Budget 2018 – A Mixed Budget, Says JLL
Following the release of Budget 2018, JLL, the financial and professional services firm that specializes in commercial real estate services and investment management, has mixed views about some of the measures that were introduced. Whilst it is encouraging to see an overall drive for positive economic growth, there is concern about the impact that some of the measures will have on the commercial property market in Ireland.
John Moran, CEO and Head of Investment said that: “Of greatest concern is the 200% increase on stamp duty for commercial property from previous levels of 2% to 6%. This is likely to have a detrimental and immediate impact on property market transactions, particularly those that are currently under negotiation. It will cause an immediate reduction in the value of all commercial property, which at -3.7% will be almost equal to the increase in stamp duty. Stamp duty is a cost that is incurred by the purchaser during an investment transaction, and forms part of the overall gross capital value. The gross value will not change, but with an increase in the costs for the purchaser, that can only lead to the equivalent percentage reduction in net value of the asset. The stamp duty increase is going to have the greatest on impact investors, from those with small-scale individual assets, to those with larger portfolios of real estate, and may not in fact raise as much revenue as the Government expects.
“There is a risk that it will lead to a reduction in liquidity from foreign investors, as costs in Dublin and Ireland will automatically be viewed as more expensive. From an investor perspective, it also sends a message about the transparency of Ireland’s operating processes and that they are open to government modifications, particularly after the changes to tax for overseas real estate vehicles in last years’ budget. It also puts us in line with the highest stamp duty rates in some countries across Europe, whereas previously, Ireland would have compared more favourably.
“Whilst there has been recovery in the commercial investment sector in the last number of years, we are entering a different period in the market cycle and if the changes to stamp duty create any market disruptions, it may be detrimental to activity. Whilst we were starting to see stability across the sector in terms of demand, supply and values, we hope that the changes announced today do not impact on the sustainability of the recovery.
“The reduction in the capital gains tax exemption period from 7 years down to 4 is broadly welcomed. This will hopefully act as a catalyst to investors who were holding property and will help to bring additional investment stock to the market, from both a residential and commercial investment perspective.”
In addition to changes which will impact the commercial property market, there was also a big focus on the residential market in the budget with a number of measures introduced.
Conor O’Gallagher, Director and Head of Residential said: “Most notably, it is positive to see that the Government has identified the need for development finance, by implementing Home Building Finance Ireland. The €750m that has been identified to provide additional finance to support housing development, is a step in the right direction for helping to address residential supply issues and is promised to bring an additional 6,000 units to the market.
“The Budget today also included the official announcement of the vacant site levy, which will come into force in 2019. Whilst this is an effort by the government to encourage development activity of vacant sites to potentially alleviate the severe supply shortages in the residential sector, it still misses the point about development, and in particular the economics of development. The main issue is not the supply of land, but that the cost of development still does not make economic sense in many cases, with taxes, land costs, building material costs and labour shortages being the main issues impeding development. It is disappointing that none of these issues were addressed in the Budget. Further clarification is also sought with regards to exceptions for this levy, and whether it will include zoned-land or shovel-ready sites only.
“On the other hand, the Stamp Duty Refund Scheme for residential land which was introduced is broadly welcomed. A refund on stamp duty for developers who commence development within 30 months of purchasing a site will hopefully act as a catalyst for investors and developers who are looking to build residential schemes on these sites. In addition, the reduction in the capital gains tax exemption period from 7 years down to 4 will help to bring additional second hand residential stock to the market.
“We also welcome the Social Housing Initiatives and the increase in funding to the HAP Scheme as there are supply issues in all sections of the market and a properly functioning residential market requires a holistic approach that addresses all of these areas.”