IN RECENT MONTHS the phrase ‘cuckoo funds’ has been used increasingly in conversations around Ireland’s housing crisis.

A number of politicians have criticised the growing presence of these funds as they buy up rental properties, but some market experts have said they could actually be part of the wider solution.

The official term for them is Private Rented Sector (PRS) funds and they are backed by institutional investors like pension funds. The first investments in Ireland started around 2013 and this has grown to €1.1 billion invested in almost 3,000 units last year.

According to a report this year from Savills, between 2012 and 2018, block purchasers bought 9,291 units in the capital – 8.1% of all the residential properties that have been purchased.

This report noted the ‘block sale’ route has become an attractive option for developers as it removes risk and provides a quicker return on capital. This has led to some build-to-sell schemes being entirely bought-out by PRS investors during the construction phase.

Examples include Fernbank in Churchtown Dublin 14, a 262-unit scheme initially being built by Park Developments for individual unit resale, but which was bought-out by Irish Life Investment Managers for €138.5 million.

Another example is 6 Hanover Quay, a scheme of 120 units in Dublin 2 that started out on a build-to-sell basis, but which was sold as a block by Cairn PLC to Angelo Gordon.

Under new apartment design standards introduced in March last year, developers who opt for PRS-specific planning designation can benefit from  flexibility on internal storage, unit sizes, unit mix and minimum car parking provision.

There are also obligations attached to these developments, including a clause to ensure the block will remain owned by a single institutional entity for at least 15 years. 

The critisicm

In April, Fianna Fáil housing spokesperson Daragh O’Brien accused the funds of “gobbling” up properties and squeezing first-time buyers out of the housing market. 

This perception of the funds is where the ‘cuckoo’ name comes from, as they are compared to the birds that push the others’ eggs out of their nests and move in.

O’Brien has said the government needs to urgently review the tax treatment of the funds as many are effectively operating tax-free while charging high levels of rent.

He said this is driving up rents as well as taking the properties out of the market, meaning first-time buyers are not getting a look in. 

Terry Mason, Director of Housing Hand, told TheJournal.ie there is an increasingly difficult landscape for first-time buyers, including the tighter regulation of mortgages, the need for higher deposits and “rocketing” houses. 

“Cuckoo funds have contributed to the later. The situation has pushed more people into renting property- and renting it for longer – before they buy, so is impacting on the country’s rental market as well.”

Tánaiste Simon Coveney has accepted the government needs to watch this activity “more closely”, but he also said this institutional investment is adding to the overall supply as it is funding stock that has not been built yet. 

In defence of cuckoos

Ronan Lyons, assistant professor at Trinity College, has also defended these funds. In a recent report he wrote for Daft.ie, he said the solution to the shortage of rental property, particularly in Dublin, will involve large-scale developments backed by international investors. 

He said the level of supply needed for rents to remain static is about 13,000 per quarter, or 1,000 per week. Currently, the Dublin market is getting half that – about 500 per week.

“To close that gap, Dublin needs to build tens of thousands more rental homes. How many depends on how frequently these change tenants. Suppose the average tenancy last three years, which is somewhat shorter than is currently the case (and thus lowering the total number of homes needed).

In that case, Dublin would need to build an extra 500 rental homes to come on the market each week for those full three years, to close the gap between the 500 that are coming on and the 500 that are needed. That’s almost 80,000 rental homes that Dublin needs to build, as soon as possible.

The solution, according to Lyons, is going to involve new purpose-built rental supply, made by professional developers and backed by long-term international capital.

“Firms that do this are hardly cuckoos, pushing us out of our nests. They are swallows, each one bringing us closer to a summer,” he said.