month in the April-June period while there were just 2,900 properties available to rent as of August 1st, down by almost 20 per cent on the same date in 2016. In Dublin, only 1,100 homes were available to rent, compared to 2,000 on the same date in 2014.
Trinity college economist and report author Ronan Lyons didn't mince his words: "The rental market remains in severe distress due to a lack of supply and thus the appropriate policy response is to boost supply of all forms."
Just as alarming as rising rents is the inadequate number of houses being built to meet demand – and there is even considerable debate about the actual numbers. Official data puts the number of new houses completed in 2016 at 14,932 based on electricity connections but the recently released Goodbody BER housebuilding tracker – based on building energy ratings – puts the figure of house completions at 5,377. Experts point out that new electricity connections can come from work to existing buildings or formerly vacant units returning to the market – hence relying on this source for new-homes data can overstate the numbers.
The Goodbody BER housebuilding tracker suggests the number of new homes built this year will be less than 10,000 – miles away from the 35,000 new homes a year that its chief economist, Dermot O’Leary, believes is required to meet demand.
Either way, it’s not surprising that the latest MyHome.ie property report shows the housing market should record double-digit price growth for 2017 and into 2018 based on healthy demand generated by Ireland’s fast-growing economy.
It's interesting to note, too, that in the rush to attract companies shifting out of the UK due to Brexit, a lot of our competitor locations for these jobs focus in their pitches on how hard it is in Ireland to source suitable residential accommodation – not to mention schools which offer the European Baccalaureate.
Brexiting firms
Andrew Cunningham, a director at estate agent Savills and head of its office agency division, has first-hand experience of attracting Brexiting firms to Ireland. He says our residential market and high office rents relative to some locations "are the weak spots" our competitors use to gain an advantage. "But it's worth pointing out that Ireland also has many advantages when it comes to attracting these Brexiting firms," he continues. "For example, we're an English-speaking low-tax country with a work culture that's more akin to the US and UK than France or Germany. It's clear that housing is now top of the political agenda in Ireland and this should augur well for the future."
Nevertheless, many estate agents and developers point to the return on residential development in Ireland at the moment being, at best, marginal – particularly on sites acquired recently but less so on those bought more than two years ago. They also point to the difficulty in attracting development finance from banks and financial institutions – this probably gives credence to their “marginal” argument, even if Irish banks are a lot more limited in what they can lend these days and may be understandably reluctant not to get overexposed to the property market after the great crash of 2008.
However, a recent report (The Real Costs of New Apartment Delivery) from the Society of Chartered Surveyors Ireland highlights the viability problem for some forms of residential development. The SCSI research found it is considerably more expensive to build apartments in the capital than a standard three-bed semi.
Its figures claimed it costs €330,493 , which includes a reasonable margin for a developer, to deliver a three-bed semi in Dublin while a two-bedroom city centre apartment in a block of five to eight storeys comes in at €470,000 to €578,000. Meanwhile, a two-bed apartment in a low-rise suburban apartment scheme would cost from €293,000-€346,000 to deliver while a similar unit in a suburban medium-rise scheme costs €400,000-€418,000.
The SCSI report concluded that the cost of apartment delivery was more than the sales price a developer would expect – apart from in the low-rise suburban category – and this differential was up to €137,000 in urban schemes.
Padraic Rhatigan of Galway-based developer JJ Rhatigan says there are many challenges to be addressed in the residential market but "you will see improvements in terms of delivery from the latter part of next year on". He believes the current wave of purpose-built student accommodation being built will help the rental market in some areas but notes, for the risks involved, the residential market is not "as lucrative as it is sometimes perceived to be".
Due to the high cost of property in the capital, Rhatigan believes the regions “will be the next area for growth and opportunity” as business and people spill out of the capital in search of a more sustainable work/life balance.
In Budget 2018, the Minister for Finance Paschal Donohoe announced a tripling of the stamp duty payable by purchasers in commercial property transactions – up from 2 to 6 per cent – while also offering commercial stamp duty refunds to purchasers of residential sites, if they start building homes on the site within 30 months.
Some in the property sector see this as the start of rebalancing development towards residential. At the very least, it will make residential development more viable.
Meanwhile, the number of houses being completed is rising rapidly – but off a low base. The latest Goodbody BER Housebuilding Tracker points to 1,049 units being completed in September which reflects year-on-year growth of 86 per cent.