Cost Rental: Viability, scaling up, and getting the right mix

Now that a number of cost rental schemes have reached completion, partner and Head of Housing in Beauchamps LLP, Fidelma McManus, and partner, Conor McEvoy, consider factors influencing the viability of the cost rental model, how we can scale up delivery with the aid of this new tenure and the importance of delivering true mixed tenure housing developments.

The cost rental model

The Affordable Housing Act 2021 (the Act) introduced a variety of measures to make the delivery of housing more affordable. Among these new measures was the introduction of the cost rental model, a new form of tenure in Ireland to provide secure, long-term rental properties at below-market rents (25 per cent below market equivalents). Under the cost rental model, rents for homes are set to cover only the cost of financing, building, managing, and maintaining the homes, with the tenants getting security of tenure by entering into long-term leases. Cost rental is aimed at those who earn above the threshold to qualify for social housing supports but who cannot afford to buy or rent on the open market.

Subsequent to the introduction of the Act, the Government published its Housing for All plan which commits to the delivery of 18,000 cost rental homes by local authorities, approved housing bodies (AHBs), and the Land Development Agency (LDA) between now and 2030.

The introduction of a new form of tenure by the Government is quite unusual and was a bold step when considering that other EU member states tend to follow traditional paths for housing delivery and stick to them. This model was inspired by the success of equivalent cost rental models in delivering affordable housing in other European countries like Austria, Denmark and the Netherlands, and seeks to draw from those examples.

Viability: Will challenges with costs as well as constraints in cost rental eligibility thwart efforts to scale up?

Now that the first cost rental schemes have been delivered and are operational, this allows us to assess (1) the viability of the model to date, (2) the ability to scale up delivery by the parties responsible, being local authorities, AHBs, and the LDA and (3) the attractiveness of this to homebuilders as major stakeholders in delivery. For cost rental to be a success, significant upfront public investment is required. The correct combination of upfront funding and ongoing income flow is required to provide for appropriate long-term housing management. The omnipresent issues around viability (including costs of construction and funding, and challenges with planning and infrastructure), as well as constraints in cost rental eligibility continue to impact delivery at scale. Accordingly, the model needs regular periodic review to ensure it is ‘fit for purpose’ and that market changes can continually be accounted for.

In terms of the public investment made available so far, Budget 2022 allocated €70 million to the Cost Rental Equity Loan (CREL) scheme for cost rental delivery by AHBs in 2022, and the Affordable Housing Fund (AHF) will also be a key lever for local authorities in delivering many of the 18,000 cost rental homes targeted between now and 2030.

AHBs must consider their ability to deliver cost rental at scale and it is likely that more funding will need to be made available to ensure the long-term viability of the model. Where AHBs, as not-for-profit charities, are being asked to take on more market risk in the absence of any state-backed security of repayment, and are required to maintain reductions from market rent, could it curb their appetite to deliver cost rental at scale? Perhaps if the model is revisited (as expected) due to the lifting of the eviction ban, this long-term concern could also be re-considered.

How are Cost Rental units funded?

The funding models differ according to whether local authorities, AHBs, or the LDA are delivering the scheme.

Local authority

Local authorities can apply for AHF funding to cover the cost of delivering – either building or buying – cost rental homes themselves, or through a third-party on their behalf. The AHF provides government funding to local authorities to assist in meeting the cost of delivery of cost rental homes.

AHBs

The Act introduced the CREL fund for cost rental tenancies pursuant to which the Government provides loans to AHBs to finance up to 45 per cent of the capital costs for new cost rental homes. The intention is that CREL funding reduces the financing costs of AHB projects and will therefore directly reduce the cost-covering rents to be charged to tenants. In addition to the CREL fund, a further €100 million of long-term commercial loans are to be made available by the Housing Finance Agency for CREL-approved projects.

LDA

The LDA is the State’s primary channel for the development of cost rental housing. In addition to its pipeline of state lands, Housing for All launched the LDA’s Project Tosaigh which is a market engagement initiative to unlock land with full planning permission that is not being developed by the private sector owners. Under Project Tosaigh, €1 billion in additional funding is being made available for affordable homes to accelerate delivery.

It is all in the mix

The introduction of the cost rental model allows stakeholders in the housing sector to consider, for the first time, true mixed tenure projects, which is a vital factor in delivering schemes for all: owner occupiers, affordable purchasers, social and cost-rental tenants.

Public consultation is being sought by The Housing Commission on what is the right balance between these different forms of tenure and there is no definitive answer to what true mixed tenure looks like. However, there is little doubt that a choice and range of tenures is important for social inclusion purposes and the overall betterment of society, and that the model must also be effective for all stakeholders collaborating to deliver it. Noting that whilst we have an established model for the delivery of social homes, introducing a government funded model for the delivery of cost rental homes will hopefully add further balance to enable the delivery of true mixed tenure schemes but further tweaks to funding the model for AHBs may be required to ensure significant scale.

It is clear that balancing the different forms of tenure with the associated funding risks for each will be an important factor in ensuring the long-term viability and attractiveness of the cost rental model for AHBs but also the LDA, local authorities, and the homebuilders, so getting this mix right can only assist the ability to scale up and deliver more homes including cost rental.

Conclusion

Given that we are at the beginning of Ireland’s cost rental journey and considering the ongoing need to react to external market challenges, questions as to the long-term viability and related challenges remain. However, with continued commitment from the public purse, the hope and expectation is that this new form of tenure can and will continue to be a powerful weapon in our arsenal, unlocking the delivery of true mixed-tenure housing developments at scale.

T: 01 418 0625 / 01 418 0644
E: f.mcmanus@beauchamps.ie / c.mcevoy@beauchamps.ie
W: www.beauchamps.ie