Investors and developers are attracted to a new range of asset classes in property, writes Aoife Brennan.
Alternative residential as an asset class has come to the fore in recent years, both globally and in Ireland. At its most basic level, alternative residential includes the private rented sector (PRS), co-living, purpose-built student accommodation (PBSA) and retirement living. Occupiers, investors and developers are attracted to the sector, which has led to greater building activity and investment.
Occupier demand for alternative residential stems from changing demographics. These include a growing population that is both young and ageing; people getting married later and renting for longer; the fact that Ireland is more international and more urbanised.
The evolution of demographics means the way people live is changing. In Cork city, the proportion of people in rented accommodation grew by 6% between 2011 and 2016, while in the county, it grew by 8%. This trend is going to continue.
The National Planning Framework has strong growth targets in place for Cork city and suburbs up to 2040 where much of the new housing will be within the existing urban footprint. This has implications for the type, size, tenure and location of future housing.
While many will always choose more traditional forms of accommodation, others want choice. Being more international, a greater variety of housing options are being demanded, particularly in city areas. FDI companies bring with them highly skilled international workers (jobs tourism) who are accustomed to a different way of living — apartment, city living, close to work. It is this cohort that PRS and co-living is catering to. Likewise, growing student numbers, including those from overseas, is generating demand for PBSA.
The attraction of alternative residential for investors is the different yield profile, which is generally more attractive than the traditional investment sectors. This is particularly relevant given that prevailing yields on offer in the traditional sectors are well below the long-term average and cycle highs of 2011. Consequently, given that the market is at a more mature stage, investors are hunting for yield. Diversification of portfolios is also an important factor. Residential investment has better counter-cyclical characteristics and can mitigate the effects of broader market swings. Since 2012, approximately 15% of the turnover in the Irish investment market has been in PRS and PBSA.
However, the amount invested in alternative residential is continually growing — in 2019, 43% of the market was made up of PRS.
PRS is now well established in Ireland, having emerged as a sector in 2012. Since then, it has progressed in various stages.
Early on it comprised unsold apartments from the recession-era that were originally built-to-sell. Then, it moved on to newly built schemes that were originally designed for the individual sales market but acquired in bulk before completion.
The most recent phase, build-to-rent (BTR), has come about since BTR guidelines were published by the Government in 2018. In terms of future BTR supply in Cork, planning permission has been granted for 118 units on lands at the South Link Road known as Railway Gardens, while permission has been sought for 201 units on Albert Quay.
However, it should be noted that some PRS schemes are not seeking specific BTR planning grants, instead pursuing a conventional planning permission that does not contain the 15 year break-up restriction. It is difficult to assess further supply in this category, however several large- scale schemes have gone through the fast-track-planning process in the last 18 months, where permission has been granted for over 2,100 apartments. Some of these will be in the PRS market such as the 302 units at Horgan’s Quay.
A sub-sector of PRS is co-living. It is similar to student accommodation but is aimed at professionals. Internationally, it is gaining momentum and continues to attract further attention in the Irish market, not always positively. The concept is accommodation that has a community centred environment but with private spaces. It generally comprises an en-suite bedroom and maybe a small kitchenette as private space but with significant communal living and recreational spaces like a games room, laundry rooms, a study, gym, kitchen and co-working spaces.
To date, no planning applications have been made for such accommodation in Cork, however a number of schemes have sought permission in Dublin. Of note is the international brand The Collective, which operates some of the best know co-living schemes in London and New York.
PBSA development has been notable in recent years with about 460 new student bed spaces added to the Cork stock since 2016. And construction activity continues.
Close to completion is the 417 bed space Brewery Quarter development on South Main Street. Additionally, works have just commenced on the 255-bed spaces at the former Crow’s Nest site at Victoria Cross while construction remains ongoing on the 348-bed spaces at the former O’Mahony Packaging in Bishopstown and the 161-bed spaces at Gillian House on Farranlea Road. There are several other schemes in Cork that have been granted planning and combined, these have permission for a further 1,440 bed spaces.
Alternative residential is here to stay and is only going to become a greater part of the property market. Demographics will be the driving force behind occupier demand, and both investors and developers will seek to capitalise on this.
Aoife Brennan is Director of research & Consultancy, Lisney