With the LDA seeking applications for over 600 cost rental apartment in January there has again been much discussion on the level at which the rent is set. The target for the rents was set at least 25% below market rates in the area. 
 
It is called cost rental because the rent is used to cover the cost of constructing the accommodation over the life of a long-term building. It has proven to be a very effective way of providing housing in many European countries and is a part of the LDA’s housing delivery mechanism. Through the Project Tosaigh initiative the LDA are currently trying to unlock stalled developments and kickstart construction through partnering with developers and make homes available as either cost rental or for purchase through a shared equity scheme.
 
While there has been recent discussion about cost rental these is less visibility on how rents are set, however, in a January Oireachtas housing committee meeting[1] there was some interaction among the witnesses and committee members on how the rent level was set and why the rent was at the level it was. The high level and unaffordability of the proposed cost rental rents  (>30% household disposable income) was highlighted by some of the attendees. 

[1]https://www.oireachtas.ie/en/debates/debate/joint_committee_on_housing_local_government_and_heritage/2024-01-23/3/accessed on 1/2/2024

There are difficulties in achieving rents below €1,000 per month given the costs associated with residential projects and the level of subsidy required to drive down the rent level under this delivery mechanism. Using the LDA Barnwell Point development in Hansfield Dublin 15 as an example this article and the attached financial model looks to illustrate how the rent is calculated based on assumptions made from publicly available sources. The subsidy or grant required to bring the monthly rent below €1,000 is also calculated. ​

​LDA Cost Hansfield Cost Rental Scheme
Having obtained planning in 2018 and being completed in late 2023 the Barnwell Point development (part of the wider Hansfield SDZ) by McGarrell Reilly involves 247 apartments over 6 blocks on a 1.5 Ha site with 272 carpark spaces. The works include the construction of 70 No. Studio & 1 bed apartments; 164 No. 2 bed apartments; 12 No. 2 bed duplex units; and 1 No. 3 apartments. With my estimate of total construction costs for the 21,447 sq m GIFA scheme at €66.8M the total development cost is €85.2M inclusive of VAT and land.

A net household income of up to €66,000 makes you eligible for the scheme. The rent is linked to the cost of the build, and will remain stable despite any market increase. Tenants will pay €1,400 per month to live in the 2-bedroom Cost Rental  homes delivered as part of this project[1]. The rent of €1,400 per month, based on the cost of delivering and maintaining the homes, is a significant reduction when compared to market rents for 2-bedroom apartments in this location (<25%) The projects have been delivered through the LDA’s Project Tosaigh initiative. The completed development will be manged by a named management agent (not the LDA).

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Cost Drivers
The following are the costs that have to be covered when setting the cost rental rent level:

• Construction costs – The initial cost of developing the site and constructing the homes.
• Land Cost - although when provided by State usually zero.
• Maintenance costs – including planned, reactive and replacement costs for the estate and the buildings to cover wear and tear and refurbishment costs. This will rise usually in line with CPI inflation.
• Administration and General – the costs associated with running the rental units including insurance costs, salaries, taxes, marketing, accounting etc. This will rise usually in line with CPI inflation
• Cost of renewal - Periodic major replacement of elements such as roof coverings, windows, lifts, kitchens & white goods, electrical systems, boilers etc. which have reached the end of their useful life. This will rise usually in line with expected construction cost inflation.
• ​Finance Cost – cost associated with any loans used to fund construction of the homes. 

Residual Value at End of Analysis Period
The apartments are owned at the end of the assumed 40 year period and thus they have a residual value beyond the analysis period - this can be based on the market value at that time (using an appropriate terminal cap rate) or the rebuilding cost at that time (using an appropriate average construction inflation estimate). 

Discount Rate
The projects discount rate is the rate of return used to discount future cashflows back to their present value (PV). This rate is often an organisation’s weighted average cost of capital, required rate of return, or the hurdle rate expected relative to the risk of an investment. In Ireland the NDFA publishes recommended project specific discount rates. An approximation can be made by using a long term building loan.
 
The model (bit.ly/KeoghCostRental) calculates the present value of each individual cash flow (rental income or expense) as a growing annuity – a series of future periodic payments that grow at a proportionate rate. Final year values and costs are calculated by inflating incomes and costs using the assumed growth rates – these values and costs are then discounted to the present value using the discount rate. 

[1] The average rent across the development is calculated to be €1,347 p.c.m. with a total estimated gross income of €123,456 p.a.

One thing that is given minimal consideration is the fact that these analyses typically consider development on a standalone site - not the reality of development of multiple small, medium and large sites in parallel with differing risk profiles.

In Ireland, the past months have been characterised by much uncertainty and a number of stops and starts in the construction industry. In particular since January 2022, there has been significant construction cost inflation resulting in increases and uncertainty in forecast development costs for projects due to these escalating costs. Decision makers need to have a range of tools available to decide which projects to prioritise, particularly when delays occur and assumptions change as they have done in the past 12 months. Q4 is always a good time to review projects and reset priorates for the next year.
 
With significant changes in project assumptions on account of global market political and economic uncertainty, not least changes in timing, costs and revenues, there may be possible knock-on impact on other projects. You need to be able to consider how to prioritise projects in a portfolio. This paper (download here) illustrates an approach to prioritisation of a portfolio of projects with a case study on a residential development.

​Projects are an iterative process of planning, doing and reviewing. From time to time despite the best intentions real estate projects get into trouble and you have to step in to review what is going wrong and put a new plan in place to deliver (do) the project.
 
The following outlines a 2-step process to strategically review a real estate project and then once the review is complete to create a turnaround plan to deliver the project.
 
The approach can of course be used as a checklist at the beginning of a project to make sure that all resources are in place to deliver a project and that a robust plan is in place to deliver certainty.