CBRE today released a very interesting report in conjunction with Future Analytics Consulting Ltd (FAC) focussing on the increasing appetite in the Irish market for investment in ‘alternative sectors’. The ‘Alternative Investment in Ireland’ report focusses in particular on three sectors, namely Build to Rent (BTR); Purpose-Built Student Accommodation (PBSA) and Healthcare, and is certain to prove very interesting to investors, funders and developers alike.
CBRE and FAC have conducted detailed research into each of these specific forms of alternative investment, exploring the concepts and considering their relevance and sustainability in an Irish context having regard to demand and supply dynamics in each sector.
According to Marie Hunt, Executive Director at CBRE, “Over the last number of years, investors globally have become increasingly interested in ‘alternative’ routes to investment in real estate as they seek to generate better returns and diversify their investment portfolios. Moving away somewhat from the traditional office and retail sectors, which heretofore have dominated investor wish lists, we have seen increased interest in, and demand for, investment in new niche areas of real estate where returns are driven by emerging macro-trends and which as a consequence tend to have countercyclical characteristics. The demand for alternative forms of investment has recently started to enter the lexicon in an Irish context as investors lessen reliance on traditional forms of investment and seek to generate higher returns and diversify investment across new geographies and sectors. The fundamentals of the Irish market are very interesting in this respect with several sectors experiencing severe supply demand imbalance”.
BUILD TO RENT
- According to the report, the concept of ‘Build to Rent’ is one that is firmly established in many jurisdictions such as the US, where it is now regarded as a mainstream sector offering superior returns to other more traditional forms of investment.
- Build to Rent has gained popularity in Europe and in the UK in recent years but is as yet only at an embryonic stage in the Irish market. This is about to change as the Irish housing sector becomes professionalised and delivery increasingly supported and realised by institutional capital.
- Build to Rent describes the practice of delivering purpose-built residential rental accommodation that is designed with the sole purpose of being used as long term rental accommodation and professionally owned and managed by an institutional landlord. Build to Rent schemes are generally of a very high quality design and with ready access to amenities such as resident lounges, business centres, common rooms, gyms, and cinema/entertainment rooms as well as being located in close proximity to good quality public transport. Amenities are generally provided within the overall development with a high degree of public space provided to facilitate social interaction and foster community enhancement. Good quality in-house management is on hand to take care of maintenance and provide a high level of support for residents within the development.
- Residents within Build to Rent schemes are willing to pay a premium for the additional benefits that living in a high quality purpose-built scheme that is tailored to their needs offers over traditional rental accommodation. Investors on the other hand are attracted to a sector that offers stable long-term income potential and is less susceptible to cyclical variations than other traditional real estate sectors.
- The rationale for developing Build to Rent in the Irish market is borne out by the fact that there has been an additional 174,000 households renting accommodation in the last ten year period. According this report, there is potential for an additional 23,300 households entering the rental sector by 2021.
Tim MacMahon, Director of Development and Residential Capital Markets at CBRE in Ireland is a subject matter expert on Build to Rent. He says “While multifamily residential has emerged as a mainstream investment sector in Ireland over the last five years, the product that has traded up until now has largely comprised residential schemes that were originally designed to be sold individually as private homes but were subsequently adapted or converted for rental purposes. This is quite different to the Build to Rent model we are now seeing emerge in an Irish context. Considering the seriousness of the imbalance between supply and demand in the Irish housing market, the Irish Government are now largely supportive of the delivery of large-scale purpose-built accommodation to service the rental sector. The Minister for Housing has acknowledged that Build to Rent projects will have an important role to play in addressing critical shortages of rental accommodation in areas of high demand and has instructed local authorities and planners to prioritise the delivery of these schemes. We can therefore expect to see increased focus on the delivery of Build to Rent in the Irish market over the coming years”.
PURPOSE-BUILT STUDENT ACCOMMODATION (PBSA)
- Another alternative investment sector that has gained popularity in recent years is student accommodation with several specialist funders and investors focussing on opportunities to invest in student residences, both on and off campus. The purpose-built student accommodation (PBSA) sector, which was once the preserve of a small cohort of specialist providers and third-level institutions themselves, is now moving mainstream.
- Third level institutes are increasingly demanding high-quality accommodation near their campuses to complement their educational offer to existing and future students. This is becoming increasingly pertinent in terms of attracting international students to particular institutions; an issue that will become even more evident in the aftermath of Brexit as third-level institutions across Europe attempt to attract higher volumes of international students who are key users of PBSA.
- Despite the fact that the sector focusses on a single demand group, the risk/return ratio tends to be similar to the general residential property market, although yields for the most part tend to be higher, which appeals to investors. One of the key attractions of the PBSA sector is the high levels of occupancy that can be attained if facilities are appropriately managed (particularly where alternative uses can be maximised outside of the traditional academic year – e.g. occupation by tourists during summer months).
- In Dublin’s case, only 13% of the full-time, higher-education student population has access to purpose-built student accommodation.
- Currently, there are 13 student housing schemes under construction in Dublin, accounting for nearly 4,300 bed spaces between them. In addition, there are 8 student housing schemes with a grant of planning permission accounting for 1,556 bed spaces between them. A further 2,300 bed spaces (net) are at various stages of the planning process, either being reviewed by Dublin City Council or on appeal to An Bord Pleanála.
Wesley Rothwell, Executive Director in the Development team at CBRE who has been involved in several student accommodation projects, comments “Investors are particularly attracted to the sector by virtue of the fact that student housing has remained remarkably resilient throughout market downturns as it is not subject to the same cyclical variances experienced by other mainstream investment options. Demand for education, and in turn, student accommodation, tends to remain relatively stable regardless of the economic backdrop and in some cases the demand for education increases at times of weak economic activity as students focus on improving their chances of securing employment. PBSA offers the potential for reliable, secure, income-generation, particularly where schemes are of a high quality and well-located. However, PBSA is more specialist and more management-intensive than other real estate sectors and those considering investing are encouraged to engage with specialists who have experience in developing and operating PBSA in other jurisdictions”.
- Driven by a dramatic change in the demographic profile in Ireland, a hospital system that is under huge pressure and a general move towards investment in alternative sectors, there has been increased demand in investment in the healthcare sector in Ireland over recent years. This trend is only going to escalate over the coming years as the Irish population continues to age. Indeed, there was a 19% increase in the number of over 65’s in Ireland in the last intercensal period, i.e. between 2011 and 2016.
- 13% of the Irish population is now classified as dependent – an increase of 36% within the last decade – and this is expected to increase to 16% by 2026, which is encouraging investors to focus on the healthcare sector.
- As is the case with all specialist sectors, investment in healthcare offers the attraction of higher yields than more traditional real estate sectors and as a result there has been a notable increase in investors and developers who are focusing specifically on this sector over recent years. As has been witnessed in other more mature markets such as the US and the UK, the healthcare sector tends to be particularly attractive to more sophisticated long-term capital and investors who have experience in this specialist sector in other jurisdictions
According to Cormac Megannety who heads up CBRE’s specialist Healthcare division, there has been a particular interest from investors in developing primary care facilities and nursing homes in the Irish market, both in terms of acquiring existing facilities and developing new accommodation, which is not surprising considering the demographic profile.
Dr William Hynes, Managing Director at FAC, who, together with his colleagues, provided comprehensive analysis on likely future supply and demand in each of the three sectors analysed within this report said, “This report explores some very interesting themes. By marrying our data and analysis on supply and demand with CBRE’s unrivalled international expertise on these specialist investment sectors, we have created a comprehensive report exploring sectors and themes that are likely to become increasingly topical in an Irish context over the coming years. As is evidenced within the report, there are significant investor opportunities within the three identified alternative sectors, which will also act as a significant catalyst is delivering much required provision within the sectors”
Read the full report HERE