AC Audio · Government announcement of changes to PRS rent controls
Video Transcription
Government announcement of changes to PRS rent controls
Deirdre Sheehan
Hello and thank you for joining us. My name is Deirdre Sheehan and I'm a partner in the Real Estate team here in Arthur Cox. I'm joined today by Dearbhla Considine, who's our real estate professional support lawyer, and Kate English, who you'll all know as chief economist in Deloitte. Last week the government announced changes to rent control measures in the PRS sector and introduced additional protections in terms of security of tenure for tenants. The focus of today's discussion will be on the impact of those changes to institutional investors, the larger landlords, as announced last week. We're conscious that there will be differences in terms of the treatment between larger and smaller landlords. But our focus is on the larger and in particular the changes and the context and the clarity that we would like to see in the legislation to come. So, before we go there, Dearbhla, can you give us a bit of a sense of what was announced last week?
Dearbhla Considine
Sure, Deirdre. So, what we have so far is the government press release, which was published on 10th June, and we do have some commentary on that as well, and we'll get into that a little bit more later on. So, the main changes that were introduced on 10th June are firstly the introduction or the expansion of RPZs or rent pressure zones to the entire country. And we'll come back to that in a minute. Also, from the 1st of March next year there will be a national system of rent control whereby rent increases for all tenancies are going to be capped by inflation, but there will also be a 2% cap in times of high inflation. The next measure is the linking of rent increases in tenancies of apartments from next year to inflation and to the consumer price index. But there isn't going to be any rent cap on top of that for tenancies of new apartments. The next one then is that all landlords will be able to reset rents between tenancies. So reset rents to market level between tenancies unless a no-fault eviction occurs. And then finally there will be increased tenant protections and increased security of tenure for tenants after the 1st of March 2026.
And what's going to be introduced is this concept of tenancies of minimum duration, which will be six-year cycles for smaller landlords and there will be restricted termination grounds for smaller landlords and for larger landlords as well. So, Kate, do you think that's a fair summary of the changes?
Kate English
I think that's a very good summary of the changes, but I might just add, I suppose why did we see these changes come through? And if we take a step back, we know that Ireland is critically under supplied when it comes to the residential market. We do not have enough either homes for purchase or for rental. And with a growing population that is putting increasing affordability constraints on both those markets. What improves affordability? Supply. And unfortunately, we're not seeing enough of that come through. We're struggling to get beyond that kind of 30,000 homes delivered each year when we have a requirement of over 50,000 homes. We've seen quite stark data released by the central bank only in the last two weeks stating that residential investment volumes fell by over 80% in 2023 and 2024. So, I think there wasn't an option to do nothing when it came to rent caps and sorry and RPZs. Something had to change. But the balance that had to be struck within that was ensuring that renters are still protected as they face very real affordability constraints. But at the same time that private capital is incentivized to both enter the market and stay within the market to inevitably supply that much needed units that are there that will aid affordability in the long run.
Dearbhla Considine
Yeah, and we've already seen some measures actually implemented by the government this week. So yesterday the Residential Tenancies Amendment Act 2025 was signed into law. So that's the act that expands rent pressure zones to the entire country. So I think, Deirdre, that probably will be more impactful for smaller landlords rather than the larger ones.
Deirdre Sheehan
That's it exactly. Rent pressures already covered 80% of the country and all of the markets in which the institutional investors and larger landlords operated. This isn't a significant change for them. This will have a different impact for smaller landlords who tended to operate outside of rent pressure zones. And actually, there's a planning issue that has arisen that means that smaller landlords who have houses or apartments for use in short term lets will now be within the planning net where they weren't previously. So, to be interesting to see how that's clarified in the legislation.
Dearbhla Considine
Yeah, it certainly will. We might get into the detail of the changes. So and the first one we look at is resetting rents to market level. Obviously, that's one of the key points for our clients, isn't it Deirdre, that ability to reset rents to market level between tenancies. But do we have any more detail on how that's going to work?
Deirdre Sheehan
The government press release said that all new tenancies after the 1st of March next year will have the ability to reset rents to market level where they're below market level at the end of a six-year cycle unless a no-fault termination has occurred. So, in reality that's one of the most significant changes from our clients in the institutional investment markets perspective. But I think it's fair to say that the wording of the announcement raised nearly as many questions as it answered now. There has been more commentary since, both in the media and statements in the dole that gave us a little bit more clarity and a little bit, we're a little bit more definitive on what the proposals are here and our understanding. And I think certainly it's fair to say the industry's expectation is that there will be an ability to reset rents to market level between tenancies where a tenant is left of their own volition or if a tenancy has been terminated as a result of a tenant breach. I think it's also assumed now that there will be a resetting of to market rents where tenants remain in situ and that that will occur at the end of every six year cycle.
So I think the timing of this and the application of it will be really important to clarify because as I say, this is one of the most important changes that we've seen. Kate, from your perspective, was this flagged, was this expected and will it do enough?
Kate English
I think the changes were expected to some degree. So we knew RPZs were coming to an end at the end of 2025 or certainly, and that there was a review process was going to be in place. It was also talked about quite early into this new term of government in terms of looking at rent caps at RPZ. So there was a lot of speculation in the market as to would we see a change before the summer period and what would that change be? I think as you rightly said that ability to reset market rents in between tenancies is something that was hoped for by the market and that has come through, even though there are certain guardrails, so to speak, on it. The initial reaction was divided last week and I think some of that comes from, as you said, there was a lot of detail, but there was also a little bit of confusion in the early stages of this. So initially, because there had been so much expectation when it was first announced, I think there was a little bit of a sit back of is this it or does this actually help us and improve viability?
And as the week went on and the more we spoke to investors and again even into this week, that sentiment has certainly changed. There's a real kind of feeling or realisation that this is a positive step in the. In the right direction. Does it, on its own do enough to change viability? Perhaps not, and we might touch on that a bit later. But overall, it is a positive step in the right direction. And now eyes look to what comes next.
Dearbhla Considine
Yeah, that summarises it really well. So then the next main heading, I suppose, or the main topic for us, is inflation linked rent caps and the 2% cap and the linking of rent increases to inflation for tenancies of new apartments. So for tenancies that commence after the 10th of June, so for new apartments, the rent increases for those tenancies are going to be capped at inflation and there's going to be no other cap on top of that. So that's another. I suppose it's another important point for our clients as well.
Kate English
I'm an economist, I always go back to the data with these things. And yes, it's been now linked to inflation which is positive news, the removing of that cap, so to speak. But where is inflation nowadays? Your most recent data for inflation we have is as of May this year, and that CPI figure is at 1.7%, so just below the 2% mark. If we look at where forecasts for inflation are over the next coming years. So the remainder of 25, 26 and into 27, most forecasts have it remaining around that 2% mark. So in reality, how much does it change? We're not sure because of where data is at in a minute, but I think it's worth pointing out that that inflation figure is very close to the 2%.
Deirdre Sheehan
And Kate, you're an economist and you like certainty in numbers. I'm a lawyer and I like certainty in words. And I think this situation doesn't really help us a huge amount because what we now have is a system or a number of systems where we're not entirely sure why or how new apartments and new tenancies will be treated a little bit differently to older tenancies of old or new apartments and houses and everything will be treated just a little bit differently, which from a lawyer's perspective, looking at a transaction makes it difficult to apply kind of a sensible diligence rule. The other thing I think is, from a logistics perspective, there's an awful lot more admin for our clients now in determining what rates and what increases apply to what tenancies and what rents. So there's a bit to be worked through here that I think we will need to see. The Other question that kind of is niggling in my head a little bit is the sense that inflation applies except in stages in states of high inflation. But we don't have any detail yet on what constitutes high inflation, though I assume it will be more than 2%.
So I guess how all this is managed is going to be a really important thing from our clients perspective. And then the other thing that I, that I couldn't really understand why the case was is that cpi, so the consumer price index will apply to the new rent increases, but harmonised index of consumer prices had previously applied and will presumably continue to apply to the older tenancies. So without getting too bogged down in the detail of what the difference is between them, what's the impact of that? Kate?
Kate English
Yeah, that was a really subtle change and I'm sure that you noticed, but it was something that was a little bit lost in some of the commentary last week too because rightly so, we were focusing on the big things, the resetting, and will it actually work? But that subtle change, it does have an impact. So, I suppose why the case? Why change from HICP to CPI and it's back to what is included. Remember these are both indices, they're essentially a basket of goods in some respect to track inflation. The HICP in its name is harmonised. It's there to create a same number to track against other European countries, but each other individual country will have their own CPI index that brings together wider costs that are more reflective of that economy. And the argument for changing to CPI was more so because it includes costs that are not included in HICP that are a bit more reflective of actual landlord costs. So some of them are down to even materials cost inflation. Dwelling insurance is an example of one. So these it's deemed that it's much more reflective of the actual cost that landlords would bear.
So therefore, it makes more sense. Now when we go back to the data, has there been a huge difference between the two? No, but there has been a couple of basis points between your HICP and CPI with CPI typically sitting that little bit higher than HICP because some of those housing costs are not necessarily included in it. So a subtle change, but an important one I think all the same.
Deirdre Sheehan
So, a hidden positive foe the detail – orientated definitely among us.
Dearbhla Considine
Yeah, that's a really good explanation. Thanks Kate. So, we might move on then to some other questions and some issues that we'd like to see clarified in the draught legislation when it's published. And I suppose what we haven't touched on really yet is security of tenure and the termination of tenancies by larger landlords. The government press release said that no fault terminations will not be permitted for larger landlords except in very limited circumstances. But do we have any detail on what that actually means? What very limited circumstances?
Deirdre Sheehan
Actually, not really, no. We don't have the detail on this yet. But quite honestly, it's not a huge focus for institutional investors or institutional landlords because in reality what they will be doing is dealing with the properties that the tenants in situ. So back to the market recess or so the rent resets to market and inflation linked increases. That coupled with continuous occupation gives them kind of a degree of certainty in terms of what the turnover of a scheme would be. So, in reality the inability or the constraints on termination aren't really a huge concern. Obviously, the considerations will be different for smaller landlords or those who have become accidental landlords over the years and I think they'll be watching very closely as to what they can do in those circumstances. I think the other thing that probably we do need to touch on, and it's a big thing to be clarified in the legislation, is student accommodation. So the government press release or the announcement that was made last week didn't mention student accommodation at all. And it's not clear to me if that was deliberate or inadvertent. But our PDSA clients are absolutely, really interested to know how they'll fare under this new regime and how the new rules will apply to them.
Have we seen any clarification on that since last week?
Dearbhla Considine
Yeah, there's been a little bit. So, it was reported earlier this week that the Minister for Housing and the Minister for Higher Education were actually looking at carving out student tenancies into a separate category. So that category of PBSA would be exempt from the new rent cap rules. So, what they're looking at is creating this student accommodation tenancy category which would actually work the same as current org visits. So, they would continue to be subject to rent caps which would be linked to inflation or 2%. But as you said, we don't have any written information on that. Nothing in writing obviously, and we'll have to wait to see the draft legislation. But just to mention as well, there was talk at one point of students in private housing also being looked at to see if they would get some kind of an exemption from the rules. But the Minister for Housing, James Brown, did say in an interview that that would be unworkable. His view seems to be that it would be unworkable for landlords to actually have to check the status of their tenants to see if they're students or not. So, I suppose that is somewhat understandable.
But as you say, remains to be seen in the legislation how purpose-built student accommodation is going to be treated.
Deirdre Sheehan
Kate, what are you hearing? You had a big industry conference yesterday. What are you hearing in the media and coming out of that?
Kate English
Yeah, I think student accommodation, as you rightly said, there was a lot of questions around it last week of is it included or is it not? And when we think about it, delivery of student accommodation is under the same viability constraints as what delivery of wider large scale apartment blocks for the rental market are under. And so they're looking at it through the same lens as what your institutional investor for PRS would. So certainly the possibility of a change in your rental caps has come through as a positive. It improves sentiment there. And we even saw it in our most recent publication, as you said, the Crane survey, that there was an uptick in some of the pipeline activity in the last kind of 2/4 and some of that is driven by the potential change that may come from rent caps. But again, in line with that, much of the commentary we've heard from investors or people looking at that space actually mirrors very closely to those in PRS in terms of if it applies to us, this is good, it's a step in the right direction. But although it reduces the viability gap, it doesn't close it.
So, it's again back to what other measures can be brought into place that help with that wider viability constraint because they're very capital-intensive projects, whether you're delivering, as I said, your PRS apartment block or that student accommodation block. So, it's, the reactions are very similar on a macro level and it's then down to the detail of are we included or not? But I think if they are, it will help.
Deirdre Sheehan
That's exactly it. Like that's the way our clients are looking at it very closely. And I suppose our sense of it is that treating students differently to other tenancies doesn't really go with the thrust of the changes that have been announced or kind of the aims that have been expressed. So I suppose hopefully this is one that will be clarified very, very quickly. But we do need to see the legislation on it. Yeah, absolutely, yeah.
Dearbhla Considine
So maybe we'll just consider our overall reaction now, given where we're at. You know, the press release haven't been published. There's been a good bit of commentary on it. I suppose the burning question, Kate, is do you think that the changes that were announced will achieve viability for PRS development?
Kate English
I'm cautiously optimistic. And when I say that, I mean that again, I sound like a broken record. I'd reiterate this is a step in the right direction. It also. Why? Because it signals that private capital, institutional capital, you are welcome here and that needed to occur. Is it enough on its own? No. That's where I would be more negative. So I think it's back to what else can come now and come quickly to, as I said, the change in the RPZ's. They reduce that viability gap, but they don't close it. We need to see something else that close it then that will really then stimulate development activity.
Deirdre Sheehan
Yeah, that's it exactly like the clarity that the announcement of something brings, in the end, all the speculation that was coming before it is a real positive. And so it's also really important to see that the government are very conscious of the need to balance the kind of different demands of the different stakeholders involved and to have enough for everyone to make it worthwhile. So I suppose from our perspective and the perspective of our clients, the measures are certainly positive, but it's really important that we see quickly how they're going to be implemented. And I think the plan is that we will see the heads of Bill before the summer recess, but that the legislation and the detail will only come in the autumn. And I think that's where we'll all be kind of waiting and watching with keen eyes for sure.
Kate English
If I was to add one final thing to that, it's now also to stick with that change that came through really, really clearly in conversations we had this week too, of stability.
Deirdre Sheehan
I think we'll leave it there. Ladies, thank you very much for your insights today. Dearbhla and Kate. So that's it from us. Thank you for joining us. We've recorded this on Friday 20th June, and we're keeping very close eye on commentary and the changes that are coming in the legislation after that. So please keep an eye on our website and we'll post any updates there. Thank you.
In this podcast, Deirdre Sheehan, Partner, and Dearbhla Considine, Senior Professional Support Lawyer in our Real Estate Group discuss the recent government announcement of changes to PRS rent controls with Kate English, Chief Economist at Deloitte Ireland. From the expansion of Rent Pressure Zones nationwide to new rules around resetting rent between tenancies, inflation-linked rent caps, and increased tenancy protections—the discussion delves into what these changes mean for institutional and smaller landlords, and PRS and student accommodation developers and investors.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
