Housing Supply: the “Wall of Money” Aidan Culhane

Collapse RTB Rent index House price: -54% peak to trough decline. Housing output: -91% peak to trough. 2,876 unfinished estates in 2011. €43 billion lost in housing wealth. RTB Rent index

Decline and Fall Decimation of banks Obliteration of house development industry Precarious public finances Confidence!! (Public/Investors/Industry) Austerity NAMA

Decline and Fall Lack of development finance Lack of equity “Sector is moving from bank debt to blended finance” (Adviser, 2015) “75-80% of land is in the hands of ‘unnatural’owners.” (Developer, 2015) Lack of development finance Lack of equity Lack of mortgage finance Lack of viability Lack of demand “It is somewhat contested whether finance is a problem. Certainly equity for smaller builders is a problem, and that reflects the new realities of finance” (Banker, 2015) “Need to make a distinction between [housing] need and demand. Strong demographics does not mean money is available to buy .... Future population growth is not a good basis for action by developers.” (Economist, 2015)

Availability of Finance: The “Wall of Money”? Private Equity Hedge Funds Pension funds Bank finance PLCs

Changing Investor Profile Opportunistic investors Vultures Funds Individuals REITs Listed housebuilders Irish Banks Divesting Developers looking for capital partners New lenders emerging ISIF LIHAF SHD

Investors need a return UK Risk/Return Profile (Residential)

Example: IRES REIT Annual Rent: €19,188 @ 6.6% gross Apartment cost: €291K Apartment Value: €344K Net yield: approx. 4.9% 6 HANOVER QUAY … 120 apartments bought for €101 million. Average Price per apartment: €800,000 Yield at 4% = €3,200 per month.

More to come … Yields are compressing But are still above many European comparable cities Dublin remains attractive to investors Values could rise further (and rents)

The Gap Median €39,005 Mean €47,870 Ireland’s Income Distribution (Source: NERI/SILC)

Affordability Source: MGI

Affordability Effect of CBI Macroprudential Rules Gross annual income Max borrowing Deposit (HTB) Purchase €40,000 €140,000 €15,556 €155,556 €50,000 €175,000 €19,444 €194,444 €60,000 €210,000 €23,333 €233,333 €70,000 €245,000 €27,222 €272,222 €80,000 €280,000 €31,111 €311,111 €90,000 €315,000 €35,000 €350,000 €100,000 €38,889 €388,889 Effect of CBI Macroprudential Rules Average Dublin House Prices, Q1, 2019, Daft.ie Average Dublin Rents, Q1, 2019, Daft.ie

Structural change Population change

Typical AHB Social Housing Deal DEBT REMUNERATION Typically 20-30% soft government loan (CALF) Long-term fixed-rate HFA finance Payment and Availability Agreement Notionally 92% of market rent. Differential rents (average c.€2,800 pa)

What’s not to like? Opportunities Challenges Government-backed income stream Index-linked adjustments (not increases!) Guaranteed payments (nearly!) Regulated AHB counterparty (almost) Strong boards and governance Scale Novelty Development risk Reputational risk Types of investor

Enhanced Leasing Scheme Minimum 20 properties 25-year lease 95% of market rent. 3-year reviews to HICP. Lessor provides management services to strict protocols. Landlord is the council. Agreement for lease is available.

Oaklee-Nord/LB €50 million 25-year fixed-rate debt SPV structure Uses CALF and P&A Project financing structure

UK Funding Debt Equity Long-standing access to capital markets Bonds Private placements. Bond aggregator Cheap Debt Off balance sheet Private Sector Participation Civitas REIT plc RESI REIT plc Sage (Blackstone) L&G British Land CBRE Global Investors

Conclusions There are plenty of possibilities for private investment in social and, even more so in affordable housing. Alignment of interests is not straightforward. Sector has work to do in terms of developing capacity and to produce scale. Investment is likely to come from a relatively limited range of capital sources. Debt and equity models are possible.

aidanculhane@theiveaghtrust.ie @aidanculhane