Landlord drought

Professional landlords and property developers argue that the cap not only limits their income, it also completely misses the main point. “The issue is supply, supply, supply,” said Ehrlich.

The developer Michael O’Flynn, who has several housing schemes under way in Dublin and Cork, said he was “taken aback” by the measures. “We need a proper supply of rental accommodation but, instead of opening the supply door, they are closing it,” he said.

Other construction sector sources were less measured in their assessment of the rent caps. “It’s like offering paracetamol to cure cancer,” said one. “We need the major surgery now.”

The scale of demand for rental properties is evident. Almost 250,000 people have joined the rental market since the beginning of the economic recovery in 2013, bringing the number of people renting to more than 705,000. Coveney noted about 30% of the population live in rented accommodation, double the proportion 20 years ago. “The expectation is that it will double again in the next 20 years,” he said.

With surging demand and little supply, rents have raced ahead; in Dublin, average rents are 5% ahead of their highest point during the economic boom. Still, Coveney was at pains to acknowledge there were two sides to the rental property equation: tenants and property owners.

“Politically, we only tend to hear one side of this argument, which is the tenant side,” he said. “We want landlords to make a reasonable rate of return.”

The 4% rent cap — designed to “put a bridle on the horse of out-of-control rent increases” — is based on the fact the Ireland Strategic Investment Fund (Isif) seeks a 4% rate of return on its investments. “There has to be an incentive for developers to bring new properties into the market,” said Coveney.

Capping rents is a strange way of going about that, says O’Flynn. “The issue is that the cost of housing is too high. You have to bring down the cost of housing to bring down the cost of rent,” he said.

When high-end office projects are generating a yield of 9%-10%, it does not make financial sense to develop residential schemes, one builder said. “Look at the cranes on the Dublin skyline; everyone is building offices, for a reason. Making money from build-to-rent is really hard, because the margins are very tight. Finance is expensive, land is expensive, building costs are expensive.”

The building costs are a particular bugbear. Apartment design regulations that were introduced to eliminate so-called shoebox apartments have set high standards for unit sizes and specifications.

At least 50% of apartments in a development must be “dual aspect”, with windows on two sides, and there should be no more than eight apartments per “core”, in essence per lift shaft or stairwell per floor. Developers argue that buildings could easily have 12-15 units per core.

“Elevator towers are very expensive,” said Ehrlich. “Ask a prospective tenant, ‘Would you mind walking an extra 15ft from the elevator, and pay lower rent? Would you accept a single-aspect apartment, and pay lower rent?’ You know what answer you’re going to get.”

The rules say a two-bedroom apartment must be at least 73 sq metres, and a three-bedroom unit must be at least 90 sq metres. If a development contains more than 100 apartments, the average size must increase by 10%. “It’s a stupid provision,” said one developer. “There’s no reason for it.”

According to Linesight, a quantity surveying and project management firm, the average construction cost for an apartment is up to €2,100 per sq metre, equating to €189,000 for a three-bedroom unit. The site cost is likely to be about €75,000 per apartment, although rising land prices are pushing that figure higher.

A car parking space, which is required under the regulations, will cost a further €25,000 per unit. Development levies and Part V social housing levies will add €40,000 per unit, and professional fees are about €20,000 per apartment. The VAT rate is 13.5% and developers are paying up to 15% interest for their finance. All told, there would be little change for a developer out of €500,000 per three-bedroom apartment. By contrast, a Dublin three-bedroom, semi-detached house costs an average of €330,000 to build, according to the Society of Chartered Surveyors Ireland.

Highlighting the disparity, completed high-end apartment schemes are selling for about €380,000 per apartment, a level at which an owner can earn 5% net yield by charging €2,000 a month in rent.

The British groups Tristan Capital and SW3 Capital recently paid an average of €368,000 per unit for 197 apartments at Dun Laoghaire, while Gannon Homes is putting 105 apartments at the Casino scheme in Malahide, north Dublin, on the market for €40m, or just under €381,000 each. Ken MacDonald, owner of Hooke & MacDonald, the estate agent selling the Casino scheme, is optimistic it will find a buyer despite the new cap on rents. “The bottom line is you couldn’t build them for that price today,” he said.

Therein lies the problem. “In general, it is not economic to build apartments if you have to start from scratch,” said Ehrilich.

Ires is planning 492 apartments at Rockbrook in Sandyford, south Dublin, which are viable only because the basement car park was put in place by the previous owner. Similarly, the US property group Kennedy Wilson, which owns hundreds of Dublin apartments, is building units at its Capital Dock and Clancy Quay schemes on land it acquired for virtually nil cost through wider property deals.

Notably, most other builders that are on sites have low finance costs. Chartered Land, which is building 215 apartments on the site of the former Berkeley Court hotel in Ballsbridge, is backed by sovereign wealth funds, while Cairn Homes, a listed home-builder, is equity-backed. Nama, which aims to develop 2,000 apartments in the Dublin docklands, has rock-bottom finance costs and no site costs.

The future for apartment buildings will almost certainly be “build to rent”, where the developer owns and rents the properties. As there is no sale, it takes out the VAT costs, which is a considerable advantage.

Coveney said his department would work with the banking sector, Isif and the Housing Finance Agency to support credit at “competitive prices” for investment in the rental market. He has also asked local authorities to identify sites with potential for up to 1,000 units, and then seek proposals from builders for rental projects.

Legislation is in the works for fast-track planning, which will allow developers of large-scale residential schemes to apply directly to An Bord Pleanala and get a ruling within 25 weeks. A working group has also been set up with the housing department and representatives from the Construction Industry Council to analyse building costs and report back by the end of June. To reduce their costs, builders will also be allowed to offer unfurnished accommodation for rent.

Investors and developers say the measures to date do not go far enough. Kevin Nowlan, chief executive of the listed property group Hibernia Reit, which owns more than 300 rental apartments, said there was a case for the creation of a national land agency. It would have responsibility for all land held by local authorities and state and semi-state agencies — including Nama and the likes of Dublin Port and Dublin Bus — and work with Coveney’s department to identify supply and demand issues. “All the residential issues in city centres have been created by lack of land,” he said. “We need to take a 10-15 year view.”

MacDonald had another radical proposal: a return of the section 23 tax breaks, which gave tax relief on expenditure on rented accommodation. Widely regarded as causing the development of residential property schemes in unsuitable areas, they were phased out as the economy bombed. “I know people will say it’s heresy,” said MacDonald, “but when it was introduced in 1981, section 23 had a dramatic effect on modernising the stock of rental accommodation in the country. A targeted reintroduction should be looked at seriously.”

Ehrlich hopes to meet Coveney in the new year to press his case for more radical measures to spur supply. “This is an emergency, and emergency times call for emergency measures,” he said.

“The minister has responded to that [with rent caps] but there are other areas, including the building regulations, that require emergency measures. Ireland has to attract the capital to build these buildings. That just got more difficult.”