Dublin’s housing shortage has seen prices increase 24% in the year to October
Companies that survived the 2008 crash are keen to start building once more
Residential development is the number one priority for US investor-developer Hines on Cherrywood Business Park, a Dublin development site the size of Hyde Park that it snapped up in a €280m (£222.7m) deal earlier this week.
Hines, which now owns more than €1bn of Irish property, said that it plans to develop up to 3,800 homes and flats at the site. This will be good news for Dubliners – the city is suffering from a severe housing shortage, and needs another 54,000 houses by 2021, according to Irish think tank ESRI.
However, new construction has been muted since Ireland’s devastating property crash in 2008. Commercial developers have been slow to resume activity, with only 1,360 new homes built during 2013. The result is that house prices have increased by an eye-watering 24% year-on-year in October, according to the Central Statistics Office.
However, companies that have emerged from the wreckage of the last crash are now keen to start building again; Ellier Developments, JJ Rhatigan and Chartered Land are all rumoured to be sizing up residential opportunities in the Irish capital. Could the Cherrywood deal be a sign that the housing deadlock is about to be broken?
“This project is a bit of a one-off because of its sheer scale, but it does send out a signal that the Dublin residential market is open for business,” says Ronan Lyons, an economist at Trinity College Dublin and local real estate pundit.
Another encouraging piece of news was Dublin city council’s announcement last month that it is opening up 17.3 acres of government-owned land for residential development, and is seeking joint venture partners for the provision of 15,000 homes.
International investor demand for exposure to Dublin residential has reached fever pitch this year, but there is a limited amount of product to invest in. Newcomer IRES REIT snapped up Nama’s €211m residential-focused Project Orange in August for €60m above the guide price, seeing off competition from international heavyweights such as Kennedy Wilson and Marathon Asset Management to win the 761-strong portfolio. The REIT has now approached its Canadian backer, CAPREIT, for a further €150m to invest in Irish residential properties having spent most of the €192m it raised in an April IPO.
However, there are wider structural issues that are leading to a bottleneck in new housing supply. While Hines may have struck out with a bold development plan, it may be a while before others follow suit, explains Marie Hunt, Dublin-based head of research at CBRE.
The Irish Central Bank announced in October that it planned to introduce new caps on mortgage lending. Borrowers will have to have a minimum deposit of 20%, with a 3:5 loan-to-income ratio, while banks will have to limit loans of over 70% LTV to 10% of lending. New rules are likely to come into effect in January.
“Most European banks will either impose a minimum deposit on borrowers, or a lending cap on the bank, but the Irish Central Bank has done both. This will create a difficult situation for first-time buyers, and could really deal a blow to the market,” says Hunt. “We don’t have a housing bubble developing in Dublin, because housing bubbles require credit, and there is hardly any available. This is a different problem altogether.”
Marian Finnegan, chief economist at DTZ Sherry Fitzgerald, agrees: “Macro-prudential policies could really harm first-time buyers, and narrow the market for developers to sell their products into,” she says.
This in turn creates a conundrum for banks lending to developers, says James Mulhall, managing director at Dublin-based advisory firm Murphy Mulhall: “If there is a threat to the end market, it’s going to create nervousness and banks will be less willing to lend to residential projects” he says.
The result, he predicts, is that housing prices will continue to rise at breakneck speed in response to the supply gap.
