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 sowing 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 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 up-front 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 two-and-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”.
