Real Estate

Predictions

Real Estate

Pre-Budget 2018

The budget for spending is small so there has to be “thinking outside the box”.

There continues to be significant activity and discussion on our property market, with the main focus being on the undersupply of residential units primarily in Dublin and surrounding counties but becoming evident now as well in the west and south. The pressure in the system resulted a level of Government intervention in the form of rent capping in certain areas, and the Central Bank continues to limit borrowing levels.   

There continues to be delays experienced in obtaining planning for sites which has resulted in the recent introduction of fast tracking some larger sites. Funding and viability of building to make a reasonable profit are still difficult for many involved in construction. 

The Government are obviously very focused on the issues and our second housing minister is actively looking for solutions. There is a need to fix the problem of homelessness, increase the levels of social housing, encourage new landlords to enter the market and maintain the existing number of landlords. On top of that, there is a need to build thousands of new homes for those currently seeking same as their private residence. Once the supply side is making progress it should be the case that prices stabilise as we move towards a normal market. We are all conscious of the need for a solution in the context off additional investment and jobs creation opportunities in Ireland, post Brexit and more generally, with the potential for a further influx of people as we hit full employment. 

The commercial property market is strong and has grown hugely over the past four years with arguably sufficient supply being built in Dublin and new schemes in the pipeline in our larger cities. 

Rents are strong and a lot of the REIT’s and funds are managing assets, having spent billions over the past number of years. 

It is now a year since the publication of draft legislation relating to S.110 companies which invest in certain Irish property related assets. The legislation introduced a level of restriction on the deductibility of interest paid to the holders of profit participating notes issued by such securitisation companies. As the draft legislation made its way through the legislative process, amendments were introduced allowing for some exemptions from the interest restriction, as well as other measures to ensure that the law worked as intended by the Department of Finance. However, there remain several points requiring clarification to provide tax payers and investors with certainty on the functioning of the new regime and it is hoped that these points can be addressed through Revenue guidance expected in the coming months.

Finance Act 2016 also introduced new Irish tax rules in relation to IREFs (Irish funds investing in certain Irish real estate assets). The new legislation results in a 20% tax being applied to returns such as dividends and redemptions where broadly the fund or subfund has more than 25% of its investments in relevant Irish real estate assets. The IREF rules were added to Finance Bill 2016 quite late in the legislative process and as a result, gave rise to uncertainties in how the rules should work in practice. Irish Revenue have begun to publish guidance to clarify those aspects of the IREF regime, although further guidance is expected in the coming months to provide greater certainty to investors and tax payers.

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Our view

There will be a need for radical solutions, some of which can be delivered through the tax system, if as a country we are to deal with the residential crisis that many saw coming three to four years ago. The budget for spending is small so there has to be “thinking outside the box”.

There have been calls for a reduction in the VAT rate, similar to what was done for the hospitality industry at a minimum – however, the concern is whether this will really boost the supply side, and it would appear that Government would not be favour of this approach. In addition , the reinstatement of full Interest relief on borrowed money to buy rental property should be immediately restored rather than on the drip , currently 80% and moving north at 5% per annum . The question of a deduction against rent for property tax is a discussion point given it is akin to rates on a property and would perhaps be one of a number of changes that would help landlords stay in the rental market.

Should there be a targeted “s23“ relief in the cities to boost supply together with a capital gains tax rollover relief to allow deferral of CGT once the proceeds of sale are reinvested in further rental property. There could also be a loosening of rules around refurbishment of buildings for residential use and living over commercial premises to facilitate increased supply and allow a tax deduction akin to repairs for such a spend.

All of these measures would help in the current market in our view. 

Our prediction

We do feel that some of the changes suggested above could well happen. One would expect that the cost of such measures would be financed by increased levels of activity in delivering housing supply, resulting in additional tax revenue as a result. The challenges in relation to housing and rented residential accommodation will only get worse if there is insufficient action taken; if at a minimum some radical measures such as those set out above are introduced, and in addition other non-tax solutions (such as the government funding infrastructure deficits and perhaps dealing with the cost of development levies) this might allow real progress to be made in dealing with these challenges.

While the changes to S110 and funds regime were specifically targeted at Irish real estate assets held by such entities, the changes were unexpected in a time when providing international investors with confidence in the Irish tax regime and encouraging inward investment as a result of international changes such as Brexit and BEPS, remains of critical importance. While there may be some amendments required to tidy up the changes introduced last year and further guidance for both regimes is expected from Revenue, it is hoped that there will no further material changes to these regimes. We await the October budget with interest.

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