RESEARCH

THE DUBLIN PRS REPORT

OUTLOOKTRENDS ANALYSIS

32

INTRODUCTIONInvestor sentiment towards the Private Rented Sector (PRS) is increasingly positive internationally, with Dublin well-positioned to capitalise on this trend.

The internationalisation of real estate coupled with its segmentation into alternative investment specialisations – student housing, retirement living and PRS – means there is a supply of specialist global capital to deploy to the right markets. The interest in PRS has primarily been driven by pension funds, who are looking to take advantage of the fact that real wages and residential rents are highly correlated – a relationship they use to offset future liabilities. More generally, a wide spectrum of investors are attracted to having an element of PRS in their portfolio as it exhibits unique risk-return characteristics thus offering

portfolio diversification benefits. However,

the real potential of PRS lies in the

Built-to-Rent model. This is where

investors fund the developments and hold

for the long-term, with an estimated

weight of capital of between three to five

billion euros chasing these opportunities

in Dublin.

The transition from a buy-to-rent to a

Build-to-Rent market will be driven by the

drying-up of standing investment

opportunities coupled with the positive

market fundamentals that BTR investors

seek. For starters, Dublin is undergoing a

population boom with the United Nation’s

THE DUBLIN PRS REPORT RESEARCH

SUMMARY

1. Dublin is witnessing a large increase in investment in the Private Rented Sector

2. The next wave of investment activity will concentrate on Build-to-Rent opportunities

3. There has been a move away from home ownership to PRS, with 60% of under 35’s now renting in Dublin

4. Ireland compares very favourably with other European nations regarding PRS market fundamentals

5. Design standards introduced by the Government in 2018 will help increase the viability of the Build-To-Rent model in Ireland

forecasting that it will be the fastest growing of any of the 162 cites in Europe with a population greater than 300,000 people between now and 2035, undergoing an expected expansion of 18% over the period.

Furthermore, tighter mortgage underwriting standards has seen bank lending fall to a fifth of the peak in 2006, resulting in a growing cohort of lifetime renters. Finally, there has been a cultural

shift in attitudes towards renting in recognition of the flexibility it offers, with this demand particularly strong from the young, internationally mobile professionals working in the tech and finance sectors.

That is not to say that the sector is without its challenges. Despite rents reaching record levels, the costs of construction remain high relative to other European markets, although the Government has introduced a set of design standards to

address these challenges. Furthermore,

there is limited public data in relation to

management/operational costs on which

new entrants to the market can base

investment decisions. However, with

increased interest and confidence in this

space, we see PRS continuing to grow in

importance and looks set to play a crucial

role in relieving the lack of residential

supply that has emerged over the last

number of years.

BUILD-TO-RENT DEAL STRUCTURING

Landpayment

Practical Completion:– Profit Payment

– Developer Exit / Refinance

DEVELOPMENT PHASE(18 - 24 Months)

CONSTRUCTION PAYMENTS

HOLD PERIOD(15+ years)

STABILISATION PERIOD(+ 12 Months)

ExitSale

• Investment value of between €450 to €800 psf

• Need for scale, ideally with

150 plus units and €50 million

plus ticket deal size

• Prime locations or those near

good transport links

Forward funding

• 100% funding solution with payments staggered as milestones of project reached and covenants satisfied

• Improves Return on Capital Employed (ROCE)

• Stamp Duty savings are possible

• Buyers are institutional investors

Forward commitment

• No up-front funding, fixed price agreed to be paid on practical completion

• De-risked disposal at practical completion

• Stamp Duty on full cost

• Less risky, wider opportunity set of capital available 5-6%

UNGEARED IRR

7-9%GEARED IRR

6-7%UNGEARED IRR

8-10%GEARED IRR

DeveloperScheme requirements

• PRS investors implement forward funding and forward commitment structures with developers and illustrate a willingness to pay a premium when transacting with well-funded developers

• Funding new BTR stock rather than purchasing existing apartment stock allows greater scope for maximising operational efficiencies as well as future proofing assets

• Net prime entry yields range between 4.00% and 5.00%, with expected returns over a 15-year horizon given below:

Investor

FIGURE 1

Dublin PRS investment volumes

0

€100,000,000

€200,000,000

€300,000,000

€400,000,000

€500,000,000

€600,000,000

€700,000,000

Q2Q1 Q4Q3 Q2Q1 Q3Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q12014 2015 2016 2017 2018 2019

INVESTMENT MARKET ACTIVITY

Date

Property

Type

Buyer

Units (1-bed/2-bed

/3-bed)

Average price psf

Average price/unit

Est. price millions

Est. net yield

Q3 2019

The Benson Building, Dublin 2

New Build

Patrizia72

(14/43/15)€€821 €€729,167 €52.50 3.95%

Q2 2018

6 Hanover Quay, Dublin 2

New Build

Carysfort Capital

120 (24/74/22)

€€807 €€841,667 €€101.00 4.00%

Q3 2019

Dublin Landings, Dublin 1

New Build

Greystar268

(82/146/40)€€740 €€654,851 €€175.50 4.00%

Q2 2018

Fernbank, Dundrum, Dublin 14

New Build

Irish Life261*

(56/188/17)€€596 €€523,946 €€138.50 4.00%

Q3 2019

Mount Argus, Harold’s Cross, Dublin 6

New Build

Patrizia179

(25/128/26)N/A €€519,553 €€93.00 4.00%

Q3 2018

The Grange, Stillorgan, Co. Dublin

Existing Stock

Kennedy Wilson

274 (74/175/25)

€€539 €€459,854 €€126.00 3.70%

Selection of recent transactions (arranged by price psf)

Source: Knight Frank Research

Source: Knight Frank Research

Institutional investment in Dublin’s PRS market is growing rapidly with allocations to the sector expected to reach €1.5 billion in 2019, which would represent an increase of 61% on 2018 and 570% compared to 2017.

There is a wide variety of capital sources active in the market, with Irish, European and United States funds all competing for acquisitions. German fund Patrizia have been particularly active, purchasing both The Benson Building and Mount Argus for €52.5 million and €93.0 million respectively. Meanwhile, Greystar bought Dublin Landings for €175.5 million, which represented the largest single asset transaction witnessed thus far in the PRS market.

Prime yields have been firmly established at 4.00% with a number of transactions providing evidence at this level, although we may see further tightening as the ECB embarks on another round of quantitative easing which will put further downward pressure on yields.

150+ units

€450 to €800 psf

*261 apartments, excluding one listed building on site that must be retained as a single-use dwelling. Estimated valuation adjusted for this.

4

FUNDAMENTAL DRIVERS

450

500

550

600

650

700

750

80020

40PR

OJEC

TED

2019

2018

2017

2016

2015

2014

2013

2012

FIGURE 2

Employment in Dublin 000’s

Source: CSO, ESRI

Source: CSO

KEY MARKET INDICATORSDublin apartment prices Dublin apartment prices have doubled since the bottom of the market in 2012, however they remain 29% below their previous peak.

Tenure

In Ireland, home ownership has traditionally been the aspiration for most people. Increasingly, however, there is an ongoing shift towards renting with 25% doing so in Dublin according to the 2016 Census, over double the 12% recorded in 1991.

Private renting is the most frequent tenure of households under 35 years of age – 60% of this cohort privately rent, while only 14% of over 35’s privately rent. However, it should be noted that in absolute numbers these are of similar sizes – there are almost 60,000 who privately rent aged under 35 and there are almost 55,000 households who privately rent aged over 35 years old.

Dublin apartment rents

Apartment rents in Dublin have hit their highest level since records began in 2007. Rents have been more stable than prices having fallen by 28% in the aftermath of the financial crisis compared to 65% for prices.

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

201920182017201620152014201320122011201020092008

Inde

x, Q

3 20

07=

100

Share of mortgage market

Non-professional individual buy-to-let

investors have traditionally been the providers

of rental accommodation in Ireland. In fact, at

one stage during 2008, the BTL share of the

mortgage market exceeded the FTB share,

which was an indication of the unsustainable

credit boom that fuelled the market at the time.

However, these individual investors have been

exiting the market due to the onerous tax

burden of approximately 50% on rental

income. Their exit is an opportunity for

professional PRS investors to fill.

Mortgage drawdowns

A lack of mortgage financing is channeling households into PRS across all household ages in Dublin. For example, the number of PRS households in the over 35 age group grew at a rate of 4% per year, the number of outright owners grew at half this rate at only 2%. The number of households who own with a mortgage grew at an even slower rate of 0.4% per annum, illustrating the lack of mortgage financing in the market.

Dublin new residential delivery

Although output has been rising in Dublin during the last number of years – growing from 964 units at the bottom of the market in 2011 to a forecast 8,000 units for 2019 – completion levels have remained consistently below the required annual demand of 11,000 units as identified by our research.

TENURE AND THE AFFORDABILITY GAP

new units will be delivered in Dublin in 2019

8,000

Dublin properties to rent The number of properties listed as available for rent on Daft.ie is less than a fifth of the peak of 8,264 recorded in Q2 2009.

Source: Daft.ie

Source: BPFI

Economy The Irish economy has been the fastest growing economy in Europe for the last five years. Dublin is the main engine of economic growth and has seen office take-up expand for six consecutive years to set a new record in 2018 with 3.9 million sq ft transacting. Though it may not quite reach these heights, 2019 is on course to be another very strong year for the Dublin office market. The tech sector is the main driver of the market, accounting for 46% of activity over the last five years. In fact, Google, Amazon, Facebook, LinkedIn and Microsoft have a total office footprint of 2.3 million sq ft in Dublin, ahead of the 2.2 million sq ft these companies collectively occupy in London.

This growth has led to employment surpassing its pre-crisis peak with 716,700 people now employed in Dublin according to the Central Statistics Office (CSO), a figure which is expected to rise to 795,900 by 2040 according to the ESRI. In addition, Dublin is well-hedged against Brexit, with our research showing that Dublin is the leading European city for Brexit-related office moves having received 86 announcements, ahead of Luxembourg (55), Paris (47), Amsterdam (47) and Frankfurt (41).

Population Ireland is experiencing a population boom, providing a natural long-term source of demand for housing. Over the period 1991-2016, the population grew by 35% compared to a growth rate of 7% for the EU as a whole. A high fertility rate in conjunction with low mortality rates has resulted in Ireland’s natural population growth being the highest in Europe at 6.1% in 2018, far ahead of the next highest of Cyprus which had an increase of 4.1%.

The high growth rate is set to continue with Eurostat forecasting that the population of Ireland will increase by 25.8% between 2020 and 2080, which compares with a -2.0% projection for the EU-28.

Due to trends in urbanisation, Dublin is set to benefit most from this population growth. According to the United Nations, 75% of people in Ireland will live in urban areas by 2050, up from just over 60% currently. Taking an average of population distribution scenarios produced by the CSO, 38% of growth will be concentrated in Dublin in the coming years. Furthermore, the commuter belt counties comprising the Mid-East region (Meath, Kildare, Wicklow) have the next highest potential accounting for 26% of projected growth. Clearly then, Dublin will be the focal point of future population growth which will underpin long-term demand for housing.

FIGURE 3

Components of Dublin’s population change by Census year (in thousands)

Natural Increase Net Migration

-40

-30

-20

-10

0

10

20

30

40

50

60

70

2016201120062002199619911986

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2019201820172016201520142013201220112010200920082007

0

10,000

20,000

30,000

40,000

50,000

60,000

Num

ber o

f loa

ns, I

rela

nd

20192018201720162015201420132012201120102009200820072006200520042003

PrivateRentedSector

1991

Owner Occupied

12%

Social Renting

2016

72%

25%

63%

15% 12%

THE DUBLIN PRS REPORT RESEARCH

5 6

Source: CSO

0

20

40

60

80

100

120

140

201920182017201620152014201320122011201020092008200720062005

Inde

x, 2

005

= 1

00

FIGURE 4

FIGURE 5

FIGURE 6

2019 (f)201820172016201520142013201220110

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Source: CSO

FIGURE 7

FIGURE 8

FIGURE 9

Source: BPFI

20192018201720162015201420132012201120102009200820072006200520042003

0%

10%

20%

30%

40%

50%

60%

70%First-time buyer Buy-to-let

FIGURE 10

Source: RTB

Source: CSO

87

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

LatviaFinland

MaltaCyprusFranceAustria

SwedenGermanySlovakia

IrelandPoland

SloveniaNetherlands

EU-28Estonia

ItalyPortugalCzechiaHungary

DenmarkBelgium

LuxembourgUnited Kingdom

SpainLithuania

CroatiaBulgariaRomania

Greece

0% 10% 20% 30% 40% 50% 60%

MaltaIreland

United KingdomBelgiumCyprus

LuxembourgNetherlands

CroatiaGermanyPortugalSlovenia

FranceGreeceEU-28

HungaryDenmark

AustriaItaly

RomaniaFinlandPoland

SwedenBulgariaCzechia

Slovakia Spain

LithuaniaEstoniaLatvia

-7% -5% -3% -1% 1% 3% 5% 7%

BulgariaLatvia

LithuaniaCroatia

HungaryRomania

GreeceItaly

PortugalGermany

FinlandSpain

EstoniaEU-28Poland

SloveniaCzechiaAustria

SlovakiaBelgium

NetherlandsDenmark

MaltaUnited Kingdom

FranceSweden

LuxembourgCyprusIreland

1.5 2.0 2.5 3.0

SwedenDenmarkGermany

EstoniaLithuania

FinlandFranceLatvia

NetherlandsAustriaEU-28

BelgiumBulgariaCzechiaGreece

ItalyHungarySlovenia

United KingdomLuxembourg

SpainMalta

PortugalIrelandCyprusPoland

RomaniaSlovakiaCroatia

FIGURE 13

Renting population paying overburdened rental level

FIGURE 14

Average household size

Source: Eurostat, data relating to 2017 Note: Percentage of the population living in a flat in a building with ten or more dwellings

FIGURE 11

Population living in apartments

FIGURE 15

Natural population growth

IRELAND

EU-28

6.1%

ANNUAL NATURAL POPULATION

CHANGE

25.8%

POPULATIONINCREASETO 2080

2.6

AVERAGEHOUSEHOLD

SIZE

12.5%5.4%

RENTING FROM A PRIVATE LANDLORD

LIVING IN APARTMENTS

-0.7% -2.0%2.320.0%23.9%

21.5%

PAYINGOVERBURDENEDRENTAL LEVEL

26.3%

IRELAND

EU-28

THE DUBLIN PRS REPORT RESEARCH

Source: Eurostat, data relating to 2018 Source: Eurostat, data relating to 2018 Note: The crude rate of natural change is the ratio of the natural change during the year (live births minus deaths) to the average population in that year.

Source: Eurostat, data relating to 2017 Note: Percentage of the population living in households spending 40% or more of their equivalised disposable income on housing

8 97

0% 5% 10% 15% 20% 25% 30% 35% 40%

RomaniaCroatia

LithuaniaBulgariaEstoniaPolandMalta

HungarySlovenia

LatviaSlovakia

IrelandPortugalFinland

SpainCyprus

CzechiaUnited Kingdom

ItalyBelgium

FranceEU-28

LuxembourgGreece

NetherlandsAustria

SwedenDenmarkGermany

FIGURE 12

Population renting from a private landlord

Source: Eurostat, data relating to 2017 Note: Percentage of the population renting at market prices

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

BulgariaLithuania

CroatiaPortugal

LatviaRomania

GreecePoland

SlovakiaItaly

EstoniaHungarySloveniaFinlandCzechia

GermanyEU-28

NetherlandsSpain

FranceAustria

BelgiumDenmark

United KingdomIrelandCyprus

MaltaSweden

Luxembourg

FIGURE 16

Forecast population growth 2020–2080

Source: Eurostat, 2019

IRELAND

EU-28

6.6%

ANNUAL NATURAL POPULATION

CHANGE

28.2%

POPULATIONINCREASETO 2080

2.7

AVERAGEHOUSEHOLD

SIZE

13.2%4.8%

RENTING FROM A PRIVATE LANDLORD

LIVING IN APARTMENTS

-0.4% 0.6%2.319.9%23.8%

19.6%

PAYINGOVERBURDENEDRENTAL LEVEL

28.0%

IRELAND

EU-28

IRELAND

EU-28

IRELAND

EU-28

IRELAND

EU-28

IRELAND

EU-28

PRS MARKET FUNDAMENTALS: IRELAND IN A EUROPEAN CONTEXT

TRENDS ANALYSIS OUTLOOK

INVESTMENT INSIGHT

DUBLINRESIDENTIAL MARKET ANALYSIS FOR INTERNATIONAL INVESTORS

BREXITUNDER PRESSURE #2

#2BREXIT

WHAT WILL ITS IMPACT BEON THE EUROPEAN

REAL ESTATE MARKETS?

Dublin Residential Market Analysis for International Investors

Dublin Office Market Overview

OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK

RESEARCH

WITH SPECIAL FOCUS: WHO OWNS DUBLIN OFFICES?

DUBLINOFFICE MARKET OVERVIEW Q2 2019

Under Pressure #2

RESIDENTIAL CAPITAL MARKETS

James Meagher, Director james.meagher@ie.knightfrank.com

Adrian Trueick, Director adrian.trueick@ie.knightfrank.com

Peter Flanagan, Director peter.flanagan@ie.knightfrank.com

Evan Lonergan, Director evan.lonergan@ie.knightfrank.com

Ross Fogarty, Director ross.fogarty@ie.knightfrank.com

Donal Courtney, Surveyor donal.courtney@ie.knightfrank.com

RESEARCH

John Ring, Head of Research john.ring@ie.knightfrank.com

Robert O’Connor, Research Analyst robert.oconnor@ie.knightfrank.com

The Irish Government introduced a set of apartment design guidelines – ‘Design Standards for New Apartments – Guidelines for Planning Authorities’ – in 2018 which included measures aimed at boosting construction and investment in PRS as summarised below.

Asset class designationBTR is now a specific asset class. In order to be classed as BTR, certain covenants must be satisfied such as providing communal and recreational facilities. Perhaps most importantly are the stipulations regarding the holding and disposal of the asset in order to be designated as BTR: ‘the development remains owned and operated by an institutional entity and that this status will continue to apply for a minimum period of not less than 15 years and that similarly no individual residential units are sold or rented separately for that period’.

However, this does not prohibit the selling of the entire scheme to another institutional investor during this time.

Dwelling mixThere is no dwelling mix requirement for a BTR scheme under the new guidelines. This means that an entire scheme could theoretically be comprised of studios or one-bed units, although operators would generally prefer some mix of unit sizes.

Unit sizes Studios are included at a minimum size of 37 sq m. In addition, a new category of 2-bedroom apartment has been

DESIGN STANDARDSintroduced. While previously 2-bedroom apartments could only be designed for four people habitation with a minimum size of 73 sq m, the new standards introduce a 2-bed standard for three people at a reduced size of 63 sq m. Also, the requirement that the majority of all apartments in a proposed scheme exceed the minimum floor area standards by a minimum of 10% does not apply to BTR schemes.

Shared Accommodation is now permissible with minimum floor areas of 12 sq m for single rooms and 18 sq m for double or twin rooms.

Dual aspect ratios The dual aspect requirement for centrally located schemes has been reduced to 33% from 50%, with the 50% requirement remaining for intermediate and peripheral locations.

Floor-to-ceiling heights Minimum floor to ceiling heights remain at 2.4m (2.7m at ground) but a floor to ceiling height of 2.7m throughout is encouraged in locations where greater height is appropriate. There is no maximum number of permissible units per floor per core for BTR schemes.

Car parking BTR schemes have a default of ‘minimal or significantly reduced car parking provision on the basis that BTR development is centrally located and/or close to public transport services.’

Knight Frank Research Reports are available at KnightFrank.com/Research

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

© HT Meagher O’Reilly trading as Knight FrankThis report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by HT Meagher O’Reilly trading as Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of HT Meagher O’Reilly trading as Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of HT Meagher O’Reilly trading as Knight Frank to the form and content within which it appears. HT Meagher O’Reilly trading as Knight Frank, Registered in Ireland No. 385044, PSR Reg. No. 001266. HT Meagher O’Reilly New Homes Limited trading as Knight Frank, Registered in Ireland No. 428289, PSR Reg. No. 001880. Registered Office – 20–21 Upper Pembroke Street, Dublin 2.

DUBLIN PRS TENANT SURVEY

RESEARCH

Market Dynamics | Tenant Survey Results | Analysis

Dublin PRS Tenant Survey