The period in the aftermath of the 2008 crash has often been termed “the lost decade”, but the term is perhaps best coined to describe how the housing market in Ireland has functioned over the past 10 years.
While statistics on current housing production are continuously debated, there is no doubt that the level of house completions falls a long way short of meeting demand. The lack of production over the last 10 years has led to soaring rental prices and a shortage of accommodation to meet the needs of a growing number of Irish people. It has also resulted in strong price rises for residential units, particularly in major urban centres. As rental levels and housing prices continue to be pushed upward, they have been tempered only by Government and Central Bank intervention to date, rather than by any supply-side response.
The significant gap between supply and demand has resulted in very poor outcomes for Irish society, with tenants in particular forced to pay a very high proportion of their income on rent and the more marginalised in society struggling to hang on to a place they can call home.
One of the key inhibitors to increasing the supply of new houses is access to funding by developers. The challenge of sourcing funding is felt particularly at the level of small to medium sized firms which are seeking to develop smaller housing schemes.
On the face of it, it is hard to understand why, with such strong demand and such a weak level of supply, access to funding has remained a challenge for residential property developers.
The funding market for residential development has fundamentally changed. In the Celtic Tiger years there were at least 11 mainstream financial institutions offering funding. This level of competition resulted in very inexpensive funding and high levels of leverage, which spurred on development. It did of course also lead to an asset price bubble and severe over-exposure to the development sector by these institutions – an experience never to be repeated.
In the post-crash era, the state and the mainstream banks have put limitations on the level of debt that can support residential construction.
The pillar banks have returned to the residential development market and are providing much needed debt support. The level of funding however is limited and the clients they choose to support tend to be well capitalised and often large scale. This form of lending is of course prudent and will assist in increasing supply.
In addition NAMA is providing funding to developers whose debt falls under its control. While the level of production from these entities has fallen somewhat short of projections, they are also providing much needed supply to the market.
There has also been an entrance to the market from international funds and stock-market listed entities which have put their capital to work supporting large scale development. This is often coupled with debt provided by the pillar banks, and provides a welcome boost to supply.
Small & Medium Developers – An Opportunity for Investment
A significant gap remains in the market for small and medium development firms to access funding. At Cantor Fitzgerald we believe that this gap provides an opportunity for our retail investor clients to put their money to work in supporting capital to fund development of housing stock. We have successfully completed a number of fundraisings in the sector and will continue to bring more opportunities in residential development loan notes, to our investors.
Supporting small and medium development opportunities can provide our investors with a good return, with a strong level of under-pinning security for the risk involved. We also believe that the level of flexibility we can bring to a funding structure makes this type of financing a compelling option for developers.
It is our view that the sector will continue to provide a good opportunity for investment and we are always happy to appraise any development opportunity, to see if we can find a funding solution that represents a suitable investment opportunity for our clients.
If you are seeking development funding, contact our Corporate Finance team today on 01 633 3800 or email Glenn Bradley at firstname.lastname@example.org.
Click here to download our October Investment Journal.