Build To Rent or Build To Sell

The recent forward purchase (for a reported price of €138.5 million)[1] by Irish Life Investment Managers (ILIM) of 262 apartments from Park Developments in Fernbank, Churchtown has highlighted both the attractiveness of the Private Rental Sector (PRS) as an investment class and the profitability of this transaction for Park Developments. With ongoing commentary on the viability of the construction of affordable homes and the publication of a number of reports by the Department of Housing, Planning and Local Government and others regarding the cost associated with apartment and housing development – the continued difficulties around the viability of residential development for individual sale is clear. Given that average residential rents countrywide are at an all-time high of €1,261 per month[2] – the combination of high rent levels achievable and the viability issues around building homes to sell are driving build to rent as an attractive development option either for forward sale or operation by Developers.
 
This study looks at current affordability levels and calculates what value of loan a typical FTB can obtain and how much they can possibly save to accumulate a deposit. Given these estimates an affordability level for each household income level is calculated based on the household income distribution published by Ireland’s CSO – i.e. the price target that must be met by a housebuilder to enable a purchaser with a given income level buy a home.
 
The study then looks at the current makeup of the components of sales price of houses and apartments in Q2 2018 and discusses the feasibility of constructing homes for this market given the estimated affordability limits. Finally, an analysis of Build To Rent as an alternative development option is presented. The findings are summarised as follows:

• A price target of between €207,000 and €350,000 must be achieved to allow households earning between the 60th and the 80th percentile of the national household income distribution purchase a 2-bed 75 sq m apartment.
• Built to rent may be an attractive development option when demand for rental accommodation is high and the level of disposable income can support high average rent levels c. €2,000 per unit. The return is particularly sensitive to land costs – thus not all sites may be suitable for this end use. The lack of VAT recoverability on development/purchase of new units impacts on return for operating companies. There are some option for forward selling of complete blocks once cost certainty is achieved in the construction phase.
• Analysis of current PRS market transactions indicate a purchase price of c. €550 - €600 p.s.f. This is to be compared with a price of c. €350 - €450 p.s.f. for individual sale of comparable units.
• It is critical that developers understand income levels in their target catchment area to ensure sufficient demand exists for their developments at a given price point whether selling or renting.
• A mid-range 2-bed 75 sq m apartment is estimated to cost €383,000 to deliver. To achieve this price apartment site cost must not exceed €50,000 per unit.
• Calculations indicate that at household income levels below €65,000 it may take over 8 years to save to purchase a mid-range 2 bed 75 sq m apartment costing €383,000.
• At the bottom of the household income distribution curve the Loan to Income (LTI) multiplier effectively sets the upper limit of what a household can afford given the low savings rates possible at this income levels – it is still difficult to deliver homes for the segment of the market given the cost structure of housing delivery.
• At this price level (€383K) the financial viability of apartment development is marginal and there is significant risk in starting projects for a developer – cost control is key in constructing for this segment of the housing market.
• The financing of apartment developments is complicated as the full building must be completed prior to receipt of the full sales proceeds (unlike houses where phasing is possible).
• The public sector take from apartment development is estimated to be 25% - 30% of the price - a reduction in this charge, with a linked maximum sales price cap, could improve the affordability of this type of house for lower income segments.
• With the 30K-50K new households that are estimated[3] to be formed each year adding to the existing deficit in housing supply there exists a market failure to deliver for lower income segments. Alternative solutions must be considered including construction by the State of social & affordable housing.

The full study can be downloaded here build_to_rent_or_to_sell.pdf

Should you have any questions about the study please contact us.

[1] Source: Irish Times 10/5/2018 & 6/7/2018
[2] Source: www.Daft.ie 4/5/2018
[3] Source: ESRI