Few industries have ever been transformed so quickly as the Irish property sector. A decade ago Irish property was on its knees. We had a cohort of indigenous developers who were basically broke. House prices were tanking. Rents were tanking. Ireland Inc was in deep trouble and was still two years away from the beginning of an IMF bailout.
But behind that layer of detritus, the make-up of the property sector was very different to today. Irish banks had been over-exposed to lending into it. They would not do it again because they would not be allowed to do so by regulators.
House prices had moved out of reach for the average couple and the solution had been to lend them more money. Never again.
Rents had gone up to new records in the boom years but looking back with hindsight were not as off the charts as they are now. The rental sector was made up of thousands of amateur landlords who owned an average of two properties each. Long-term renting was not the norm.
The industry was dominated by a relatively small number of indigenous players who ran their own businesses like personal fiefdoms. They sat at the top of large complex webs of corporate structures where they were directors of dozens and at times even hundreds of companies. Nobody, not even the banks, knew how much they owed and what their real net worth was.
There was a logjam when the whole system collapsed with the loss of tens of thousands of jobs. The move to attract new foreign capital into the sector was spearheaded by Nama, with the help of incredibly lavish tax breaks.
The aim was to have a new kind of institutional property investment class with solid overseas balance sheets and an eye towards long-term investment.
Initially, hedge funds arrived to make a killing and they did. Now the picture is becoming a little more nuanced. They have sold out at substantial profits and other investors, such as pension funds, or quoted property Reits are increasing their presence.
The old developers appear to be back, in so far as they are involved in lots of commercial property and housing plays, but in many cases they are not in the driving seat. Because they don’t have the money, they have international backers who will earn the lion’s share of the profits. Familiar developers are often promoters of projects and their reward is based on a fee structure which can include marketing fees, success fees and bonuses. But many of them no longer have much equity in the ventures they are promoting.
The new kingpins are international investors such as Kennedy Wilson, Hammerson or listed firms such as Cairn Homes, Glenveagh or Green Reit. Throw in the country’s biggest landlord, Ires Reit and the picture has really changed. In order to reflect this radical shift in the make-up of the sector, some of these institutional property firms have set up their own lobby or representative group called Irish Institutional Property (IIP).
Directors include Kevin Nowlan of Hibernia Reit and Brian Moran, managing director of Hine Ireland. Pat Farrell, the head of group communications at Bank of Ireland, is set to join as its first chief executive when he leaves his current job shortly. The fact that institutional property companies need or want their own lobby group speaks volumes about the presence they now have in the Irish market.
They obviously believe they have enough in common, even though some only build houses while other don’t do residential at all, to be able to form a unified voice to government on policy matters.
And there is no better man for the job than Mr Farrell. IIP isn’t the first lobby group he has run. He is a former head of the Irish Bankers Federation. He knows the political and policy landscape very well.
The likely members of this new group are very much in the driving seat in the industry. They have the cash to make projects happen. They have the scale and they represent much of what government policy seems to want to achieve. They are developers building houses with a view to selling them off in advance in large blocks for rent. Increasing the long-term rental market seems to be a major building block of where the Government wants the sector to go.
Mortgage-funded first-time buyers are becoming an endangered species. Only a certain number can raise the deposit and qualify for a mortgage under Central Bank rules.
If these institutional players are in such a strong position, why do they need to come together and form a single lobby group? One view is that they believe they are getting bad press. They see themselves as long-term investors in the property market, in pursuit of reasonable long-term returns.
Yet, they are often associated with vulture funds which are seen as large faceless organisations eyeing up a quick buck. The problem for the Government is who to listen to when it comes to policy. It still doesn’t want to be seen to be close to the previous generation of individual developers, who are still associated with the worst days of the Galway Races tent. Although I am sure for anyone who was in the tent, those were the best days.
Government doesn’t want to be cosying up to international vulture funds who are blamed for everything from avoiding taxes to throwing people out of their homes. Yet, from a lobbying point of view, it should listen to somebody. Industry players all have their own agenda, but they also know what is going on and may have workable solutions.
So, if the institutions could establish their long-term commitment to the market, and shed some of the negative image, they might believe they will get a better hearing. That seems to be the plan.
The IIP says it purpose is to “educate legislators” and other stakeholders about the sources of members’ money. It wants to show how much of this emanates from pension funds.
There are some positives around these new players. Listed property companies are much more transparent than old-style fiefdom developers. Their international capital has helped kick-start a building boom which has generated tens of thousands of construction jobs. We did have too many smaller amateur landlords.
Yet, the property market in Ireland is changing fundamentally. Young couples cannot buy a home. The Government should plug the social housing gap by building and owning more social houses – not outsourcing it. Rents are at rip-off rates. Not enough houses are being built. Some long-experienced Irish developers argue the problem is getting worse not better, yet they are not listened to.
Because property and housing is so important to society and the economy, there should be a clear roadmap of what the desired future of the industry should look like. Do we want to be a nation of renters or owners? If a mix is best then what is the mix and how is that best achieved?
What is the quickest way to resolve the housing crisis and what part do the industry stakeholders have to play in achieving that?
The Government should not simply dismiss every industry perspective on the solutions but should have an open mind and an open ear. The trick is to not get too close.