Friday, 11 November 2016

A spiral out of control: global real estate funds, rental crisis & government policy

Rory Hearne: The Minister for Housing, Simon Coveney, indicated yesterday that he is not going to introduce rent regulation/certainty as it might deter the ‘supply’ of private rental accommodation. This shows that it is the new Irish landlords – the wealthy global real estate funds – that are influencing housing policy and not the needs of the hundreds of thousands of tenants facing spiraling rents and evictions.

The current housing crisis is not an accident. It is a direct result from the particular strategy for economic recovery pursued by successive Irish governments in response to the 2008 property and financial crash.

These policies have focused on demonstrating to the international markets that Ireland’s banking and property crash has been solved through, firstly, Ireland’s bad bank, NAMA, being a ‘success’ and ‘wound up early’, and secondly by the Irish banks bank becoming profitable again.

This strategy required two things – a re-inflation of Irish property prices (rental, in particular, and government indicated support for future increases in property prices and rents) and the attraction in of international property investors and vulture funds to buy up the toxic loans and assets off NAMA and the Irish banks.

All other issues – particularly the impact on Irish housing and its affordability for citizens – was not given a priority in policy. The ‘economy’ came first. And yet this approach has left us with a housing crisis which is a social emergency with major economic implications.

NAMA has been the government’s key vehicle to attracting in international investment by selling off key residential and development land assets at knock down prices. But they also sold key residential property on the basis of future rising rents and prices.

The other key measure introduced by government to attract in international property investment funds was the low tax regime for Real Estate Investment Trusts operating in Ireland. In 2013 Michael Noonan made rental profits arising in a REIT are exempt from Corporation Tax. This was on top of other existing tax avoidance and reduction loopholes available to investors (such as the Section 110).

As the housing crisis developed and worsened in 2014 and 2015 the government found another major argument in defence of this approach. According to government these new REIT investors and international global property funds would play a major role in addressing the ‘supply’ crisis in the private rental sector.

But the problem with that approach is that this particular investor is seeking high returns – which requires high rents – which means policies to keep rent affordable, such as rent regulation, are not seen favourably by them. And this is what we have seen happen.

In the run up to last year’s budget it was reported that there was a possibility of rent regulation (linking rent increases to inflation) and increasing security of tenure being implemented. However, following intense lobbying by one of Ireland’s newest and largest landlords, US real estate fund Kennedy Wilson, the government instead introduced the two year rent freeze which has done little to stem the rising rents.

In a letter to Minister Noonan on September 30 2015, the Kennedy Wilson Europe managing director Peter Collins wrote: “Investors and their funding banks will see the new proposed regime (some form of rent certainty) negatively . This will certainly limit and, potentially eliminate, future investment.”
From the government’s perspective, their policy is working in attracting in big investors.

Michael Noonan, speaking at the homeless and housing committee in April this year explained,
“This intervention (the favourable tax regime for REITs) has been successful in encouraging large scale investment into the commercial and residential property markets. There are currently three REITs operating in Ireland - Green REIT plc, I-RES REIT plc and Hibernia REIT plc. With subsequent rounds of capital raising since flotation, it is estimated that the market capitalisation of the three REITs is now approximately €2.3 billion.  I-RESREIT plc, which is purely focused on the residential market, has a property portfolio consisting of 2,087 apartments.”

In 2011, Ireland had one landlord with more than 400 properties, and now there are five. There are two REITs amongst Ireland’s biggest 20 landlords. There has been a 27 percent increase since 2011 in landlords with 20 or more tenancies since 2011 (926, up from 730).

These big investors are making major profits from Ireland’s housing crisis. Kennedy Wilson started investing in Ireland after the crash and now has €2bn of assets in Ireland. They say “Dublin is the most attractive property market in Europe”. They paid no tax on their profits in Ireland in 2015. Its rental income here rose to £19m from £13.9m. Kennedy Wilson is now one of Ireland’s biggest landlords as it has over 1000 rental units.

Irish Residential Properties REIT (Ires) generated net income of €5.5 million between July and the end of September 2016. This compares to €3.6 million for the same period last year, a gain of 53 per cent. They explain that the current housing crisis, with a “deep imbalance between demand and supply in Dublin’s housing market” means their profit outlook is “very positive.”

And global wealth funds from across the world are looking at Ireland, and Dublin’s property, in particular as a potential site for investment. The Price Water House Cooper Europe 2017 Emerging Trends in Real Estate report, also shows how government policy has been successful in making Irish private rental property an attractive global asset.  The Report notes that “REITs are seen as good investment”. And the PRS (private rental sector) is a “compelling opportunity because of the limitless demand.” And in particular, cities like Dublin are seen as good investment locations:

 “One of the biggest changes is the way that residential is now viewed by institutional investors and their desire to have at least part of their portfolio in this sector. In addition to established multi-family markets in Germany, Denmark, Sweden and the Netherlands, an institutionally backed build-to-rent, or private rented sector (PRS), is beginning in Ireland”.

One US investor described the attractiveness of investing in the private rental sector in Dublin:
The PRS in Dublin is a home run,” he said.

The Report stated that equity is flowing into Europe “from all corners of the globe and all types of investors” and “residential is on the radar and is undervalued because it gives long-term, stable returns.

I have shown here how successive government policy has lead to a deeper financialisation (commodification) of Irish housing and the attraction of investors who expect high returns and thus high rents and low levels of tenant’s rights. This is a disaster for the provision of affordable housing in Ireland as it is locking in the existing high and unaffordable rents into the future.

This housing crisis also worsens and reproduces our already unacceptably high levels of economic inequality. We now have low income households and younger generations spending a significant proportion of their low and moderate incomes on rent which is flowing to the rentier class of the Irish and global wealthy.

An alternative approach is available to government. Introduce rent regulation and security of tenure which would provide affordable housing and attract in a different type of investor - the global pension funds and ethical investment funds willing to take lower levels of guaranteed returns over a longer term and respect, and expect, high levels of tenant’s rights.  Secondly, the state must lead in an emergency development programme of 'not-for-profit', de-commodified, affordable mixed income housing provision – from social to cost rental to shared ownership and cooperative housing.

Dr Rory Hearne is a Senior Policy Analyst at TASC


Finnegas said...

I agree with the diagnosis, I do not agree that controlling the rent is part of the solution at present. It would be far more useful to work on the second solution of social housing, and particularly in the present situation, housing cooperatives.
The government and the establishment are the ones who have control of devising, implementing and monitoring any rent control scheme. I doubt that they consider excessive housing costs to be a problem, but even if they did, their mindset is that free-markets and opportunity to profit is the best way in which society can allocate it’s resources. This is the supply-side argument.
Rent control is a constraint on this because the government is not an agent in the contract of renting. They act on the mindset that interference by the government will lead to misallocation of resources for society, and a reduction on the return on investment, and a reduction in supply. Instead this desire for a return on investment should be allowed to attract further investment into the market, leading to increased supply and lower prices in the future.
For similar reasons of an outsider interfering in a market between buyer and seller, the supply-side people argue that government building programs reduce the incentive to invest, leading to a reduction in supply; and are inherently less efficient because there is no competitive restraint.
Asking them to bring in rent control or housing programs is like building a castle and asking the enemy to organise the building of it.
Housing is a social need, not a market commodity, but there is a great weight of bureaucratic inertia, and vested interests in the supply-side mindset that will not be easily changed. Rather than we asking them to build a castle for us, in order to attack them, we should be building our own forces. That is why I argue that housing cooperatives could be the most useful approach.
Determined steps to develop housing cooperatives could possibly have a deterrent effect on the speculators, and provide a spur of hope to home-builders.
Another benefit of housing cooperatives is that they can use the prime free-market ideologists own financial markets to drive down the cost of finance.
More importantly the development of well-run housing cooperatives would provide a training ground for socially minded people in how to organise effectively for change. There is a difference between organizing a protest, and organizing a change of bureaucratic mindset; the supply-siders don’t organise protests, because they are experts in manipulating bureaucrats. Their weakness is that they do not know how to organise communities.
The strength of a cooperative is that it’s primary resource is the social capital of it’s members, not their financial capital. We have in Ireland a significant competitive advantage in our community level social capital. If it had been developed for housing a long time past, we might not be in our present situation now.
Like planting a tree, the best time to do so was twenty years ago, the second best time is now.

Mick Mack said...

Dr Hearne gives a very good overview and assessment of how the development and influence of Capitalism has taken control of both policy and the material ownership and exploitation of residential property markets. This is of course just the tip of the iceberg and could equally be applied to all areas of the 'economy'. It is unfortunate that once again despite the commitment to an alternative perspective and approach to dealing with the problem to serve the interests of the majority by creating the capacity to both build and offer for rent affordable homes, what we are offered is more of the same reformist 'solutions' to manage the market through various means, which whilst they would be a vast improvement to the current trajectory are NOT the long-term answer to Ireland's housing crisis.

First of all, the Irish Government WILL NOT be persuaded to deviate from its current course by rational argument. there is far too much political and economic investment/leverage already in operation to either change their mind or move those who invest to do otherwise - i.e. it is not in their interests for capital to work against themselves. Secondly, this notion of 'ethical investment' is a lie. All Capital seeks capital and is FOR PROFIT. Even on the level of Housing co-ops there is a need to pay back the banks or any other source of capital back at a rate that suits them and even in a so-called 'competitive market' banks work against the interests of the populace.

These issues, both specifically, housing, and generally, the state and the economy, and universally, global capitalism, are revolutionary questions, i.e. they CANNOT be resolved by reformist policies such as those offered here. Creating the illusion that this is so is indicative of a theoretical mind that has not yet broken with a bourgeois outlook and is still committed to the capitalist mindset and practice and is not remotely radical enough for the questions posed for either the Irish majority or humanity as a whole to move forward to a more humane, egalitarian and rational future. Only the organisation of a general strike and the overthrow of capitalism and a workers government can give the people the power and authority to implement on the scale necessary to make wholesale changes - expropriation of banking, land, industry - to begin a huge house-building programme nationally, employing hundreds of thousands of people and offering genuinely affordable rental, in short, an centralised economy based on need and not surplus value is the truly radical answer to this and all other aspects of our current dilemmas. Any other approach is a deliberate attempt to mislead the public and should be rejected.

soldiersofdestinydotorg said...

Will working people continue to be crippled with high taxes-direct and stealth-plus soaring rents and house prices;all to facilitate the vulture funds who can still evade paying tax on rental income in Ireland,?.