Is the equity case compelling for Irish housing

As Ireland strives to deliver more new homes each year, the housing market faces a critical need for investment. This piece examines Government initiatives and how a favourable economic climate can create a unique opportunity for equity investors.

In brief

• Ireland requires 50,000 new homes annually, with a €20bn capital investment needed, highlighting the importance of non-domestic capital involvement.
• Despite challenges like rental caps and planning delays, strong economic fundamentals and government support create compelling investment opportunities in the housing sector.

For Ireland to reach its targeted housing output of 50,000 units it requires both significant capital investment and other forms of capital but does a viable investment thesis exist to attract other sources of non-domestic capital?

Ireland’s Housing Agenda

With government formation now settled as we move into 2025, one of the key measures of its success will be the performance of housing over the next five years. The numbers are widely known:

• Over 50,000 new homes required each year until 2030
• An estimated capital requirement of over €20bn to deliver these new homes
• 30,330 units (Per CSO) delivered in 2024
• A government commitment of €6bn to the housing agenda in 2025 via various vehicles and schemes

Delivering the necessary housing numbers requires the involvement of non-domestic, institutional, and private capital. It is not solely the government's or taxpayers' responsibility to fund this effort and our assessment is that a compelling investment thesis prevails for Irish housing

Ireland’s Housing Make Up

As the table below outlines, housing can broadly be split into 3 categories:

1. Individual units: One off housing (funded by the individual through a combination of debt and equity) which accounts for 15% - 20% of stock annually.
2. Scheme units: New homes schemes of medium density make up c. 50% of annual supply. These are typically funded privately by the builder / developer through a combination of debt and equity and acquired by (i) by individuals on the private market and (ii) local authorities or approved housing bodies (“AHBs”) - Irish planning laws stipulate that 20% of units must be allocated as social and affordable housing and it is not unusual to see this percentage exceeded in a new home scheme.
3. High density apartment units: High density apartment developments, either (i) funded by institutional investors who deliver the stock to the private rental sector (PRS) or (ii) as the case has been more recently, constructed by private sector contractors and acquired by AHBs, local authorities or the Land Development Agency (“LDA”) on a forward purchase or forward fund basis. Over the last 24 months PRS investment has been subdued and by extension so has the inflow of international institutional capital. However, with interest rates now starting to look more favorable to the investment thesis, it has been widely discussed that rental caps need to be re-assessed to unlock this situation and increase the supply of stock into the private rental market.

When people talk about the need for non-domestic or institutional capital how does this investment ultimately manifest? In Ireland to date, it has typically taken two forms:

1. Debt funding of non-bank lenders: this is now a firmly established part of the development financing landscape and has seen international capital successfully partner with domestic capital and local management teams. It is attractive as it benefits from first ranking security and can achieve deployment at scale.
2. Equity: the provision of equity in the acquisition and/or development of large-scale apartment schemes, also attractive as capital can be deployed at scale and steady returns can be generated over the long term. However, as mentioned above, this type of investment has been less prevalent in recent times.

A significant gap in the capital structure prevails in equity for robust mid-tier developers who are seeking to rebuild their balance sheets in paralell to scaling their delivery efforts. We see this as a significant investment opportunity.

Investment Underpinning

While development is inherently at the higher end of the risk spectrum, the investment case for housing in Ireland is compelling and underpinned by the following:

1. Ireland: We present strong fundamentals in terms of (i) economic growth projected at 4.0% in 2025 and 3.6% in 2026, (ii) a strong labour market with unemployment expected to average 4.2% in 2025 and (iii) strong population demographics with 18% of the population aged between 15-29 years, being the youngest population in Europe.
2. Perennial housing supply shortfall: Since 2010, our housing market has consistently been undersupplied with developments of new homes effectively coming to a standstill post the global financial crisis. While delivery is now on an upward trajectory, supply is still falling short of demand (estimated to be 50,000+ units per annum) year on year and recently published analysis suggests this is set to continue with 2024 completions down 7% on 2023.

3. Stock being delivered into the private market: The pipeline being fed through to the private sale market is relatively thin after total supply is adjusted for one off housing, social and affordable allocations and purchases by AHBs, the LDA or local authorities. While this is not yet fully reflected in 2024 completions where schemes would have commenced in 2022/2023, it is notable also that Ireland’s two housing PLC’s are increasing delivery to state supported entities.