Storm clouds gather over stamp duty in­crease on com­mer­cial prop­erty deals

Prop­erty in­dus­try voices fears that 4 per cent rate rise in­tro­duced in bud­get may frighten off buy­ers

The Irish Times - Business - - AGENDA - Barry O’Hal­lo­ran

Sto­ries that the ex­che­quer had “lost” mil­lions of euro as com­mer­cial prop­erty deal­ers rushed sales through ahead of Tues­day night’s well-flagged in­crease in stamp duty ap­pear to have been over­played.

In fact, the un­cer­tainty that fol­lowed Min­is­ter for Fi­nance Paschal Dono­hoe’s Bud­get 2018 an­nounce­ment that he was in­creas­ing the rate to 6 per cent from 2 per cent may have had a dual im­pact. Buy­ers pay stamp duty, so an ex­tra four per­cent­age points could prompt them to walk away.

One in­dus­try source says that he knows of two deals that did not go ahead as a re­sult of the in­crease; an­other says he is aware of one sale that was rushed through on Tues­day and an­other that was dropped.

While the rate in­crease it­self is clear, there is con­sid­er­able con­fu­sion over what hap­pens with trans­ac­tions that are un­der way but not com­plete. If con­tracts were signed weeks or months be­fore the new rate came into ef­fect at mid­night on Tues­day but the sale has not been com­pleted, will the prop­erty be sub­ject to the duty?

A Depart­ment of Fi­nance spokesman con­firmed that there will be tran­si­tional ar­range­ments, as there were when the Gov­ern­ment cut the rate to 2 per cent in 2011.

Back then, of course, peo­ple sim­ply waited for the new lower rate to be im­ple­mented be­fore go­ing ahead with any trans­ac­tions. This time around, it is dif­fer­ent. Ef­fec­tively the stamp duty bill on trans­ac­tions will tre­ble. If some­one was close to com­plet­ing but not quite there on Tues­day, should they go ahead and hope that their pur­chase will not qual­ify for the in­creased duty, or should they wait and see and risk pay­ing the ex­tra four per­cent­age points?

Tak­ing the re­ported €50 mil­lion sale of the Radisson Blu in Gal­way as an ex­am­ple, the stamp duty bill un­der the new regime would amount to €3 mil­lion, com­pared to €1 mil­lion pre­vi­ously.

Fi­nance Bill

A day af­ter the an­nounce­ment in the bud­get speech, lawyers and ac­coun­tants were still not sure what im­pli­ca­tions the rate rise has for nearly com­pleted trans­ac­tions. Just how far down the road to com­ple­tion will a trans­ac­tion need to be to qual­ify for the old rate un­der any tran­si­tional ar­range­ments?

The de­tails, the depart­ment says, will be con­tained in the Fi­nance Bill, which is due to be pub­lished next Thurs­day, Oc­to­ber 19th. In the mean­time, ad­vis­ers say, their clients are stuck be­tween a rock and a hard place.

There was also con­fu­sion over what trans­ac­tions were in­cluded and which were not.

In his speech, in line with the bud­getary theme of de­liv­er­ing on the need for hous­ing, the Min­is­ter ex­pressly stated that pur­chasers of land sold for res­i­den­tial prop­erty de­vel­op­ment would be able to avail of a stamp duty re­fund as long as they meet cer­tain con­di­tions. Chief among these, it ap­pears, is that they “com­mence” de­vel­op­ment within 30 months of buy­ing the land. But what about farms? Ini­tially, Min­is­ter for Agri­cul­ture Michael Creed was cat­e­goric in his as­sur­ance that farm land trans­ac­tions would not come un­der the new, higher rate.

Speak­ing at a post-bud­get depart­men­tal brief­ing, he said: “We need to nail this one, be­cause I’ve seen some com­men­tary on so­cial me­dia. The in­crease in stamp duty does not ap­ply to agri­cul­tural land.”

That’s not the view of Dono­hoe who, when the is­sue was raised with him later on Tues­day night, con­firmed that farm land was in­cluded.

On the ba­sis of the 34,000 acres of farm­land were sold in 2016, the Ir­ish Farm­ers’ Jour­nal says the stamp duty in­crease will cost farm­ers around €14 mil­lion a year at cur­rent prices.

To put that into con­text, Dono­hoe has pen­cilled in a fig­ure of €376 mil­lion that he ex­pects to raise from the new stamp duty in­crease – though prop­erty in­dus­try groups sug­gest this is ex­tremely am­bi­tious.

The Min­is­ter did note that con­san­guin­ity re­lief, which fa­cil­i­tates the trans­fer of farms within fam­i­lies at a re­duced stamp rate of 1 per cent, will con­tinue to be avail­able for three more years.

He also re­ferred to the re­lief avail­able to young trained farm­ers (un­der the age of 35) to pur­chase farm land from landown­ers un­der the age of 67 free of any stamp duty.

The Farm­ers’Jour­nal cites Rev­enue fig­ures show­ing that 4,922 of 5,258 farm land sales in 2016 were deemed li­able to duty. How­ever, this in­cluded 735 cases of pur­chasers avail­ing of the young qual­i­fied farmer re­lief and an­other 864 cases claim­ing con­san­guin­ity re­lief.

Re­cov­ery

Sug­ges­tions that rafts of sales went through be­tween news of the hike leak­ing last week and Dono­hoe’s con­fir­ma­tion on Tues­day are “mostly noise”, ac­cord­ing to Mar­ian Fin­negan, chief econ­o­mist and di­rec­tor of re­search with Sherry Fitzger­ald.

“Com­mer­cial prop­erty deals aren’t that easy to do, you can’t just rush them through,” she says.

Builder Michael O’Flynn be­lieves that it was more likely to have had the op­po­site ef­fect, stop­ping trans­ac­tions yet to be fi­nalised in their tracks. The head of O’Flynn Con­struc­tion thinks that the in­crease came too soon and was based solely on a re­cov­ery in the value of of­fices in Dublin, rather than in the com­mer­cial prop­erty mar­ket as a whole.

“There are many as­pects to the com­mer­cial prop­erty mar­ket. It’s more than the of­fice mar­ket in Dublin,” he says. “It’s not just the tim­ing, it’s also the scale of the in­crease that has taken peo­ple aback.”

O’Flynn ar­gues that it will dam­age any re­cov­ery in other re­gions and could also put off for­eign in­vestors, who may fear that the rate could be dou­bled or tre­bled again next year.

Be­fore re­duc­tions in the rate in re­cent years to in­ject life into the mar­ket, the stamp duty rate on com­mer­cial trans­ac­tions had been 9 per cent.

Other fig­ures agree that the rise in duty could leave over­seas in­vestors wor­ried that Gov­ern­ment pol­icy on prop­erty is un­pre­dictable.

Not every­one shares the view that it is neg­a­tive. Fin­negan sug­gests that it will cool val­ues in the short term, but it is un­likely to put brakes on the mar­ket.

“We think that 3.6 per cent or 3.7 per cent could be stripped off val­ues where peo­ple are about to trans­act,” she says. “But that will dis­solve over time.”

Most agree with Fin­negan’s pre­dic­tion that any fall in value will be less than 4 per cent. In Dublin, that could be seen as pos­i­tive. It will push up yields, a mea­sure of prop­erty in­vest­ment re­turns that di­vides the price by the an­nual rent.

These have been fall­ing as prices rise, so re­vers­ing this trend could – the­o­ret­i­cally any­way – en­cour­age more in­vestors into the city.

In an im­me­di­ate re­ac­tion to news on bud­get day, Kil­lian O’Hig­gins of WK Nowlan Real Es­tate Ad­vi­sors, ar­gued that those who want to in­vest will con­tinue to do so. The only dif­fer­ence will be that, from now on, the Gov­ern­ment will help it­self to €6 mil­lion from ev­ery €100 mil­lion, rather than just €2 mil­lion, as it did up to Tues­day night.

Though the Gov­ern­ment is of­fer­ing re­funds to de­vel­op­ers buy­ing to build houses so that the cost will not be passed on to home­buy­ers, Michael Stan­ley, chief ex­ec­u­tive of listed res­i­den­tial builder, Cairn Homes, points out that it is still an up­front ex­pense.

The 30-month win­dow for com­menc­ing work on such sites would in­di­cate that de­vel­op­ers would have to carry the ad­di­tional stamp duty cost for these twoand-a-half years be­fore pro­vid­ing ev­i­dence of com­mence­ment in or­der to claim their re­fund.

While his com­pany has the land it needs, he says, he sug­gests it could cause dif­fi­culty for oth­ers who are look­ing to build and need sites.

Stan­ley also wor­ries that Ire­land’s slow-mov­ing plan­ning sys­tem means that it may not be easy to be­gin work within 30 months of buy­ing land.

He un­der­stands that the Gov­ern­ment wants to dis­cour­age hoard­ing, but ar­gues that builders want to build. “That’s how you get a re­turn,” he says.

Fund­ing

Stan­ley agrees that an­other bud­get mea­sure, the pro­posal to pro­vide a new State agency with €750 mil­lion to loan to de­vel­op­ers to build 6,000 new homes, is pos­i­tive. Al­though his com­pany is well funded, he says that get­ting fi­nance is the big­gest prob­lem faced by most in his in­dus­try.

“Putting some­thing in place that helps to re­solve that has to be a pos­i­tive,” he stresses.

Fin­negan echoes this point. “This was some­thing that we have been shout­ing about and now they have done some­thing about it. You would have to wel­come it,” she says. While she be­lieves that there is slightly more fi­nance avail­able than two or three years ago, she says that it is still very ex­pen­sive.

Home Build­ing Fi­nance Ire­land (HBFI) will get its cash from the Ire­land Strate­gic In­vest­ment Fund, which is now re­spon­si­ble for what is left of the old na­tional pen­sion re­serve fund.

Staff from an­other State agency, the Na­tional As­set Man­age­ment Agency (Nama), will do the ac­tual work of loan­ing the money to builders. How­ever, the home fi­nance body will be in­de­pen­dent of the as­sets agency. Nama’s chair­man Frank Daly said that it will have a “ser­vice-level agree­ment” with the new or­gan­i­sa­tion.

O’Flynn also wel­comes the move, and notes that the Gov­ern­ment is go­ing to struc­ture the new agency so that it gets State aid clear­ance from the EU. He and sev­eral other builders have al­ready com­plained to Brus­sels that an ear­lier ini­tia­tive to al­low Nama it­self to fi­nance new homes built by its bor­row­ers is an il­le­gal state aid.

How­ever, he is con­cerned that Nama’s in­volve­ment could give rise to po­ten­tial con­flicts of in­ter­est.

Many of those now look­ing to build homes are pre­vi­ous clients of the agency. While it is not the lender, they now have to deal with it again if they want to bor­row from the home fi­nance body.

Nama has said lit­tle be­yond Daly’s re­marks on Wed­nes­day, but it is un­der­stood that, if the HBFI is go­ing to work prop­erly, any projects to which it lends money will be con­sid­ered on their own mer­its.

The Min­is­ter said on Tues­day that leg­is­la­tion would be needed to set up the new body. When that is pub­lished, it will be read closely by all those with an in­ter­est in build­ing homes.

O’Flynn be­lieves the Min­is­ter missed a trick by not cut­ting VAT on new homes. He points out that this has been well flagged. Many of the prop­erty and con­struc­tion bod­ies have been rais­ing it over the last two to three years. But, to date, the Gov­ern­ment has not been minded to ac­cept the mer­its of the pro­posal.

As Dono­hoe pointed out in an­other con­text ear­lier this week, he was “not in a po­si­tion to do ev­ery­thing for every­body”.

There are many as­pects to the com­mer­cial prop­erty mar­ket. It’s more than the of­fice mar­ket in Dublin. It’s not just the tim­ing, it’s also the scale of the in­crease that has taken peo­ple aback

PHO­TO­GRAPHS: CYRIL BYRNE AND PAUL FAITH/AFP/GETTY

Fi­nance Min­is­ter Paschal Dono­hoe in­tro­duced his Bud­get at Gov­ern­ment Build­ings this week, which in­cluded an in­crease in stamp duty on com­mer­cial prop­erty.

Newspapers in English

Newspapers from Ireland

© PressReader. All rights reserved.