Ireland’s newly appointed Housing Minister, Darragh O’Brien, has recently declared the new Government’s intentions to ramp up the delivery of social and affordable housing, with an emphasis on new-builds. In fact, he aims to increase the social housing stock by 50,000! We all agree achieving this number would be welcomed and, frankly, is long overdue.
Social housing guidelines for local authorities (“LA’s”) and Approved Housing Bodies (“AHB’s”) were always geared towards acquiring old stock or constructing new stock. The LA/AHB would then own the property outright. However, there is a third option which is becoming more popular in the market and which can assist in reaching these delivery targets. Through the introduction and promotion of (a) the Build to Rent model and (b) a range of funding mechanisms and options for LA’s and AHBs for the delivery of social housing under Rebuilding Ireland, there are real instances where it is more practicable, or it may better serve the overall objectives of the Housing Strategy, to enter into leasing agreements for social houses. The two main forms of letting concepts being adopted are the “standard lease” and the “enhanced lease”:
The Standard Lease
The standard long-term lease of units to an LA/AHB is up to 25 years in tenure in exchange for a rent set initially at a proportion of the Open Market Rent – typically at up to 80/85%. The criteria for the type of property to be used is very broad in that it must be of good quality and condition but can be a stand-alone property and it does not need to be a new-build. The Standard Lease is essentially a simplified residential lease with the developer becoming the landlord and the LA/AHB assuming the obligations of the tenant. The rent is paid monthly to the landlord by the LA/AHB (reviewed every 3 years to CPI) and all rental payments and outgoings are guaranteed by the LA/AHB by for the duration of the term of the lease (irrespective of whether there are voids in occupancy). The developer landlord can be rather “hands off” during the term of the Standard Lease and all internal maintenance of the property is the responsibility of the LA/AHB.
There is no contractual relationship between the property owner and the social housing occupant. If a tap leaks or the heating system fails, the occupier of the unit liaisies directly with the LA/AHB, not the developer landlord, and the LA/AHB is responsible for any internal repairs. In essence, save for the property owner’s obligation to insure the building, all of the day-to-day management relating to the occupant of the property lies with the LA/AHB.
The Standard Lease is an attractive concept for a developer/investor as it is guaranteed a rental income over a set period and there are very little obligations attributed to it. The natural downside of this option however is the cap on rental income (typically 85% of Open Market Rent).
The Enhanced Lease
The Enhanced Lease scheme was introduced in 2018, and unlike the Standard Lease, is property specific. The scheme targets private sector investors holding tranches of a minimum of 20 houses or apartments (“Units”), the purpose of which is to encourage the construction of new stock. Proposers may only put forward newly built Units or those yet to be built (but have the benefit of planning), and which have not been leased or rented within the previous 12 months. The Units must be contained either in one development or dispersed within the local authority area. It is important to note that the scheme does not remove / waive a proposer’s obligations under Part V of the Planning and Development Act 2000 (as amended).
Just like the Standard Lease, the tenant under the enhanced lease is the LA/AHB and the term is on a long-term basis of up to 25 years (break options are not permitted); however, the rents received are higher than those of the Standard Lease (around 95% of the open market value). The increased rent under the Enhanced Lease reflects the additional requirements to be performed by the property owner, including but not limited to, the maintenance of the property including onerous response maintenance to address issues with the Property as and when they arise. Prior to the Enhanced Lease being executed, the property owner must provide details of the management structure that will be in place to manage and maintain their properties in line with the terms of the enhanced lease for the duration of the lease.
There are three different Maintenance Services Response categories:
Immediate– 24-hour response - required to ensure continued safe occupation or to prevent significant damage to property e.g. a leak;
Responsive– 5-day response - required to ensure continued comfortable occupation and full use of the property e.g. broken boiler; and
Periodic– 15 working days response – deals with issues other than the above to ensure continued comfortable occupation of the property.
The Enhanced Lease is a performance-based contract where, If the management services are not performed in the timelines set out above, the LA/AHB are entitled to apply penalties at a proportion of the monthly rent for the property, capped at a maximum of 12.5%. These potential penalties / rental uncertainties across a 25-year term can often be unattractive to funders. Separately, it is our experience that LAs/AHBs insist on third-party independent property managers to carry out the maintenance service response function, the cost of which (together with the cost of the actual repairs) can quickly start eating into the extra 10% rent achieved under the Enhanced Lease.
An additional and unique aspect of the Enhanced Lease is the repair obligation. The Standard Lease sees the LA/AHB having the full obligation for interior repairs in the Unit. However, under the terms of the Enhanced Lease, the LA/ AHB is liable for a contribution only (capped at 50%) towards any repair costs incurred by the property owner for damage caused wilfully or intentionally by a Unit occupier (i.e. the occupant of the social housing Unit). Furthermore, the repair costs must exceed a "Qualifying Threshold" calculated as a percentage of annual rent before the LA/ AHB is obliged to contribute. The LAs/ AHBs promote this as a risk sharing relationship.
The main attractions for a developer/investor of opting for the Enhanced Lease scheme are (a) the 95% Open Market Rents achieved and (b) the government covenant strength; however, the availability of the scheme is limited to those investors who can deliver stock at reasonable scale. The maintenance service requirements can also be onerous and failure to comply with the obligations can result in rent reductions across the term.
To Enhance or not to Enhance – that is the question
The social housing letting option is set to explode in the next 24 months. Approximately 1,000 social housing lease arrangements were exchanged in 2019 but the new Government has set a target of 6,000 over the next 2 years. Affordability for LA/AHBs is a real struggle at present. In larger Irish cities, the cost of development and house prices has sky-rocketed. You must remember the LA/AHB does not receive the properties for free from the developer!
Prices in Dublin alone have risen by 25% in the last 5 years. Take 6 Hanover Quay, Dublin 2 as a real example of where a letting option was more beneficial to the LA than an outright acquisition of the Part V apartments. The average cost of an apartment in 6 Hanover Quay was €800,000 so if DCC elected to acquire 10% of these units under its Part V rights, you would have to ask if this would be money well spent? Almost €10m in one expense to only house 12 families! Hence, we are seeing the alternative approach to social housing in the form of lease agreements.
A further benefit to the leasing option is the investment opportunities from international and domestic private investors. CBRE has recently reported that investors are keen to acquire residential units and schemes let to local authorities on long-term leases. This is “in line with trends elsewhere in Europe and the UK, where the investment market for public housing is well established, and institutional capital, pension funds, private equity and other specialist investors regularly invest in public housing provision”. This is an area that can benefit greatly from an injection of more capital. Now begs the question, will the investor prefer the Standard Lease or the Enhanced Lease? We would argue that a hybrid of the two formats is potentially more beneficial for all stakeholders.
Leman Solicitors have extensive experience dealing with social housing and property matters. For more contact Gavin or Sarah on 01 6393000 or visit www.leman.ie for more.
The increased demand from investors in the sector is attributed to the “long-term secure income stream” guaranteed from a local authority or an Approved Housing Body.