In this article, Derek Henry and Charlotte Cumiskey consider how the stamp duty residential bulk buying measures have affected the supply of social housing.

Media and public interest in institutional investment and fund financing has reached new highs in the last 12 months, with the narrative being largely negative. A new housing development in Maynooth hit the headlines after it was discovered that all subsequent phases had been acquired by an institutional investment fund and would therefore not be available to owner–occupiers, in particular first-time buyers.

While the general public may only have become aware of the existence of these funds in the last few years, institutional investors entered the Irish property market in the aftermath of the crash. Before this, the majority of property development was funded by the Irish banks.

Government policy introduced in the wake of the Crash to de-risk the banking sector, mainly the establishment of Nama, led to the prominence of these funds and institutions in the Irish property market. Such investors were incentivised to acquire properties from Nama by way of newly introduced tax legislation that gave capital gains tax (CGT) exemptions and allowed for the establishment of REITs and other specialised investment structures. It was feared that without the entrance of these funds, there would have been a shortage of buyers for the properties held by Nama, which would ultimately require the State to contribute more to the bank bailout.

Sherry Fitzgerald estimates that the private rental sector funds (or “cuckoo funds” as they are commonly known) have invested €3.7 billion in the Irish property market since 2018. It should be noted that the majority of these funds are pension funds that are driven by the customers’ requirement for long steady income growth and that their customers are ultimately all of us.

Research on the investment property market in Ireland carried out by Savills found that the vast majority of the €1.5 billion spent on the private rental sector (or build-to-rent) in the first half of 2021 came from investment funds. 90 percent of those residential units were forward funded or committed with just 10 percent being standing stock. As the developments are being funded by the end buyer (being the investor), the units are not put up for sale. This has resulted in major public outcry.

The reality is that banks still dealing with the repercussions of the Crash are slow to lend to developers. Therefore, the developers are reliant on investors to enable the continuation of residential construction. It is no secret that the demand for housing in Ireland currently far outweighs supply. The yearly demand for homes currently sits at around 35,000 units. However, just 18,000 units are to be completed in 2021, with 21,000 expected in 2022. Per the Government’s recent Housing for All1 plan “[i]t is estimated that Ireland will need an average of 33,000 new homes to be provided each year from 2021 to 2030” of which on average 10,000 per annum will be needed for social housing. Introducing measures that curtail supply is not what is required in relation to the delivery of social housing if these high targets are to be achieved.

The need for institutional investment can be clearly seen when it comes to the delivery of apartments. The cost of building apartments in Dublin is higher than many aspiring owner-occupiers or first-time buyers can borrow or afford, and therefore large-scale apartment development is not economically viable for the “build to own” market.

A report by the Society of Chartered Surveyors Ireland found that while the total development cost of medium-rise apartments in Dublin city and suburbs has actually fallen between 2017 and 2020, it still ranges from €411,000 to €619,000 including VAT. In fact, the purchase of the lowest-priced, low rise suburban apartments would require a household income of at least €98,000. The report also highlighted that investment funds that purchased build-to-rent schemes had made a major contribution to apartment supply.

At a national level, or in terms of the broader Dublin market, the advantages of institutional investment are manifold, broad-based and beginning to yield positive outcomes for the Irish housing system in particular social housing and apartments. From a macroeconomic perspective, it is not possible for the State to take on the full burden of social housing delivery or ownership.

Model for delivery of Social Housing

A common business model in recent years has been to develop or acquire residential units, secure leases with local authorities for social housing purposes, and then sell the units in one or more lots once the leases are in place.

Investors often enter forward funding commitments with developers which give a source of funding that may otherwise not have been available from the banks. The ultimate purchaser of these units is commonly an institutional investor or fund that is attracted to the long term, steady income (albeit at a discount to market rents) that the units generate. They are not interested in development or leasing risk. This model gives certainty to developers, without which it is highly unlikely that the delivery of these units to accommodate social housing needs would happen. The forward funding takes the leasing risk and institutions buy the property to access the income.

New Bulk Buying Measures

Section 31E Stamp Duty Consolidation Act 1999 (“SDCA”) was introduced in haste in May 2021 as a response to the perceived2 monopolistic pricing power of investors leading to owner-occupiers being priced out of the market and fears of unaffordable rents. It provides that where a person (corporate or individual) purchases 10 or more residential units in a 12-month period, the rate of stamp duty on the conveyance is increased to 10 percent. Prior to this, the rate of stamp duty on the conveyance of residential property was 1 percent on consideration up to €1 million and 2percent on amounts in excess, regardless of the number of units acquired. These new provisions do not apply to apartments.

Soon after its introduction, the effects that the measures would have on the supply of social housing became clear. Finance (Covid-19 and Miscellaneous Provisions) Bill 2021, enacted in July 2021, amended the new section 31E to provide an exemption from the higher rate when on the same day as the residential unit is acquired by the person, the person enters into a housing authority lease in respect of the residential unit for the purpose of the provision of social housing support to a qualified household.

Section 83E was also inserted into the SDCA which provides that where a person executes a qualifying lease with a housing authority not later than 24 months after the date of execution of a relevant instrument affecting the acquisition of the relevant residential unit (i.e. lease is not put in place on the same day as acquisition), the excess stamp duty charged under section 31E will be refunded.

Revenue guidance issued by way of a Tax and Duty Manual in October 2021. The guidance appeared to apply a narrow interpretation to the conditions for refunds under section 83E and to the conditions for the 10 percent rate exemption on houses leased to local authorities for social housing purposes. The Consultative Committee of Accountancy Bodies (the CCAB-I) wrote to Revenue noting concerns that the guidance was not aligned to the legislation. The submission emphasised that institutional investors are crucial to the development of property for social housing purposes and set out a clear case that the exemption to section 31E applied on the acquisition of a house with an existing lease in place and that sales of social housing with existing leases qualified for a stamp duty refund under the legislation. However, Section 55 Finance Bill 2021 amends sections 31E to put beyond doubt that the acquisition of a residential unit with an existing social housing lease is within the scope of the 10 percent rate. Section 83E SDCA 1999 is also amended to put beyond doubt that sales of social housing with existing leases in place are excluded from the refund scheme. The doubling down of efforts by the Government to apply the 10 percent duty rate to investments which fund social housing development is disappointing and may prove to be damaging to the supply model for the provision of many social housing developments.

The capital investment that institutional investors bring is very important to the supply of apartments and social housing. These investors are bridging a funding gap because Irish banks are reluctant to fund housing developments. The Irish housing crisis is complex, and many systemic issues will have to be addressed in finding a solution. However, the use of the tax system to penalise institutional investors will have a direct and detrimental effect on the supply of social housing and further measure like this should be avoided.