Social Housing – An Investment Opportunity?

August 2021

In recent times, the Irish social housing market has been generating interest from private sector participants. Investors, home grown and abroad are keen to acquire residential units and let to local authorities on long-term leases and it is not just institutional funds that are investing in Social Housing.  For many individual investors it is considered a relatively low risk income producing asset.

We see in Europe and the UK, the investment market for social housing is well established, pension funds, private investors and other specialist investors regularly invest in this sector. This looks to continue to develop in Ireland, opening this investment option to new investors.

With Housing at crisis point – remaining top of the agenda, there is no doubt there is a big political appetite for investment in this area.  Budget 2021 saw the government’s commitment to spending €500m on social housing construction projects. The Land Development Agency intends to leverage state for the construction of 150,000 houses (including social and affordable homes) over the next 20 years using public funds and by obtaining third party finance.

While there has been a surge of interest, it is not only institutional investors funding or purchasing social housing developments to date.

 

So – What Makes Social Housing Attractive to the Private Investor?

One can argue that the Investment in Social Housing compares favourably with a private landlord model – the main reason being the security of a 20-year government lease.  It can also be considered as an ideal investment vehicle for those investors seeking a high yield at low risk. The main features attracting the private investor are:

• Security with Government backed leases 10-20-25 years terms.
• No advertising or letting fees.
• Monthly payment of rent direct to investors underwritten by Irish Government- meaning no rent arrears!
• Hands-off minimal management – meaning no Tenancy Management – the Tenancy Management becomes the responsibility of the local authority.
• No responsibility for internal maintenance and repairs or refurbishment on the part of the Investor, for the duration of the tenancy.
• No registration required with the Residential Tenancies Board (RTB).
• Rent Reviews Every 3-4 years
• Rent reviews linked to the change in the Harmonised Index of Consumer Prices (HICP) Ireland.
• Income generating asset with capital growth potential.
• Rental income can be reinvested.
• Capital Appreciation on property does not attract Capital Gains tax within a pension structure.
• No requirement to liquidate asset at retirement – can be transferred “in-specie” to ARF/AMRF.
• Owning a property in your Pension/ARF is the ideal way to preserve capital and transfer assets to your family.

With any investment one must consider the risks, what market will you be faced with when your property is returned in 20-25 years?  How much work or structural repair will be required over a longer period?

Also given the many legislative changes in the Irish rental market over the past decade regulatory certainty is also a key consideration for investors when entering a new market.

 

In Practical Terms – How Do the Tenancies Work for the Landlord?

 

Who exactly rents my property?

The property will be leased by the Local County Council, or an Approved Housing Body (AHB) underwritten by the Department of the Environment.

How long is the lease?

The lease is for a period of between 10-20-25 years as agreed between the owner and the Council/AHB.

Do I have to register with the RTB?

No.

What rent will I get?

The Council will pay 80% of the open market rent for houses and 85% for apartments where there is a management fee.

How is market rent calculated?

The Councils/AHB will use the latest Rental Report produced by Daft.ie to calculate market rent. The lease makes provision for rent reviews throughout the term of lease.

When can a rent review be conducted?

The rent is reviewed every 4 years with the option of an early rent review after 2 years.

Is the rent restricted to Rent Pressure Zones (RPZ) rules?

No, under the terms of the long term lease the rent reviews are not subject to the RPZ rules which is a significant advantage in comparison to a regular residential property investment.

How is the rent paid?

The rent is paid monthly/quarterly by electronic transfer directly from the Council/AHB into the landlord’s pension trust or bank account.

What happens if the tenants leave the property – do I still get paid?

Yes, there are no voids in rent for the duration of the lease.

Who pays the Local Property Tax (LPT)?

You as the property owner are responsible for LPT charge.

Who is responsible for the insurance of the property?  

It is the Property Owners responsibility to insure the structure of the property.

According to David Faughnan CIP of S.A. Faughnan (Brokers) Ltd., under the Residential Tenancies Act 2004 there is an onus on providers of private rented accommodation to maintain a policy of insurance to provide Property Damage and Property Owners’ Liability cover for every property/unit they let. In fact, there may be further compulsion on Property Owners to maintain even more extensive insurance cover on their rental property under the terms of either their mortgage / finance loan agreement or a lease agreement. Furthermore, it is in the Property Owners’ best interests to maintain Property Damage ‘All Risks’ insurance on their investment property, providing not only Property Damage and Property Owners’ Liability cover but also extending to ‘All Risks’ basis cover to include coverage for Loss of Rent and Liability cover for Property Repairs & Maintenance persons. They should also ensure that their Property Damage cover is maintained at a figure representing the full current reinstatement value of the property (and not a guesstimate), also that their Loss of Rent cover represents the real rental income of the property over a 12, 24 or even 36-month period allowing for rent inflation during that indemnity period.

*S.A. Faughnan (Brokers) Ltd. have the experience and expertise required and have access to willing Insurers when placing Social Housing risks, from single buy-to-let houses or apartments let to the County Council, AHB or Local Authority, to Social Housing Estates and fragmented Social Housing Property Portfolios. Social Housing risks are not within the appetite list of most insurers; therefore S.A. Faughnan Brokers have cemented long standing relationships with selected A-Rated Insurers who are willing to enter this space and adhere to the strict (insurance related) requirements of housing bodies, and at competitive pricing. S.A. Faughnan Brokers operate nationwide and are actively placing social housing risks in all County & City Council areas in Ireland.  https://www.safaughnan.ie/property-owners-insurance/single-unit-buy-to-let-residential/  or 01 824 5555.

Does the Landlord need to furnish the property?

Yes

Who is responsible for maintaining the property?

The Council/AHB takes responsibility to manage the tenancy and to manage and maintain the property.

Who cuts the grass?

The person allocated the property by the Council in the case of houses and the Management Company in the case of apartments.

Who is responsible for the structural maintenance of the property?

The landlord will be responsible for structural maintenance, structural insurance, and structural repair.

Who pays any annual management fees?

The management fees are the responsibility of the landlord.

What happens if there is Anti-social behaviour – is the landlord responsible?

The Council/AHB will have the responsibility for dealing with any anti-social behaviour.

Can I terminate the contract with the Council/AHB if I want to sell my property?

No. The property can only be sold by the property owner during the term on the condition that the lease agreement is transferred to the new owner and the local authority is notified in advance and agrees.

The landlord can agree to include an option in the lease for the Council to have “right of first refusal” to purchase the property should you decide to sell.

In what condition will the property be returned?

The property will be returned in the same condition as when the contract commenced subject to normal wear and tear.

With social housing at crisis point and a surging population this collaboration between government and the private sector may be a good fit for some.

Social Housing Investment as an opportunity? Certainly, a consideration!