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Real Estate Update: Headlines of Budget 2018

11 October 2017

Solving the Housing Crisis?

After the macro information, housing was the first sector the Irish Minister for Finance, Paschal Donohoe addressed in his Budget 2018 speech. He indicated the importance of solving what is a national crisis. Minister Donohoe agrees that increasing housing supply is critical and has, accordingly, set specific targets for his initiatives.

Time will tell how successful his measures will be. In reality, this will take up to ten years.

Social housing

3,800 new social homes will be built by Local Authorities and approved housing bodies. The Minister is increasing the Housing Assistant Payment Scheme to include 17,000 more households. He has promised a further 4,000 social homes through increased funding of the Social Housing Current Expenditure Programme.

In planning for beyond 2018, the Minister has allocated €500 million for the Direct Building Programme to achieve 3,000 new build social houses by 2021. This equates to a €167,000 provision per house. The Government policy document Rebuilding Ireland target has increased to 50,000 new social homes of which 33,500 will be delivered through construction.

The focus on social housing is welcome. There was no mention of affordable housing, another important element in the residential market.

State funding

The Minister will increase funding for developing local infrastructure, to enable development to take place. He is establishing Home Building Finance Ireland (HBFI) with up to €750 million for it to lend as housing finance. HBFI will initially draw on the expertise of NAMA to assist in building an additional 6,000 new homes, equating to a €125,000 provision per house. The Minister said that this will not interfere with the expiration of the NAMA mandate. The funding will be at market rates and, therefore, will not be State aid. The initiative will need legislation, which the Minister wants to see enacted quickly. 

Law made in haste is often flawed, but the country needs prompt action. Hopefully, the Minister will publish a Bill quickly and take feedback before enactment. Developers have complained that banks are not making enough finance available and private equity money is expensive. Will HBFI be a senior debt funder or take mezzanine positions as well?

CGT

Property bought between December 2011 and 31 December 2014 and held for at least seven years is exempt from capital gains tax. An unintended consequence of this has been owners’ reluctance to sell when land supply is badly needed. The Minister has announced a new timeframe of four years.

This is a welcome measure and shows flexibility in responding to changed market conditions. The Minister has not restricted the change to property which will be used for residential development within a specified period, unlike his proposed stamp duty refund scheme. There is no mention of the increase in value arising from the changes to density and height restrictions announced by the Minister for Housing.

Tinkering?

The Minister will allow the offsetting of preletting revenue expenses against income tax where:

  • the property has been vacant for 12 months or more,
  • the expenses do not exceed €5,000 per property, and
  • the property stays in the rental market for at least four years.

The relief will end in 2021, so it is a temporary measure.

The current system of taxation on rental residential property is regarded as being unfair. More landlords are leaving the market than are joining. If the Minister wishes to encourage more landlords in the residential sector, then a broader set of changes should be included in the Finance Bill.

An old reliable

During the boom, previous governments increased stamp duty to rein in the market. Unfortunately, their efforts were in vain. This time around, the Minister’s increase in stamp duty on non-residential property from 2% to 6% is probably driven more by the €376 million he expects to gain in taxation every year. Hopefully, the transactions continue at a level to make this possible. 

Ireland suffered badly before from becoming overly reliant on transactional taxes. Context is everything - the Minister is providing €1.8 billion in housing initiatives, far more than the anticipated revenue of €376 million. There is real doubt about whether the revenue will match the forecast and we anticipate more corporate transactions (1% stamp duty) as a result of the 5% differential.

In a paper accompanying his Budget 2018 speech, the Minister comments that “with the commercial real estate market now performing strongly, the disjoint between available yields and overall viability considerations as between the residential and commercial sectors, and given the policy desirability of rebalancing construction activity towards residential investment and avoiding overheating in the construction sector, it is now appropriate to increase the rate of stamp duty on non-residential property to 6%”.

Stamp Duty Refund Scheme 

The Minister announced that there will be a Stamp Duty Refund Scheme to increase housing supply. The Finance Bill will have conditions including a requirement that developers will have to start the relevant development within 30 months of the land purchase.

Stamp duty on residential property remains at 1% up to €1 million and 2% above that. The Government must ensure that the planning process is speedier to enable a timeframe of shorter than two and a half years to become the accepted norm. The move will increase the premium for subject to planning sales as many would regard 30 months as optimistic for buying a site, getting planning and starting building. Defining the start of development will need careful drafting. If it is too rigid, the scheme will not achieve its objective. If it is too loose, land will remain largely undeveloped.

Vacant Site Levy

The 3% annual vacant site levy goes live in 2018, with the first payments due in January 2019. To encourage owners of “vacant sites” to develop their properties, the 3% levy will increase to 7% in the second and every subsequent year that a property is on the register, starting in 2019. This is a matter of immediate relevance to property owners. Land categorised as being subject to the vacant site levy gives rise to a 3% payment for 2018 (payable in 2019) and if the property is not developed in 2019 then 7% is payable on 1 January 2020

There has been much debate about the effectiveness of this levy. 2018 and 2019 will provide some answers.

The Minister announced details of the phasing out of mortgage interest relief but made no change to the help to buy scheme.

Conclusion

Developers and investors will need to be cognisant of the many changes brought about by Budget 2018.

For more information on the features of the Budget 2018 and how they may potentially affect your business, please contact a member of our Real Estate team.


The content of this article is provided for information purposes only and does not constitute legal or other advice.

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