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Throughout his career Pat Farrell has, in one way or another, been involved in transferring money from foreign investors to property developers.
He first worked at EBS, then as CEO of the Irish Banking Federation, then as a communications exec at Bank of Ireland. The Irish banking industry — particularly from 2000 to 2008, when Farrell was head of the Irish Banking Federation — basically acted as a middleman between European savers and Irish property projects. European investors lent the Irish banks hundreds of billions on the understanding that they would put it to work in the Irish property market.
After that model blew up, the banks got out of the property lending business. But property deals still need funding, so a new model emerged: direct funding of deals by investors. And because the people of Ireland don’t have that kind of capital lying around, the investors have come mainly from overseas. In the first nine months of this year, 78 per cent of funding for Irish residential investment came from overseas.
Farrell’s new job is as CEO of Irish Institutional Property, an industry group. He represents German, Dutch, British and American investors who are looking to buy and build things in Ireland.
On The Currency podcast, I asked Farrell whether the new model is any better than the old one. He said:
“All that capital got transmitted directly through the banking system to developers who 100% funded themselves. And that proved utterly unsustainable when the crash came, because of the collapse in asset values. The risk is [in the new model] significantly diversified compared to the old model.”
“The model now is quite different in that you’re dealing with global players who have very big balance sheets, and whose risk is diversified right across the globe. And also, the type of investment mandates means that they’re not highly leveraged,” he added.
The upshot, according to Farrell, is that in the absence of banks, institutional investors are the only ones who can make the numbers work on big apartment developments:
“You cannot set a single unit in an apartment development until the whole development is finished. Whereas in this traditional semi detached housing model, you build ten, you get the equity, and you then fund ten more, and so on you go and eventually you build out an estate of a couple of hundred houses. That’s not possible. So to build apartments in this market, particularly in our cities where the apartment development is happening, it’s expensive, number one, and number two, you really cannot actually build it for sale. So it has to be built for rent. And that means it has to be forward funded [by institutional investors].”
It’s easy enough to make the case for institutional investors funding new apartment blocks, which grow the stock of homes and put downward pressure on rents. But there’s a more ambiguous trend in the US, where institutional investors have started buying up individual family homes, and putting them out for rent. They’ve found a way to do this at scale, and now own 80,000 rental homes. It’s making it harder for Americans to buy homes. I asked Farrell whether he’d welcome it here. He said:
“That’s not a scenario we’d like to see. I think we need mixed tenure in this country. I mean, at one stage, we had almost 100 per cent, not 100 per cent, we had a very high level of home ownership, it’s swung now, though, it’s still less than the European average.
“Ireland has a largely homogenous housing stock. And it’s pretty well three and four bedrooms. But the reality of it is there’s an awful lot of people, this country has changed, who want a bedroom, they want a one unit of accommodation, and particularly in proximity to the IFSC and the silicon so called docks.
“A lot of the people that are working there are coming to work for two or three years for their global parents. They’re not, they’re not here for the long haul, the last thing they want to do is buy a property.”
Institutional investors aren’t popular in Ireland because they’re a big part of the housing system, and the housing system isn’t delivering affordable homes to people. Why, I asked Farrell, is the industry incapable of delivering affordable homes?
“The economics of house building in Ireland are somewhat challenged. As you know, if you look at all of these companies – publicly quoted companies – that are delivering house building and it’s clearly evident like they are not making outsized profits,” he said.
“We have high wage costs in this country… the cost of land as well, typically to somewhere between eight to fourteen per cent. But then the government itself actually takes about 30 to 35 per cent of the cost of the house itself. It takes about 13 per cent in VAT, it takes another, seven or eight per cent on levies depending on what particular local authority they are working with. And then you have payroll costs and everything else that come out of actually the people directly.
“And then, as I said, the planning system, which is quite dysfunctional as we speak, and is quite unwieldy, does add a fair bit of cost as well. Because typically, at the moment, when you go for planning, that can take years to actually get to the point where you can actually get into construction phase.”
Farrell had much more to say about how funders see Irish property. Click here to listen to the whole podcast
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