Finance Bill Could Turn Commercial Property Bubble into next Crash

Analysis by Stephen Donnelly TD, released today, provides new evidence that Dublin is in the throes of a new bubble in commercial property. This means higher rents for businesses across the capital, which are increasingly being paid to institutional foreign landlords who will now be able to operate in Ireland tax free. It means higher rents and house prices for people living in Dublin and the commuter belt. It means less exchequer funds to invest in public services like education and health, infrastructure like housing and transport, and support for enterprise. And as the bubble is being caused by an influx of foreign capital to buy property assets, it means a greater risk of another crash.Dublin is the 2nd most expensive commercial property market in the Eurozone. High quality office space is now selling for 6.4 times more than it costs to build, with only Paris and London having higher multiples in the EMEA region. This is being caused in part by a raft of new tax breaks on property, including REITs, and ICAVs. These are being combined in creative ways with other tax vehicles like QIFs and Section 110s to avoid taxes on an enormous scale. Critically, these taxes would be on profits generated in the domestic economy, which this government has repeatedly said should be subject to full Irish taxes.The Finance Bill 2016 introduces a new tax vehicle for property which will explicitly make all income and capital gains from property completely tax free. This will be done via the Irish Real Estate Funds, IREFs. At the same time, the Finance Bill creates a new tax-free market for loans, providing a path for an influx of foreign capital together with a further erosion of the tax base.

Deputy Donnelly is calling on government to immediately reverse these proposals in the Finance Bill, and has tabled amendments for committee stage to that effect. Speaking today, he said:

‘So far as I can tell, no other European country provides tax-free status for commercial property. We are in the middle of another commercial property bubble here, businesses are struggling to meet spiralling rents, families are struggling to buy homes, or even rent them, and the State is short of monies needed to invest in public services and infrastructure. And yet, the government is proposing to pour petrol on top of all of this, for no obvious reason.’

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  • EMEA: Europe, Middle East & Africa
  • REIT: Real Estate Investment Trust
  • ICAV: Irish Collective Asset-management Vehicle
  • QIF: Qualified Investment Fund

Figures on commercial property in Dublin:

  • 2nd most expensive commercial property market in the Eurozone; [1]
  • 6th most expensive market in CBRE’s 57 City Commercial Property Survey; [2]
  • Cost to build in line with other 1st world European cities;
  • Grade A office buildings now selling for 6.4 times more than they cost to build;
    • Only Paris and London have a higher multiple of gross property value to core property build cost in EU;
    • Most major 1st world European cities maintain a multiple of 3.5 – 4.5;
  • In the last few years alone commercial rent in Dublin has nearly doubled;[3][4]
  • Dublin commercial property is selling for over €1,200 per sq ft, while core Dublin residential property sells for less than half that price (c €500 per sq ft);
    • At the height of last bubble, commercial property peaked at around €1,400 per sq ft.

Source of new tax break (making commercial property tax free on income and capital gains):

  • The new section in the Finance Bill on IREFs provides full exemption from Capital Gains Tax, CGT, once investors hold the property for at least five years.
  • The section on IREFs goes on to apply a 20% Dividend Withholding Tax, DWT, but it excludes nearly all investor types from this tax. There are no other Irish taxes to be paid.
  • Over 80%[5] of all future Irish Commercial Property investment will come from foreign Pension Funds, Life Assurance Funds other Collective Investment Undertakings, CIUs;
  • CIUs covers a wide range of REITs, unit funds and trusts, mutual funds, UCITs, and almost any other investment structure and institutional investor would use.[6]

Additional new tax break for loans

  • Finance Bill allows tax breaks via Section 110, in the domestic economy, for securitised loans;
  • This means banks can package up mortgages, commercial and other loans, into securities;
  • These can then be bought by foreign funds and operated tax free;
  • The effect is substantive erosion of the domestic tax base coupled with influx of cheap foreign capital;
  • See Section 5 in policy note for a more detailed explanation.

[1] Knight Frank Q2 2016 European Quarterly – Commercial Property Outlook (Top 26 Commercial Property Cities in Europe for Prime Office).
[2] CBRE Marketview Q3 2015 EMEA (Europe, Middle East and Africa) Major City Commercial Office Survey (Top 57 Commercial Property Cities in Europe, Middle East and Africa for Prime Grade A Office).
[3] Jones Lang LaSalle, 2016 Dublin Office Market Outlook, prime rent in Dublin grew from €35 / sq ft to €55-60 / sq ft from Q4 2013 to Q4 2015.
[4] Sunday Business Post October 9th 2016, ‘Peak rate of €65-€70 per square foot are being predicted’, referencing Knight Frank as source.
[5] CBRE Investment Digest H1 2016”, it was 70% for deals over €1m, but 80% for deals over €10m.
[6] Pension Funds (e.g., German BVK, Canadian PPIB), Life Assurance Funds (e.g., Aviva, M&G, Allianz), Collective Investment Undertakings (e.g., Hines, Hammerson).