Developers need more funding options to meet housing demand

This article was originally published in the Irish Times on 23 October 2024.

To build 50,000 houses a year residential developers need a more diverse capital structure.

The real estate lending market has been fluid for some years now, impacted by interest rate increases, post-pandemic behaviour changes and an increase in non-bank lenders entering the market.

Whilst last year’s EY Real Estate Borrower Outlook survey, which examines the mindset of borrowers in the lending market by surveying 50 of Ireland’s most senior real estate industry leaders, was cautious in its outlook, this year things are looking a lot more positive.

Overall there’s good news for the residential development sector, with 54 per cent of respondents believing the residential sector will experience the greatest increase in value over the next 12 months (compared with student accommodation – 28 per cent; logistics & data centres – 13 per cent; and offices – 5 per cent). More than half (51 per cent) expect to see most real estate lending activity in the development space.

However, the availability of third-party equity is causing concern, with 43 per cent of respondents saying that the greatest gap is in the availability of financing, particularly in the residential development space. We believe this third-party equity will be needed at (i) a specific housing project level for some developers; and (ii) for larger private developers at a group level, thus allowing them to have stronger balance sheets and ultimately take on larger housing projects, which will ultimately be needed to meet housing demand. Finally, having more developers with strong balance sheets should lead to more consolidation in the residential sector, which will again help in allowing the larger residential developers work on numerous housing projects concurrently.

The Central Bank has said that around 50,000 new homes need to be built every year between now and 2050, at a cost of €20 billion per year. To fulfil that construction goal there needs to be a range of capital solutions. These include not just traditional banks but non-bank lenders, long-term funders, third-party equity as discussed and government. It’s essential that all these solutions are working together to get that €20 billion a year into the marketplace.

In a lot of cases it was previously thought it was “traditional bank versus non-bank lender”, but we’re now seeing more banks working alongside non-bank lenders as they complement each other. Internationally that’s the way it works, and we’re seeing this trend work increasingly that way in Ireland.

Some believe there is a gap in bank funding, with many of our respondents not as familiar with the non-bank lending community as expected, and there seems to be a lack of understanding around the fact that non-bank lenders can work alongside banks. Over a third (33 per cent) of respondents believe the availability of capital will prove to be a potential obstacle to financing activity in the Irish market – again increasing the importance and need for banks, non-bank lenders and third-party equity providers.

The Government has been assisting in the residential development space also, a move which has been broadly welcomed by our respondents, particularly the extension of the development levy waiver. Other ways that the Government is helping is through pre-buying and pre-leasing completed homes via the county councils, approved housing bodies and the Land Development Agency. This allows many new homes to be built as it unlocks funding options, ensuring that private developers can go to a lending source with a derisked funding ask.

More generally in the real estate sector refinancing is also top of mind for respondents, with 2025 expected to be a big year, with 41 per cent seeing refinancing as an area of “most activity”. Some 30 per cent of respondents say interest expense is their first challenge, but less favourable terms (26 per cent) and reduced loan sizes due to increased capital values (21 per cent) are also significant issues. These statistics demonstrate the importance of having a plan prior to approaching your lender with your refinancing ask. Over the next 12 months under half of respondents (48 per cent) believe interest rates will continue to fall by 75 bps.

Other areas to note include the outlook for the office sector, which remains muted, with only 5 per cent of respondents expecting this asset class to experience an increase in value versus other real estate sectors.

The office market, while continuing to be nuanced, is more positive than 12 months ago, with a number of high-profile receiverships likely to bring some price discovery to the Dublin market. Improvements in interest rates and a noticeable improvement in office workers returning to the office has also helped.

While there have been several high-profile lettings recently a significant volume of new floor space will be completed over the next 12 months – further testing the market – so we and our respondents will continue to monitor the office market valuations.