Ireland’s housing market has felt the heat of the COVID-19 crisis, as with most other parts of the economy. While demand has been on the rise, there have been supply constraints in the past year as delivery of units came to a grinding halt in 2020 with the closure of development sites. With the pressing need for launching new housing projects, the Government has been focusing essentially on public, social and affordable housing. A recent report from the Economic and Social Research Institute (ESRI) said the Government needed to double the existing level of capital investment in housing to €4 bn to address the current supply crisis. It is not just the Government, private developers too are chipping in to make good the supply shortfall. An IIP report suggested that there is a capital requirement of €7 bn in international institutional investment to align with the Government’s target output of 30,000 homes per annum.¹ According to latest reports from property websites Daft and MyHome, house prices are now rising by 13% with listed prices increasing at a faster rate outside Dublin (8.4%).
Although the demand-supply gap continues to weigh on the Irish property market, the funding environment – both from the debt and the equity side – remains robust and competitive for large-scale residential projects. Certain real estate asset classes, such as multi-family homes (especially, the private residential sector, build to rent and social housing), have withstood the pressures of the pandemic and have remained an attractive prospect for Ireland’s institutional investors.
Meanwhile, the shakeout in Ireland’s banking sector is likely to leave a lot more room for domestic and international non-bank lenders to meet the funding needs of Irish developers due particularly to the planned exit of KBC Bank Ireland and the country’s third largest bank, Ulster Bank. The competition is now just among three domestic banks and some international lenders.
Guarded approach, changing landscape
In recent years, the funding landscape has changed to one favouring a more prudent approach towards development and construction finance. A number of non-bank lenders have been stepping away due to their own funding constraints as they find the risk or their exposure too great at this point in time even though there is a lot more opportunity in the market for them. Others have introduced much tighter underwriting measures for their individual loan metrics.
Our Debt Advisory Team has worked with about 20 domestic and international non-bank lenders in the Irish real estate market. Among those who have been particularly active over the past 12 to 18 months are Activate Capital, Bain, Cardinal, Castlehaven and Home Building Finance Ireland (HBFI). HBFI’s entrance in the market in early 2019 has approved residential development funding of €395 mn to support the delivery of 1,850 homes across 17 counties in Ireland.² These lenders have been playing a key role in fulfilling the debt requirements of residential developers, along with the two top banks. The non-bank lenders, in particular, have been able to show considerable resilience during the pandemic due largely to three reasons:
- Credit support received
- Robust underwriting
- Strong portfolio and relationship management
Lenders are treading cautiously, no doubt. Leverage or gearing levels have contracted by 10-15% in some instances, while margins have increased to cater to the risk profile of the construction and development loans. Banks and alternative lenders are implementing more robust monitoring processes for all covenants and milestones throughout the lifecycle of a development project.
As banks and non-bank lenders tighten their credit parameters, the importance of a third-party equity pool for residential developers is likely to increase. While the third-party equity pool of capital for residential development is not as deep as the debt pool, there are a number of additional domestic and international equity providers. Developers who do not have the benefit of pre-sale or pre-let due to size, location or end product, are likely to rely on sales to individual buyers to repay their loans. This is a riskier prospect for lenders, which will lead to less leverage being offered and ultimately the requirement for higher equity throughout the project. The importance of local authorities and approved housing bodies in the sector has also been growing and is likely to continue in the coming years.
Another interesting pivot has been with respect to environmental, social and governance (ESG) considerations that have a bearing now on the real estate lending principles. ESG has risen to the top tier of real estate investment criteria over the past 12 months and is now deemed essential in terms of protecting the long-term value of portfolios. We expect this to become equally important in the context of debt.
Role of institutional investors
The multi-family sector – especially, PRS and BTR – remains high on institutional investors’ radar with several high-profile domestic and international acquirers such as Urbeo, DWS, Real IS, Patrizia and IRES REIT being active over the past 12 months. The role of the institutional PRS investors in Ireland continue to be of prime importance.
In recent times we have seen that both debt and equity providers continue to deploy capital in asset classes such as affordable housing, PRS and BTR as they have proven capacity to withstand pandemic-induced economic pressures by providing stable, contracted yields at about 3.75%. Ireland, as an English-speaking destination, is deemed as an attractive prospect for institutional investors with low interest rates. There is also the added advantage of availability of assets/opportunities for new development and an improving infrastructure system. While this trend has been historically Dublin-centric, additional PRS developments are also underway in Cork and Galway.
Supply shortage of complete/partially complete stock has resulted in an increase in off-market forward sale transactions. This has become more popular in the Irish residential market and enables larger scale developments to take place as it provides banks and non-bank lenders visibility into how they will get repaid at the conclusion of the project. Meanwhile, it remains to be seen what impact the 10% stamp duty rate on purchases of 10 or more houses will have on the appetite of the institutional investors. In summary, the demand for residential funding in Ireland remains strong. The increase in the number of debt funds is welcome and we expect to see more international and domestic equity investors partnering with Irish residential developers to fulfil their development objectives and meet demand.