Ireland has the capabilities, the skills and the ambition required to solve the housing crisis. Our problems do not stem from a lack of capital as such but from the regulatory environment we have created, which has driven away international capital. We have made progress over the past few months with changes to rent regulations and taxation, but we have more to do.
Despite a strong economy and near-full employment, we can’t satisfy existing demand for homes nor keep up with the continued growth in demand.
So why aren’t we building more homes?
There are many reasons, including a shortfall of zoned land and an unreliable planning system. But viability is also a huge challenge, especially for apartments, where construction costs often exceed achievable sale prices.
And to reach housing targets, apartments are essential. Research suggests we need 172,000 new apartments by 2031. Achieving that requires viability.
It also requires a large amount of capital. Meeting Ireland’s housing needs will require capital financing to rise from €13 billion in 2024 to €41 billion by 2031. Half of the €28 billion increase in capital required will need to come from international investors. And these are annual figures. By 2031 we will need about €16 billion of international capital every year.
In tandem with attracting this capital we need to ensure that our real-estate sector can deploy the required levels of funding on an annual basis. This is not a question of construction labour but of firm-level capacity.
To deploy €15 billion of international capital in one year, we would require 75 firms that could invest and manage €200 million in that year, which is the equivalent of building and completing about 400 units.
At present, we probably don’t have 10 companies in Ireland delivering 400 units a year. As a matter of urgency, the State needs to create an environment and develop supports where small and medium-size indigenous housebuilders have the corporate infrastructure to attract institutional capital.
For investors to return to the Irish market at scale, they need to be comfortable with the investment maths. At present, the average yield for Irish residential investment assets is 5 per cent versus a European average of 4 per cent. To understand why this is a problem, consider that at today’s costs, a two-bed apartment might cost about €450,000 to build but would sell for only about €385,000 based on current 5 per cent valuation yields.
Around the world, reits and listed real-estate companies are vital in attracting international capital, converting it into domestic investment and providing liquidity in the market. In Ireland, the limited liquidity means investors are often locked into assets and hesitant to commit fresh capital without clear exit options
If yields fell to 4 per cent, the value would rise to roughly €480,000, restoring viability and helping developers to build again. However, as things stand, Irish apartments are worth less than average once completed, as well as being more expensive to build in the first place because our minimum sizes are among the largest in Europe.
At first glance, this gap between Irish and European yields is puzzling. Ireland’s credit rating is among the strongest in Europe, our debt profile is stable, and our economy is healthy. Yet investors continue to price Irish rental housing as if it were a higher-risk proposition than in countries with heavier debt burdens.
Our residential investment yields sit around two percentage points above 10-year Government bonds, while in France, these yields are almost level even though French government bond yields are far higher. On paper, investing in French residential investment property should be riskier than Ireland, but that is not being reflected in market pricing.
What’s happening is that Ireland’s higher yields reflect frequent policy changes, restrictive rent regulations and a lack of liquidity in the residential investment market. With few domestic institutional investors, international players are hesitant to commit, wary of markets where there are few domestic players bidding on residential assets.
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In well-functioning, liquid housing markets, institutional investor-developers can recycle capital either by selling to listed operators or floating their own funds. The proceeds generated are often recycled into investment in new supply.
But in Ireland, a small stock market, restrictive listing rules and shifting regulations for reits (real estate investment trusts) have discouraged new listings.
Around the world, reits and listed real-estate companies are vital in attracting international capital, converting it into domestic investment and providing liquidity in the market. In Ireland, the limited liquidity means investors are often locked into assets and hesitant to commit fresh capital without clear exit options. Twelve years after the reit structure was introduced here, just one remains (Ires Reit).
This crucial point about liquidity is often misunderstood. As well as attracting the capital to develop housing units, we also need to generate liquidity that will drive yields down from 5 to 4 per cent in line with the rest of Europe. This will have the most significant impact on viability, and it does not require State subsidies to reduce costs which is how we are tackling the viability gap today.
The Government needs to tackle our housing problems by maintaining stable, balanced regulation and incentivising a larger and better-functioning listed real-estate sector, with more listed companies and more reits.
This includes more listed development companies who can deploy capital at scale. Doing this will help increase liquidity in the marketplace and attract more investment. We have a proven ability to attract major international investment already and we can do it in housing.
It won’t be achieved overnight, but with a clear vision and the will to act, we can set Ireland on the path to delivering homes at scale for the next generation.
Eddie Byrne is chief executive of Ires Reit
