Should Private Finance Play Any Part in the Roll Out of Cost-Rental Homes in Ireland?

In February, government officials met via Zoom with representatives of one of Europe’s biggest landlords to talk, among other things, about Ireland’s plans for “cost-rental” housing, a model for homes that proponents hope will be more affordable and stable than market rentals.

A spokesperson for the landlord, Vonovia, which is headquartered in Germany, said by email later that it doesn’t have any plans at the moment to invest in housing in Ireland.

It “frequently speaks to various interested parties and stakeholders, including public policy makers, in various European countries”, said the spokesperson.

They didn’t address a query as to why the company hadn’t logged the February meeting with the Irish Standards in Public Office Commission’s register of lobbying.

Officials from the Department of Housing, Land Development Agency (LDA), and Housing Agency were all at the meeting, according to the documents released under the Freedom of Information (FOI) Act.

However, government officials didn’t take minutes of the meeting, said the FOI response.

There was an agenda for the meeting, though, and among the items on it was the government’s draft Affordable Housing Bill, which covers for the first time a national cost-rental housing scheme.

A current point of contention is that the draft bill leaves it open for private developers and investors to get involved.

A spokesperson for the Department of Housing said that it intends cost-rental housing to be provided mostly by the LDA, councils, and approved housing bodies (AHBs) and funded at first by the state and “state-backed debt”.

But longer-term, a more expansive concept needs to be considered, said the department spokesperson. “Such as that delivered elsewhere in Europe. This would be one that is not solely reliant on public funding and capacity.”

Opposition politicians say they worry that the draft bill twists the idea of cost-rental housing to meet the needs of private developers and investors, so that some provisions undermine the model’s long-term benefits.

Concerns include the possible knock-on effects of allowing providers to reap limited profits, and the fact that lower-rent cost-rental homes – even those built on public land – could switch to higher market-rent homes after a time.

Profit for Who?

The idea of cost-rental housing is that the rents charged cover the cost of building and maintaining the homes, with the financing stretched out to make rents as affordable as possible.

In other words, the rents aren’t tied to the market and so should be more manageable for squeezed middle-income renters.

The definition of costs in the draft bill captures that, but costs can also include “limited equity returns”, it says. The government has suggested that these would be somewhere between 3.5 and 5 percent a year.

Answers as to why these limited returns, or profits, would be allowed, and the possible effects of allowing them, depend on who you ask.

“What we’re trying to do is encourage, attract and support, ethical sustainable investment in it. We don’t want speculative investment,” says Mary Fitzpatrick, the Fianna Fáil senator and party spokesperson on housing.

“That essentially keeps big-profit fund people from coming in,” says Francis Noel Duffy, Green Party TD and housing spokesperson.

Duffy points to the Austrian system of cost-rental, which also allows limited profits in that range, which are recycled by the country’s “limited-profit housing associations” back into building more cost-rental homes.

“It isn’t profit for their pocket, it’s profit to reinvest,” he says.

Here in Ireland, approved housing bodies – housing charities that build and manage social housing for the state now, and plan to do the same with cost-rental in the future – could use it the same way, he says.

That said, if private players do want to come in and build cost-rental housing at lower-than-market rents, it’s great, says Duffy. “Why would you stop them?”

A spokesperson for the Department of Housing said that the state needs to be open to ethical investors looking for moderate returns, given the need to deliver cost-rental at scale and have a knock-on impact on rents across the sector.

Limited equity returns may attract non-state investors with a long-term view, they said. “Like pension funds providing for the retirement of workers and specialist investors with an emphasis on environmental, social and corporate governance factors.”

Eoin Ó Broin, the Sinn Féin housing spokesperson, says cost-rental should be developed by not-for-profits, rather than for-profit equity investors.

Adding profit will push up the rents, he says. “Because if there’s extra cost of development, there’s extra costs to be repaid back.”

Allowing for profit also affects how much money can be recycled into future cost-rental homes, he says.

Once the cost of building the home has been paid off, if the surplus goes to a not-for-profit or the council, it can put that money into, say, maintaining homes or building new homes or community facilities, says Ó Broin.

Bringing in equity investors means it doesn’t make a difference that the loans have been paid down, he says. “Because the equity investor is still taking the yield.”

Ó Broin says he’s not against private investors lending to AHBs to build if terms are competitive. But they shouldn’t hold equity, he says – in other words, own or part-own the homes.

Fitzpatrick, the Fianna Fáil senator, says she thinks an equity investment is better than debt. “My view is that you’ll get more quality sustainable investments if… if they have an equity stake.”

The private investor will have skin in the game, she says, and “care a bit more, and want it to be more successful”.

Michelle Norris, director of the Geary Institute for Public Policy at University College Dublin, says the small profit allowed to housing associations in Austria isn’t the same as what would be understood as “profit” by the private sector.

It isn’t extracted and paid out as a dividend to shareholders, Norris says.

“It is used to build up the housing association’s reserves (ie. savings), and Austrian housing associations are legally obliged to reinvest these reserves in the provision of new housing,” she says.

How Long For?

Earlier this month, as the draft Affordable Housing Bill was debated in the Seanad, independent Senator Alice-Mary Higgins raised another issue that she, and others, say would undermine a long-term benefit of cost-rental homes.

Cost-rental homes wouldn’t have to stay cost rental forever. Just for a minimum period, the draft bill says.

A spokesperson for the Department of Housing said that the minimum period will be based on how long it takes to pay off the capital costs of building the homes, and will be at least 40 years. “But it may be considerably longer.”

The 40-year cut-off “is envisaged only in cases where there is no public investment, no State-backed lending, and no public subsidy”, they said.

“Any project which receives public support will require a very long commitment to the sector, which will be set out in the funding agreement,” they said.

But if a private provider wants to offer cost-rental homes independently and comply with the restrictions, they said, in that case “a commitment to the sector of at least 40 years is to be welcomed”.

The legislation is broad so as to cover all cost-rental homes, regardless of whether the state has helped to develop them or not, they said.

Higgins, the independent senator, says cost-rental homes should be cost-rental forever and that should be clear in the bill.

Saying that it is envisaged, or the intention, that they’ll be cost-rental in perpetuity is ambiguous, she says. “There’s nothing in the bill about that.”

She’s concerned with how that get-out clause would overlap with use of public land as a subsidy, she says.

It raises the possibility that private developers could build cost-rental homes on public land, which would later convert back to market-rate homes.

That would echo social-leasing schemes, she says, in the sense that the state would contribute and the private player ends up with the asset at the end.

Under such schemes, councils and AHBs can sign long-term leases of up to 25 years for privately built homes and pay to use them as social housing. When the lease is up, it may not be renewed, and the homes are still owned by the landlord.

“If public land is made available for the purposes of cost-rental, I believe that that should revert to public ownership after the period of time,” said Higgins.

Even if those homes or land aren’t needed for cost-rental homes in 100 years time, maybe the land is needed for something else – a hospital, energy needs, or childcare spaces, she says. “We need to plan for future generations.”

The time limits are problematic, said Ann-Marie O’Reilly, policy officer with the housing charity Threshold in an email. “Particularly if private investors invest in cost-rental.”

Long-term tenants will pay off the cost of the building but no further tenants can benefit from lower rents or investing rent in further cost-rental, she says.

“Cost-rental is at its most effective when done over an extended period of time and across multiple sites. Building in this revocation undermines the cost-rental project,” she said.

It also raises questions about the impact on tenants, who may have lived there for decades, at the time of revocation. “Will they then be charged a market rent? Will they face eviction?”

Duffy, the Green Party housing spokesperson, says he thinks a cost-rental home should stay cost-rental until it’s knocked down.

The minimum period is something he’ll be trying to get changed, he says. “That doesn’t mean we’ll get what we want.”

In the Seanad on 18 June, Peter Burke, the Fine Gael minister of state for local government and planning, said that the current policy of requiring the homes on public land or with state subsidies be cost-rental for a long period was best.

“This would, in practice, equate to their retention within the sector in perpetuity for the functional lifespan of the homes,” he said.

Expecting all properties built on public land to return to the state when they stop being designated as cost-rental would be disproportionate, said Burke.

It would put off AHBs from accessing state lands, he said, as they would have been responsible for all the construction costs and maintenance “with the exclusion of any land cost being passed on as a benefit to the tenants in correspondingly lower rents”.

“The State may have made no additional financial contribution to the development of the homes bar the initial access to the land,” he said.

The Irish Council for Social Housing didn’t respond to queries as to whether it would put off AHBs building cost rental.

Among the discussion points on the agenda for the February meeting between government officials, the LDA, and Vonovia was: “Where are infrastructure and sites readily available to ensure a largescale building of suburban cost rental apartments?”

But a spokesperson for the LDA said “We have no current plans to develop projects with Vonovia in Ireland.”

In April, the National Economic and Social Council (NESC) said in a policy paper that: “If public land is provided to a nongovernment body for cost-rental accommodation, it should be leased to ensure its permanent allocation to cost rental.”

Reilly, the policy officer with Threshold, said there should be a covenant in the legislation which ensures any cost rental homes which got state support have to be cost-rental for 999 years.

Would There Even Be Interest?

On top of the debate around whether private investors should play a role in rolling out cost-rental housing in Ireland, there’s another debate around whether they’d be interested in developing and owning cost-rental, based on the terms on the table.

In Austria, the small package of subsidies given to those providing cost-rental homes is put out to tender, says Norris, the UCD professor, and “the housing associations and private developers can both bid for them”.

So there is private provision of cost-rental housing, she says. “But the dwellings have to be let at cost rents and also delivered for below a specified price so to my knowledge the take-up of this is low.”

Pat Farrell, the CEO of Irish Institutional Property, which represents big company landlords, said there isn’t enough detail available yet to comment on whether private providers would be interested in cost-rental.

Higgins, the independent senator, says there would be a predictable return, guaranteed tenants if rates are below market rents, and an asset at the end to sell.

She thinks that between 3.5 to 5 percent annual returns would be attractive. “That is a very substantial return, you would not get that from any bank.”

Even with that limited profit though, Fiona Cormican, the new business director at the AHB Clúid Housing, says she can’t see how private investors would make the sums add up, developing homes and renting them at below market rates – and without the same kind of government-backing that social homes get.

“I cannot see investors being keen on lending to that market, certainly not until they see for a few couple of years to see how the first ones go,” she says.

State or Private, and How?

Cian O’Callaghan, the Social Democrats TD and housing spokesperson, says the state should borrow more to fund cost-rental homes itself, rather than trying to tempt private investors to do it.

He pointed to a recent ESRI report, which said the government should double its investment on housing from €2 billion to €4 billion a year. “You could be using a proportion of that for cost-rental.”

Higgins, the independent senator, says the same and points to the same report.“The signals have been very clear that financing is available.”

Norris, the UCD professor, says that government capital investment in social and cost-rental housing does need to increase.

But there are limits to how much it can increase, and competition for that investment with other vital public services such as transport, health and education, she says.

In other words, the government has to spread its spending around and there’s a risk housing could miss out.

“One of the challenges with paying for housing is that all the capital costs have to be paid for up front when it is being built or bought,” says Norris.

That’s why Western European countries with large social and cost-rental sectors have not funded them entirely with public loans or grants, she says.

“In Austria for instance 40–60 percent of the capital costs of cost-rental housing provision comes from bank borrowings,” she says.

It is likely that private finance is needed to reach the scale of provision required, she says, but she also stresses there’s a difference between investors owning or part-owning the cost-rental homes, and them just lending money to fund their construction.

“I am not a supporter of the former,” she says, as the best way to provide cost-rental housing is non-profit delivery by an AHB, local authority or state agency which ensures rents are as low as possible and the homes remain cost-rented over the long term.

But if properly managed, private finance has a role in funding more cost-rental provision, she says. “By properly managed I mean regulated in terms of interest rates charged, terms of loans etc.”

That said, there’s a bigger challenge than accessing private finance, says Norris, and that is keeping any private financing off the government’s balance sheet.

That was a central consideration in one of the government’s past abandoned attempts to draw up an affordable rental scheme. One of the touted benefits of social leasing has also been that it is off-balance sheet.

Under EU rules, there are limits to how much debt the government can carry on its balance sheet, relative to GDP, and how big a deficit it can run up.

No matter where a council or AHB borrows from, it is on-balance-sheet, says Norris. “Because they are all public bodies.”

“So they would have to set up subsidiaries to manage their cost-rental housing to keep private debt finance off balance sheet,” she says.

That may sound complex but other parts of Europe do it, she says. Vienna City Council hasn’t built any housing since 2004, she says.

“All of its housing has been delivered by a housing association it set up to keep its borrowings off balance sheet,” said Norris.

Higgins, the independent senator, says she doesn’t see the European Union’s fiscal rules, which have been suspended during Covid, coming back in the same form.

“Because there has been a wide realization across institutions of the need for public investment and the need for stimulus,” she says.

“We have a large amount of money available to us at 0 percent financing,” she says, so “we are not required to do this in a complicated off-balance-sheet way”.