Real estate and construction
Padraic Whelan, Head of Real Estate at Deloitte on Budget 2015.
Overview of Budget Measures
Against a backdrop of a much improved real estate market, the focus of the Budget is broadly on measures to address the undersupply of residential housing, in particular. As part of the Government’s Strategy 2020, there is a drive to ensure that land is available and ready to be built on. In this regard, the 80% windfall tax on gains from rezoning of land is abolished from 1st January next. This measure is certainly not one which generated revenue and its abolition is necessary in the current environment, particularly when profits from land dealing are already subject to taxation in the normal manner.
The 7-year capital gains tax exemption for Investment property held for at least 7 years will not be extended post-31 December 2014, albeit there may have been a case for this to encourage investment outside the Capital, in particular, as the overall economy improves.
A further welcome development is the extension of the Home Renovation Scheme to rental property up until the end of 2015, where the owners are subject to income tax on profits. This measure gives the person making the investment a tax credit of an amount ranging from €675 to €4,050 depending on the spend. Over 9,000 homeowners and 3,000 contractors are registered currently under the scheme and it encourages tax-compliant behaviour by those wishing to benefit from it.
In addition, there does seem to be a significant move to provide social housing with a spend of €2.2billion promised over the next 3 years and more to come under a multi-annual exchequer investment. The plan is to have 2,500 units built in 2015 and 10,000 by 2018. This measure should create jobs and, combined with the need to build the undersupply of residential housing in the private sector, this should help the overall unemployment rate to fall to 10% next year and perhaps lower as activity scales up .
For corporate investors investing in energy-efficient plant , there is a 3-year welcome extension which enables an accelerated write off of plant in year 1 against profits rather than over 8 years.
Who will be affected
Those parties involved in the construction sector in general will benefit from the changes announced. Landlords, likewise, who need to carry out works on investment property will get some relief, but on its own it is unlikely to bring rents back from current levels, as more additional supply is needed to help rents stabilise. Those seeking to buy should in due course have more to choose from, which should keep pricing competitive.
In light of the well-flagged elimination of the 7-year exemption from capital gains tax on investment property, due to expire on 31 December next, there is a window to benefit, where an investment is contemplated. There may be some restructuring opportunities where investors may want to ring-fence assets, be it with family members or through a corporate given the one-off nature of this relief.
Those involved in the renovation of housing and on the product supply side are likely to benefit and will need to consider how this will affect their business going forward, in particular if they are looking to expand and grow their business.
What it means
The measures announced are welcome and should stimulate activity in the construction sector and as a result should create jobs. The real challenge, once land is ready to build on, is the availability of finance to developers to get the product built. There is a level of non-bank finance available, particularly from private equity sources, that started to emerge some months ago, but it does need to be supplemented with additional bank funding. In addition, the impact of the proposed new lending limits for homebuyers might see a slow-down in first time buyers entering the market as they save the required proposed funding necessary to get mortgage approval. Realistically, the DIRT refund measure set out in the Budget for those saving to buy is unlikely to make much of a financial difference given low deposit interest rates.
A combination of funding from the state for social housing, private equity , bank funding and responsible lending and indeed borrowing should, over time, lead to a more normalised residential market where price increases stabilise and rent levels likewise. All the representations have been made and perhaps now is the time for the market to deliver after almost a decade of austerity.