Institutional investors from Singapore to Amsterdam, New York, Chongqing, San Francisco, London and Zurich are getting to grips with the finer points of Irish social housing. 

The biggest names in global finance (and some obscure ones from obscure places) have been moving into Irish social housing at an accelerating pace this year. It’s “the hot space to be in, in commercial real estate in Ireland” said John Hogan, head of commercial property at Leman solicitors.

They are attracted by the government’s social housing leasing scheme. This scheme is a 25-year commitment, by the government, to rent social housing from the owners. The government takes on the responsibility of managing and maintaining the property. When the lease is finished after 25 years, the government is obliged to hand the property back to its owners in more or less the same condition it got it. 

For institutional investors, this ticks a lot of boxes. They get a long-term commitment. They don’t have to find tenants or chase rent. They don’t need boots on the ground, managing the property. The property’s fit-out doesn’t depreciate. The income is linked to inflation. And most importantly, it has the backing of the Irish government. 

For an equivalent amount of risk — and no inflation protection — Goldman Sachs could buy a 20-year Irish government bond yielding 0.39 per cent. The social housing lease, by contrast, can be put together at a yield of about 3.5 per cent. 

The difference between 0.39 per cent and 3.5 per cent is the reason global capital is taking a keen interest in two-bed houses in Dolphin’s Barn and apartments in Dundrum. You’ll recognise some of the names: Goldman Sachs, JP Morgan, AXA, Aviva. Another is GIC, which is Singapore’s $488 billion sovereign wealth fund. 

Institutional investors are rich and patient. They do deals at lower yields than ordinary investors. When it comes to financing new projects, that’s great news. It means they can profitably build lots of projects that ordinary investors can’t. Thanks to institutional backing, a lot more houses have been built here than otherwise would have been. That pushes down rents for the rest of us. 

But until houses are built, it means the rest of us are bidding against very patient and deep-pocketed investors for a fixed stock of homes. That pushes up house prices for the rest of us. At the end of 2021, with construction frozen and house prices shooting up, we’re seeing it in action. 

To be sure, increased house prices should stimulate supply, and eventually that should moderate prices. And the channel through which capital is entering the market is the social housing list. So social housing tenants benefit from it. Albeit at the cost of bidding up prices across the market. 

Right now, the leasing of social housing is still a relatively small part of the overall residential property market. But it’s growing quickly. And industry players agree, a wave of money is on its way. “Things have changed,” said Dublin City Council’s deputy chief executive Brendan Kenny. “Since Covid, we have 800 units at various negotiation phases with developers.” One senior lawyer is expecting “an explosion of deals later this year”.

“We get probably 20 social housing projects in a week, and we probably get one private housing development in a week,” says a property lender. “Everything is just social housing.”

The lease

Long-term leasing of social housing isn’t a new idea. It first appeared in 2010 when, after the crisis, the budget for social housing construction had been cut by 90 per cent. Long term leasing of privately-owned homes was intended to plug a gap between supply and demand for social housing.

The leases were administered through the local authorities, which allowed the government to keep them off its balance sheet — very important in 2010, when the Troika called the shots. According to a Department of Public Expenditure and Reform report, the leases’ rationale was “securing high-quality properties for long-term social housing use in a way that maximises… the off-balance-sheet potential of private and other institutional investment in social housing.”

There are two types of social housing lease: standard and enhanced. The standard lease has proven to be overwhelmingly the more popular one among investors. 

In the standard lease, the owner gets up to a 25-year lease in exchange for rent that’s 80 to 85 per cent of the market rate. To get on the lease, the home needs to pass inspection and be in good condition. It does not need to be a new build, though it can be. The rent is linked to inflation. All rental payments are handled by the local authority, and rent is paid whether or not there are voids in the property. If a boiler breaks, the tenant deals directly with the local authority, and not the property owner. 

Local authorities administer the scheme. From the investors’ perspective, this makes matters more complicated, since each local authority will take its standards for BER, fit-out quality etc. In order to get a property onto the scheme there’s a fairly slow process of investing €10,000-€15,000 in fit-out, booking a council inspection, getting a council valuation, and getting signed up. That in addition to the legwork that goes into buying the property itself. Plus, the owner of the property is responsible for the external condition of the structure — the common areas and the exterior of apartment blocks, for example.

Herbert Hill in Dundrum, which was leased by the German fund Realis for social housing in 2019.

The players

Once JP Morgan or Goldman Sachs gets the leases, they run on autopilot. But before then, to actually gather a portfolio of Irish social homes, they need to partner up. A cottage industry has developed of Irish entrepreneurs who source properties on the big funds’ behalf.  

The entrepreneurs might do it off their own bat, or build a portfolio of 50 or more houses on the scheme which they sell on to the bigger fish (what’s called “pepper-potting”). Some source deals for their funders, and take a management fee. They buy houses in ones and twos as they come up, or small lots of houses from the likes of Pepper and Link.

Former Dublin manager Pat Gilroy is in the business. Through his company GS Infrastructure, he acquires and develops homes predominantly for the local authority market. Robert Keogh and Andrew Gunn are others, backed by Singapore’s $488 billion sovereign wealth fund. Barrister Ross Maguire’s New Beginning is another, which is funded by the UK private equity house RoundShield. 

Asked about their international partners, one Irish property professional said: “The guys we work with are extremely cautious about any kind of publicity. They don’t want their name attached to anything.”

“We don’t own anything. We just bring them opportunities. They seem to fund them with just straight equity. We just get a fee as managing agents,” the person added.

And then there are the Chinese investors. Chinese investors in Irish social housing aren’t big institutional guys like Aviva or Franklin Templeton. These are fairly small investors, investing a million apiece to avail of the government’s immigrant investor programme. 

“If we’re buying houses we’re displacing, in some cases, Chinese investors. Now, that might impact prices. But we’re in the middle of this, and we need houses.”

Brendan Kenny

Under the IIP, non-EU citizens and their families get Irish residency if they invest a minimum of €1 million in certain industries, or donate to charity. Chinese investors make up 93 per cent of the participants in the programme. Of the money raised in the programme, the biggest beneficiary was social housing, which got €249 million. 

Focus Capital helps put these deals together. It sources funding from Chinese investors for long-term social leasing or for developments to sell to local authorities, mainly outside of Dublin. Focus’s managing director Robert Adams said: “Big funds won’t go to regional Ireland. The deals aren’t big enough there. The smaller deals, backed by foreign capital, will go out to the country.”

In Dublin, there is a mix of big and small players. DCC’s Brendan Kenny deals with some of the smaller Chinese investors. “We have Chinese investors buying up individual houses and coming to us to lease them,” he said.

At the next size up are Ireland’s own asset managers. BCP Asset Management, with €3 billion of assets under management, helps source deals for the global players. MM Capital does the same thing. Davy has also been buying up leases on behalf of clients.

Beyond that, you’re into global institutional investors. These come in all shapes and sizes. There are straight up asset managers, like San Francisco-headquartered Franklin Templeton ($1,400 billion under management), Principal Real Estate Europe ($88 billion under management), GIC ($488 billion) and their Amsterdam-based partner Orange Capital, or Deutsche Finance with $2.7 billion under management. There are pension funds like Axa and Aviva. There are banks and boutique advisors like JP Morgan, Goldman Sachs , NatWest Markets and Alvarium. Or private equity houses like RoundShield Partners. These institutions are involved in different ways. Some are funders. Some, like RoundShield, take an equity stake, targeting a 15 per cent annual return. 

These institutions differ widely, but they’re all in the same boat: they’re looking for long income opportunities in a world where they are in short supply. For the last decade, there has been an acute shortage of safe assets — assets that act as a store of value. That makes it hard for a household to save for retirement, for a company to hold cash, for a bank to get collateral. 

Because there’s more demand for safe assets than there is supply of them, the returns on safe assets have fallen a lot. And investors have to invest in more obscure and risky assets to get the same return they could have banked easily in the mid-2000s. “What we’ve seen is a lot of international capital looking for long income opportunities,” said Marie Hunt, head of research at CBRE, an advisory. 

German investors, in particular, are looking for long income. They had previously invested in office space, and more and more they’re looking at social housing. It offers them a commercial-style long lease on the residential sector. 25-year leases are hard to come by these days.

The firehose of global capital had previously been pointed at the private rental sector, where it accounted for some 90 per cent of new planning permissions for apartments last year. But there’s a sense that build-to-rent has passed its peak. As reported in the Business Post on Sunday, developers are discreetly lowering rents. Some of those investors are now turning their attention to social housing leases. 

The big investors are hungry for yield. They also increasingly care about environmental, social and corporate governance (ESG). Ordinary investors want their money invested ethically, so the industry is scrambling to cater to them. ESG funds now have about a 25 per cent market share in the US, compared to one per cent in 2014. They grabbed $51 billion in new US investments in 2020, which is more than double the 2019 total (the previous record). And Irish social housing ticks the ESG box. 

So social housing is doubly in demand. It offers secure long income, and it’s ESG-compatible. The challenge is finding deals big enough for them. These funds are looking to deploy several hundred million. Anything less than about €50 million isn’t really worth their while. So they’re looking to pick up lots of about 100-200 units. “Lack of supply is the issue,” said John Doddy, head of debt and capital advisory at Deloitte. 

These giant pools of money have distorted the market. For example, ordinarily, a block of 100 apartments is worth less than the sum of its 100 constituent apartments. That’s because selling apartments one-by-one is slow and costly. But now, in Ireland, the block sells at a premium to the sum of its parts. That’s because big funds with lots of money to spend are more active at the level of apartment blocks than of apartments. 

What the government gets

On the private market, individual houses usually yield six or seven per cent. In other words, the the annual rent is around six or seven per cent of the price of the house. That’s the going rate for normal houses in Dublin.

However you run the calculation again at a 3.5 per cent yield, you’ll get a very different number. A house generating €24,000 of rent at a seven per cent yield is worth €342,000; at a 3.5 per cent yield it’s worth €685,000. 

This is an issue for newly built property, where the institutional funds are most active. But since the standard lease applies to old as well as new houses, it applies there too. Dublin City Council’s 486 existing social housing leases are mostly old houses, said DCC’s Brendan Kenny.

For the local authorities, the long-term leasing scheme is great. It’s delivering much-needed homes for those on the social housing waiting list. At the current rate of social housing provision – whether built, acquired or leased – it would take 14 years to get through the social housing waiting list in Dublin.  

“We’re kind of of the view we’ll take anything anywhere,” said Brendan Kenny. “Because the situation is so bad in Dublin City. When a family comes to us they’re delighted to have a house. 25 years is a long time.”

“If you’re going out to buy a car — if you have cash you’ll spend cash on it, but if not you’ll do hire purchase or you’ll take a loan.”

The local authorities are involved in all sides of the market. They’re building houses, they’re buying new houses turnkey, and they’re leasing them from investors. They see it all:

“We buy a house that might have been bought three or four times, might be bought from us previously. If we’re buying houses we’re displacing, in some cases, Chinese investors. Now, that might impact prices. But we’re in the middle of this, and we need houses.”

Kenny has seen the long-term leasing market change and grow in recent years. Where before it was smaller players coming to them with portfolios of older homes, now it’s institutional money buying newly-built stuff. “We prefer dealing with the big funds, even though they might be greedier and more expensive. They just want to collect the money. They tend to put in good management structures,” Kelly said.

“It’s not a scheme we’re sure will be there in two years’ time. Because prices are going up,” he added. 

An interesting test of how the government views international investment into social housing is coming up this week. An updated social housing lease is expected. 

The standard long-term housing lease wasn’t designed to funnel hundreds of millions of international capital into social housing. “The standard lease was never designed for anything other than single house. It’s being used incorrectly,” says Marie Hunt.  

The problem for institutional investors is there’s a clause in the standard lease saying the appointment of a receiver terminates the contract. That, in turn, means the investors can’t put debt on the leases. With the addition of debt, the already rock-solid, inflation-protected 3.5 per cent returns could be ramped up even further. 

If the new contract resolves that problem for institutional investors, take it as the government giving them its blessing. The government’s official target for the leasing scheme has risen by a compound annual growth rate of almost 60 per cent since 2016, to 2,450 units this year. 

A good question, is what happens after 25 years? The owners are entitled to their property back. Will they want to roll over the tenancy? Will the government? What if market yields are higher then, will the owner sell up? What will happen to the social housing tenants?

As for value for money, the Department of Public Expenditure and Reform ran a study on the use of leases and subsidies to deliver social housing. It found that in local authority areas with high rents, leasing was more expensive than building housing directly.

Under multiple governments, and more housing ministers, the programmes pushed by the Department of Housing have a striking consistency. The housing assistance payment (subsidy for private tenants), turnkey purchases (state purchase of privately built homes), and long-term leasing all basically throw resources at the demand side of the housing market. Whether through subsidies, or capex, or encouraging foreign capital, they help gobble up supply and help particular people to get homes. In doing so they help the most needy and take pressure off housing lists. What they don’t do is help more people get homes, or – if this is your thing – put more homes in the hands of the state.