As the Government mulls its options on restricting the bulk purchase of family homes by investment funds, Ministers and senior officials are wary of chasing away a source of funding for desperately-needed new housing projects.
While Government has accepted in the last 24 hours the political necessity of stopping investment funds and trusts from buying outright estates of family homes, it will not, according to people involved in the process, shut out the funds from the housing sector completely. The Government wants the funds to continue their investments in Irish property, "to finance developments that might not otherwise happen", as Tánaiste Leo Varadkar told the Dáil on Thursday.
The funds were invited in back in the wake of the financial and property crash that paralysed homebuilding for half a decade, laying the foundations for the chronic shortage – and sky-high prices – of today. Michael Noonan, then-minister for finance, wanted to stabilise the property market, which had been in freefall since 2008, to "put a floor" underneath it, as he used to tell colleagues.
Not everyone liked it. People Before Profit TD Richard Boyd Barrett described it in the Dáil on Thursday as “rampage and plunder” by “bloodsuckers”.
The funds were facilitated with favourable tax treatment and bought up billions of euro worth of property, much of it from the State's bad bank, the National Asset Management Agency. Noonan's strategy worked on its own terms – the property market was stabilised. But the funds made a killing, and many of them were keen to hang around for more. There was good business to be done in Ireland.
Institutional investment in Irish residential property has grown rapidly since the 2008 crash, with the overwhelming bulk of the money going into apartment blocks. A paper this week by Michael Byrne of the school of social policy at UCD shows that institutions bought no more than 76 individual units in 2010 and 606 two years later. Since then the sector has taken off, with investors buying up thousands of new apartments in each of the intervening years.
Data from property consultants CBRE shows that more than 15,550 units were under institutional ownership at the end of 2020. Concern about such activity crowding out young private buyers from a booming market has done nothing to stem the flow of institutional money. Despite sharp pandemic disruption to the economy in 2020, CBRE says institutions spent €1.75 billion on residential investment. Another €700 million followed the first three months of 2021. Much of it is driven by the global “hunt for yield” – the desire of investors to find returns in a world of low interest rates. There’s a lot of money looking for a home, and a purpose.
The biggest owner is IRES Reit, a Dublin company which controls some 24 per cent of all institutional units, followed by US group Kennedy Wilson, which has 16 per cent. Urbeo, founded by former Hibernia Reit executive Frank Kenny, has 9 per cent. LRC Europe, founded by Israeli investor Yehuda Barashi, has 8 per cent.
It works for developers: investors willing to pay a premium to buy up entire apartment blocks give them the opportunity to cash in quickly on a project and move on to the next one. The developers avoid having to go through a cumbersome series of transactions with individual buyers. “It gets development done that might not otherwise be done, recycling money more quickly,” said one long-term market observer.
The tax treatment of the funds – which was tightened in 2016 – is sometimes misunderstood, though it is undoubtedly designed to facilitate the funds. Sinn Féin is right that the funds themselves do not pay tax – but tax is payable on the dividends and profits that are paid to investors from the funds.
In the two principal classes of investment vehicle – real-estate investment trusts (reits) and Irish real-estate funds (irefs) – there are specific mechanisms to catch investors for tax.
According to the Department of Finance, reits "are required to distribute 85 per cent of all property income profits annually to investors".
“Dividend withholding tax at a rate of 25 per cent must be applied to these distributions,” the department says, though it concedes that certain classes of investors, such as pension funds and charities, are “more generally exempt from tax”.
In irefs, they must “deduct a 20 per cent withholding tax on distributions to non-resident investors”, the department says. “Irish resident investors may be subject to the investment undertakings exit tax, at a rate of 41 per cent,” it says.
It is no doubt true that the funds use every opportunity and loophole to minimise tax; but it’s not quite the full truth to say “they pay no tax”.
In any event, those familiar with the investor side say that tax is no longer a driver of foreign investment in Irish property. "I don't think people are paying proper attention," says Jim Clery, head of real estate at KPMG. "The Government dealt with that problem a few years ago. Foreign investors are paying tax in Ireland. Ireland is not giving a better deal [on tax] than anywhere else."
What is unchallengeable, however, is that it is now a political imperative that funds can’t be allowed to compete with families for homes.
Investment funds were facilitated because the government of the day believed that their activities were benefitting everyone – investors, government, people looking for a place to live. That judgment has now changed, and the environment for the funds will change too. The Government still wants the funds to operate in the Irish property market – but not any any price.