Irish Housing Minister: We need Private Equity

The private equity industry has wreaked havoc on everything it touches; why does Ireland's housing minister want to get the industry involved in housing provision?

In a recent interview with the Sunday Independent, the newly appointed housing minister James Browne mentioned that one of his key priorities is to get the private market back involved in the provision of housing to address supposed supply shortfalls.

Journalist Niamh Horan asked the barrister turned Minister with a remit for the most important issue facing the country about rental caps known as Rent Pressure Zones (RPZs), in which rents are capped at 2pc or inflation in specified local areas. While expressing concern about the lack of new rental apartments in Dublin City Centre, the minister mentioned that in order to ramp up the supply of apartments in the city private equity would have to be explored as a funding source.

“I’m also conscious of people who can’t get anywhere to rent and supply has completely dried up, particularly in Dublin, in terms of new rental apartments.

“So we need balance to ensure renters are protected but that we can get supply going again. We have to get private equity back in (my emphasis). That’s the key to it.”

But what is private equity and will it solve the housing crisis?

In short, private equity involves private companies that gather investors’ money to look for something to invest in that is usually not publicly traded. These investors can range but pension funds are the most popular income stream due to the high returns generated. Private equity also uses a little bit of their own money but the majority of funding is a lot of borrowed cash to buy up companies meaning they are highly leveraged. In private equity parlance that usually entails a leveraged buyout or an LBO for short. They then make financial and operational changes to the purchased companies to sell for a profit. Once the asset or company they invest in has been sold a steady stream of income and profits flow as a result.

If you are a bit confused as to why Minister Browne feels this investment strategy is appropriate for the provision of an essential public service such as housing you are not the only one.

Ever since the financial crash of 2008, the Irish State has crippled the ability of the domestic banks to lend credit to fund construction activities and has made it harder for ordinary borrowers to get on the property ladder. In the former’s case, this was due in the short term from bad loans on the bank’s balance sheets mainly from reckless lending during the Celtic Tiger, and in the long term from onerous legacy regulations from the European Union (EU) which compel Irish banks to hold much more capital ratios than other European lenders. Several reports from the Construction Industry Federation of Ireland, including in 2017 and 2021, have indicated that the industry is finding it difficult to access finance for the delivery of homes. For potential borrowers, deposit requirements ranging from 10-20% of the total value of a home along with loan to income constraints meaning buyers can only borrow a maximum of 4 times gross income for the first time and 3.5 times if they are a second time buyer, makes getting on the property-owning ladder a pipe dream. According to the Irish Central Bank under their so-called Macroprudential Rules: “A first-time buyer couple with a combined income of €100,000 can borrow up to a maximum of €400,000.”

According to analysis by KBC, the price of new homes being bought by first-time buyers has doubled from about €200,000 to €380,000 since 2012 which requires buyers to need an income of €98,000 for a 90% mortgage with two-thirds of Irish households having an income of less than €60,000. Unfortunately, only 14% have an income above €100,000.

Since 2013, house prices have risen by €200,000prices are now above the Celtic Tiger peak with the average price nationally at a whopping €327,500. According to the Irish Independent: “At the end of the year (2023) prices were 103.9pc of the 2007 peak and the highest on record (my emphasis). Increases last year were higher outside Dublin, up 5.7pc, compared to 2.7pc in the capital.”

But how have prices risen exponentially given the flurry of post-crash regulations imposed on banks preventing them from lending and individuals preventing them from buying?

Following the crash, the Irish government was desperate to recapitalise Irish property following their sudden plunge. This involved coordinating with various private equity companies to encourage them to invest in Irish assets and recover falling assets in commercial and residential property.

These companies vary from Apollo Global Management to Cerberus. The Minister for Finance Michael Noonan, dubbed ‘vulture’ lover, met with these entities on 14 different occasions while devoting little to no time meeting with mortgage advocacy groups.

The establishment of the National Asset Management Agency (NAMA) saw all the ‘bad loans’, those non-performing due to a failure by borrowers to repay loans, worth €70bn transferred into the state-backed bad bank.

Further pressure was heaped on Ireland by the European Bank Authority (EBA) to dispose of so-called bad loans by broadening what constituted such a loan.

From 2014-16, NAMA sold over €50bn worth of distressed loans to investment funds. Irish loans accounted for over one-third of all distressed loan sales in Europe in both 2013 and 2014 with Dublin at the epicentre of these transactions. According to the United Nations (UN), over 90pc of these loans were sold to US hedge funds, private equity and/or vulture funds.

Leading financial firms bought these properties when they were cheap, taking advantage of the tax-free incentives offered by the Irish State. NAMA’s role was to package these distressed loans into multimillion-dollar portfolios containing a mixture of commercial, residential and retail, to sell to investors.

Many of these private equity vehicles set up what are known as Special Purpose Vehicles (SPVs) to warehouse these loans in the International Financial Services Centre (IFSC) and declare ‘charity status’ meaning they were exempt from capital gains tax and VAT.

The IFSC

Far from reforming the hitherto Wild West of European property lending profligacy, post-crash measures to stabilise the banking sector and raise house prices have turned Ireland into the fourth largest shadow banking location in the world with private credit flooding the market.

This has spelt havoc for homeowners whose loans were sold by NAMA to private equity vehicles.

Take the case of an apartment block in Sandyford sold to Cerberus in 2016. Titled Project Gem, shortly after the sale to the vulture fund Cerberus started to evict several tenants while deploying debilitating tactics to remove the remaining tenants. This involved forcing them to pay over €200 per month to their existing costs in heating and hot water charges - a 20% surcharge.

These tactics are part and parcel of why private equity gets involved in the housing market. They view housing as an asset that generates high returns, thus they either leave properties vacant and speculate on high prices further down the line or evict existing tenants and wait for higher-paying ones.

Take another example of a housing estate in Maynooth. In May 2021 the US investment fund with offices in London Round Hill Capital bulk purchased most of an 170-home estate that was meant for first-time buyers. The homes were not only designated for first-time buyers but also, in conjunction with the affordable housing body Tuath, for those on a social housing waiting list. Instead, the estate would be a source of favourable rental yield for the fund.

The week before the purchase was announced, the same group purchased an estate in Hollystown Dublin 15. The foreign fund bragged about the return on investment on their website stating that this was, “further evidence of the strong appeal of the Irish build-to-rent sector for institutional capital, attracted by its resilient, long-term yields.”

Internationally, private equity has spelt devastation for the industries and companies it has invested in.

A more recent example is the impact it had on the California wildfires that burned out the Palisades and Eaton neighbourhoods. According to the Chief of the Los Angeles Fire Department Kristin Crowley, nearly half - 100 out of 183 - of the force’s fire trucks were out of service amid the devastation. Why? Private equity massively inflated the cost of fire trucks from $300,000–$900,000 to up to $1m for pumpers and $2m for ladder trucks. Private equity also caused the cost of producing and delivering a fire truck from less than a year to between 2-4 years.

The private equity firm American Industrial Partners (AIP) purchased multiple fire truck manufacturers controlling two-thirds of annual US fire truck sales and placed them into one single conglomerate named the REV Group which led to less competition exacerbating supply bottlenecks. As such, municipal fire departments found that they had to allocate “disproportionate resources to vehicle procurement, leaving less funding for recruitment, firefighter salaries and other critical needs.”

According to Marc Wells: “The societal need for functional emergency vehicles clashes with the financial interests of private equity.”

When the private equity firm the Carlyle Group purchased the Manor Care nursing homes for $6bn they managed to hollow it out. Several reports of health-code violations and negligent care towards the nursing home patients with several staff laid off emerged following extensive reporting from The Washington Post. Following the sale to the private equity company, that owned the series of nursing homes since 2007, in 2011, the number of violations went from over 1,500 in 2013 to almost 2,000 in 2017 - an increase of over a fifth.

The violations started after investors engaged in a sale-leaseback agreement which saw them recover the $1.3bn in equity they put into the original purchase in 2007. This meant Manor Care had to foot the bill to pay for property taxes, insurance, and general upkeep.

Indeed, according to the Washington Post, the company’s financial obligations rose from less than $1bn to over $5bn during the buyout by Carlyle, with ManorCare’s rent for the nursing homes rising by 3.5% at over $400m annually.

According to the CEO of Welltower Real Estate Investment Trust (REIT) Tom DeRosa, who purchased Manor Care from the non-profit ProMedica: “Because of the leverage that private equity firms who owned these businesses put on these businesses, the operations became unsustainable”.

If the Minister for Housing wishes to get these types of entities further involved in the provision of homes then he should resign.

Haven’t they done enough damage?