Reits are not the enemy and emotion is not a policy

If we turn our back on them we better be ready for the implications of adding €20bn to our national debt

Mullen Park estate in Maynooth, Co Kildare, where  Round Hill Capital – which is not a Reit – has bought 135 homes. Photograph: Colin Keegan/Collins

Mullen Park estate in Maynooth, Co Kildare, where Round Hill Capital – which is not a Reit – has bought 135 homes. Photograph: Colin Keegan/Collins

 

“Reits are a scourge,” says one Irish Times columnist. They are “steaming into Ireland and indiscriminately hoovering up all sorts of housing stock,” says another.

You’d be forgiven for feeling alarmed when you read these sorts of comments. I know I am because it is one of my biggest sources of professional pride to have led the campaign for the introduction of Real Estate Investment Trusts (Reits) into Ireland, which was achieved in early 2013.

Round Hill Capital, the company whose purchase of 135 houses in Kildare lit the touchpaper of the recent controversy, is not a Reit so it is a little bemusing that Reits have loomed so large recently as commentators’ villains of the piece

I know I didn’t create the rapacious monster that is suggested in the current media narrative. It’s a narrative that is misguided and unhelpful if we are to navigate effectively through the complex housing crisis the country undoubtedly faces.

First, let’s get some of the terminology correct. Round Hill Capital, the company whose purchase of 135 houses in Kildare lit the touchpaper of the recent controversy, is not a Reit so it is a little bemusing that Reits have loomed so large recently as commentators’ villains of the piece.

The introduction of Reits in Ireland was to solve the problem of lack of capital for property investment. The market had bridged this gap in the Celtic Tiger era through reckless bank lending to individual property developers, but learned the hard way that this didn’t work.

Reits were a well-understood international structure that could attract international investors but avoid crazy debt levels. Reits are common in many countries, including places like the Netherlands and France, both countries to which some of the commentariat point as an alternative to what they view as Ireland’s failed “neo-liberal” economic model.

Sadly, the introduction of Reit legislation has not been as successful as I had hoped. You might be led to believe that Ireland is crawling with Reits invested in the residential property sector, but that isn’t the case.

There have only ever been four Reits in Ireland, and only one – Ires Reit – can be said to be a major player in the Irish residential market.

So if Reits were a problem – and they’re not – it is manifestly the case that they could only ever be a small part of it.

One of the major charges levelled against Reits is on the issue of taxation. Reits allow investors to avoid paying tax and give them an unfair advantage in the market, or so the myth goes.

Reits are obliged to distribute 85 per cent of their income as dividends to shareholders who then pay tax on those distributions. If you were to levy a tax prior to distribution then you would face a double taxation situation that would make the investment unattractive. It was avoiding the potential for double taxation that underpinned the reason for Reits, otherwise any sensible international investor would have continued to avoid Ireland like the plague.

By way of a simple example, an international institutional investor faces a dividend withholding tax of 25 per cent as the minimum tax it incurs in Ireland on income received. If that income had – for example – already faced tax at (say) 25 per cent within the Reit, then the investor would be facing a pretty unattractive 50 per cent rate of tax, and that’s ignoring the fact that some investors would face marginal tax rates that would take the overall tax burden over 80 per cent. And let’s not forget any tax levied on capital gains when shares are sold by investors.

The wall of money that travels the world seeking to maximise after-tax income wouldn’t find it hard to give Ireland a miss in these circumstances. You can rail against this flow of global capital all you like, but it won’t make any difference, it will still just ignore Ireland.

We are reaching an Orwellian point of promoting the idea that capital that produces jobs is good, while capital that produces housing is bad and therefore should be forbidden or penalised by penal rates of taxation. And this concern applies to other kinds of property investment funds, not just Reits.

Let’s not forget that a political discourse that depends on bashing Reits or the avian label du jour will not lay one brick or house one family, and that’s surely what counts

The hurlers on the ditch in the current debate often fail to appreciate just how much money is going to be required to build the quantum of houses that are needed. There are 62,000 households on the housing waiting list which in a rough calculation it would cost €20 billion to build homes for. As it stands the vast majority of that is expected to come from international institutional investors.

If we want to turn off that tap then of course as a sovereign democratic Republic we can do so. But if that is our choice – and it seems to be implied by the housing policy of at least one major party in Opposition – then we better be ready for the implications of adding €20 billion to our national debt and the need to service that debt when interest rates rise, perhaps sooner rather than later if bond markets are spooked by our spending.

So the State, and its citizens, have a decision to make: they can accept the fact that in a low interest world, international investors are ready and willing to provide billions of euro of investment that will help build homes in Ireland; or they can frighten away international property capital by imposing taxes that would allow a Minister to issue a press release saying they had “stuck it to the Reits”.

Hopefully it’s not quite that stark, and if reason prevails we will likely land on some kind of middle ground whereby stamp duty levels are tweaked to ensure that a certain percentage of houses in any new development are made available to first-time buyers, but not engage in penal tax policies.

Property and housing are emotive subjects, no more so than in Ireland where we all desperately hope to resolve the housing crisis we face. But hope is not a strategy, and emotion is not a policy.

Let’s not forget that a political discourse that depends on bashing Reits or the avian label du jour will not lay one brick or house one family, and that’s surely what counts.

Bill Nowlan led the Irish Reits Forum to promote the introduction of Reits to Ireland. He is a former director and investor in Hibernia Reit.

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