Developers will be paid up to €120,000 per apartment by the state to fund the gap between spiraling construction costs and current market prices.
The €500m fund aims to unlock stalled developments and will see 5,000 apartments built between 2024 and 2026.
The move comes as builders fear they may not develop some sites in cities due to the cost of construction.
Developers will need to apply to have their developments included in the fund and will receive a grant of up to €120,000 per apartment.
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This is intended to bridge the gap between the cost of construction and the selling price.
However, it is understood that this may be exceeded in some parts of the country.
Cabinet ministers were told this week that the purpose of the fund was to increase supply but not reduce the cost of flat prices.
When selling a property built under the Croí Cónaithe (Living Heart) Cities fund, the state subsidizes the cost of the apartment up to €120,000 to bring it back to “market level”.
Government sources have stressed that the scheme will not see a “discount” on apartments.
In order to be part of the fund, apartments will have to meet three sets of strict criteria.
Developers will have to open their books to the state to show they are struggling to meet rising construction costs.
A government source said the fund would mean building flats would become financially viable for developers and it would not mean they would make additional profits.
Promoters will not have to return the funds to the state.
Only apartments located in the cities of Dublin, Cork, Limerick, Galway and Waterford will be considered and they must have at least four floors.
There must also be at least 35 dwellings per hectare and the development must be within 1.2 km of public transport such as the Luas or regular bus services.
An “open call” will soon be launched for expressions of interest for developments which have obtained planning permission but work has not yet started.
Ministers were told this week that the fund will aim to activate building permits in cities, as the cost of building new apartments is sometimes higher than their selling price.
This leads to a ‘viability gap’ and funds given to developers will aim to close this gap.
For example, a one-bedroom apartment can cost between €325,000 and €385,000 to build, but it can only be sold for up to €300,000 in a particular part of the country.
This would mean a viability gap of up to €85,000 per apartment for the developer and would mean a grant of up to €72,500 under the fund.
There are 40,000 building permits granted in Dublin alone, equivalent to four years of housing supply in the capital.
In 2011, apartments accounted for 12% of the total housing stock, which is very low compared to an average of 50% in other European countries, the ministers said.
The €500 million Croí Cónaithe fund is a key part of the government’s multi-billion euro Housing for All strategy to tackle the housing crisis.
However, only €5m will be allocated to the fund this year and next, with funding rising to €165m in 2024 and €275m in 2025.
The remaining 50 million euros will be used for a separate program for the towns of Croí Cónaithe.