Investors warned to close apartment block deals before budget
Minister for Finance may be eyeing up stamp duty hikes in lucrative private rental sector
Paschal Donohoe: The Minister ‘may be mindful that stamp duty receipts of €939 million for the first nine months to September 2018 are up by 29.4 per cent on the same period last year, but 9.7 per cent below target’. Photograph: Conor McCabe Photography
Investment and pension funds working on multimillion-euro deals to buy apartment blocks in the fast-growing private rental sector (PRS) have been warned to sign contracts before Budget 2019 is unveiled on Tuesday, to avoid being caught by a likely rise in stamp duty.
“The flood of investment into the PRS sector and anticipated scale of deals makes it a highly attractive source of extra money for a minister for finance looking for extra cash to fund any voter-friendly tax cuts,” said Killian O’Higgins, managing director of WK Nowlan Real Estate Advisors in Dublin.
Mr O’Higgins said that Minister for Finance Paschal Donohoe “may be mindful that stamp duty receipts of €939 million for the first nine months to September 2018 are up by 29.4 per cent on the same period last year, but 9.7 per cent below target”.
Buyers of apartment blocks avoided being hit by a move by Mr Donohoe last October to triple stamp duty on commercial property transactions to 6 per cent. Deals in the sector are structured so that apartments in a scheme are typically sold individually to funds, where a 1 per cent residential stamp duty rate for properties worth less than €1 million applies, according to Mr O’Higgins.
If Mr Donohoe moves to include buyers of PRS schemes in the higher commercial property rate, he may target funds acquiring more than 10 or 15 units in an apartment block, according to Mr O’Higgins. This would protect smaller landlords.
Only deals with binding contracts in place before last year’s budget avoided having the higher, 6 per cent rate levied against them. “If you are in the early stages, or in the midst of a transaction, whether PRS or student accommodation, last year’s precedent suggests it is critical that a binding contract is signed by budget day at the latest,” Mr O’Higgins said.
Cushman & Wakefield, a commercial real-estate services company, estimates the private rental sector invested €386.8 million in 24 deals last year, up more than 40 per cent on 2016. Transactions this year include Irish Life’s purchase of 262 apartments under construction in Churchtown in south Dublin for €138.5 million, and US group Kennedy Wilson’s’s acquisition of 274 apartments and a site at The Grange in Stillorgan, Co Dublin, for €160 million.
The raft of large-scale investors in this emerging segment of the property market in recent years has prompted criticism that they are vacuuming up supply that might ordinarily go to would-be owner-occupiers, and that they are contributing to the homeless crisis given the power imbalance between landlords and tenants.
Average Irish residential rents are now 75 per cent higher than their low point in 2011 and 26 per cent above their Celtic Tiger peak, according to figures recently released by Daft.ie, the property website.
However, AIB real estate economists said in a recent report that funds investing in PRS schemes are “critical” to solving the housing supply crisis and easing rent growth, as they provide much-needed funds to support construction in the sector.
Commentators said that Mr Donohoe may be emboldened to target the PRS sector with higher stamp duties, as the hike in the commercial property duty did nothing to dampen activity in the market, with agents JLL predicting that the value of Irish transactions will rise as much as 50 per cent to €3.5 billion for 2018 as a whole.