Private rental sector PRS is Prevalent, Relevant, Strong, says John Moran.
The Private Rented Sector (PRS) has had a record year in the investment market.
A term that didn’t exist in Ireland a number of years ago, it is now at the forefront of most investor portfolio strategies.
What exactly is it?
It is basically apartment blocks with added amenities that are individually rented, managed professionally and held for income.
With a tightening in pricing and supply of core assets we have seen a shift in investor interest to other sectors, some looking for greater value opportunities, others looking for a steady investment return.
PRS offers both of these and as a result, it has progressed in the last few years from being a fledgling alternative asset class, to being a core sector in its own right.
It is an institutionally-accepted asset class and is viewed as being able to generate stable long term returns.
Investment activity has increased significantly in PRS in 2018, and it accounts for over 30% of total investment volumes.
This compares to just 5% in 2017.
Investment volumes have been boosted by a number of larger-sized deals, although small deals are also evident.
The largest deals this year were Fernbank in Churchtown for €138.5 million (Irish Life), Marsfield in Clongriffin for €135 million (Tristan), and The Grange in Stillorgan for €126 million (Kennedy Wilson).
Whilst the largest deals have been Dublin-centric, there has also been a lot of activity outside of the capital.
The largest non-Dublin deal was the sale of The Elysian development, a PRS scheme in Cork, which was purchased by Kennedy Wilson for €87.5 million.
Another non-Dublin deal of note is City Square in Cork which was a receivership sale and was purchased by a private UK fund for €33 million.
We have also seen transactions in Galway and Limerick.
Whilst Cork is a smaller market, it is also facing housing shortage issues, and offers greater returns for investors than the Dublin market.
As demonstrated by the assets that sold this year, good quality PRS that has come onto the market has been met with significant investor interest and strong pricing.
There has been a solid depth of interest in each of the main deals.
Interest is broad, across a range of investor types, with domestic pension funds, UK, US and German Funds, plus a plethora of overseas and domestic private funds all active within this sector.
We are constantly seeing new entrants in the market, and expect to see more in 2019.
There is currently approximately €6 billion of capital looking to get into PRS, but volumes next year will be dictated by supply.
Opportunities that come onto the market will be met by strong demand and pricing.
We are seeing greatest investor interest is for wholly-owned PRS, whether complete, or in fact there is greatest interest for schemes at the development stage.
This is where investors are seeing the best opportunity to generate value.
Although prime PRS yields are now on a par with prime core office investments at 4.00%, there have been more opportunities for PRS investment.
The life span of a PRS building is greater than an office block, and is therefore fit-for-purpose for a longer period of time, which is also attractive to investors.
Underpinning this strong interest are the solid fundamentals in the residential occupier market.
The significant issues in the Irish housing market around supply, demand and rents is underpinning this demand.
From an occupier perspective, I cannot see a short-term solution to the housing issues on either the letting or buying side and therefore, these fundamentals look solid, not just now, but looking to the next few years ahead.
Supply still remains a major issue across the board and there is no short-term solution to this.
With an annual requirement for 25,000 houses per annum for the next 20 years (Project Ireland 2040), and only 14,400 delivered in the year-to-date (CSO), this shortfall in the development pipeline is of significant concern.
The basic principles of property are simple: you need demand and supply for a fully-functioning market and an imbalance in one or the other will cause prices to change.
Greater demand than supply will only ever cause rental increases and this is what we are seeing across the Irish residential market.
Whilst the cap on rents and mortgage lending has caused some steadying in rents and house prices, further growth is expected across both.
Strong forecast population growth will only heighten this, plus a changing landscape in Ireland away from home ownership to a more European rental-based residential market will also place greater reliance on the rental part of the sector.
So looking to 2019, will PRS still be prevalent, relevant and strong?
It will be prevalent: it is not a Dublin-only asset class, but it’s widespread across Ireland.
We expect to see continued solid interest in any good quality, well-located PRS assets across 2019, regardless of whether it is in Dublin or another regional city.
It will also continue to be relevant: assuming that the supply becomes available it will be met by significant investor demand and pricing, and PRS will continue to dominate investment volumes in the next 12 months.
PRS will also continue to perform strongly: there is no quick solution to the issues in the Irish housing market, so the fundamentals are to continue to support investor interest.
Assets for sale in the next few months will test the market, but I wouldn’t be surprised if we see a sub-4% PRS yield in 2019.
My advice to anyone looking to get into PRS is to act quickly, and also to be well-informed about what you are investing in.
Analyse cash flows sensibly, factoring in realistic rent increases and sensible operating costs.
John Moran is CEO of Jones Lang LaSalle/JLL