IRISH REITS: EXACERBATING THE HOUSING CRISIS?

 

1st June 2020

 

Our main preoccupation here in Ireland, before the Covid 19 lockdown, was the housing crisis. The huge gains made by Sinn Fein in the general election in February, at the expense of the two traditionally powerful political parties, Fianna Fail and Fine Gael, were largely attributed to younger voters registering their discontent at the lack of progress in building affordable housing.

 

FF and FG now look like they will form the next government, with the help of the Green Party. All concerned know that if significant progress is not made regarding the housing issue in the next few years, then the political landscape will change for sure, to their detriment. When the Covid 19 obsession fades, housing will then be back as the number one item on the agenda.

 

It is interesting therefore to re-read an article that was written by Dermot Desmond in the Irish Times back on March 7th 2020, on how he would solve our housing crisis. His proposed solution is surprisingly 'left-wing' for someone who is one of our most successful businessmen.

 

And how do FF and FG pull the rug out from under Sinn Fein?  In the time honoured political tradition of stealing their policies, on the most critical issue that we are likely to face post the Covid crisis. With one of our foremost captains of industry and finance now advocating massive state intervention, it appears likely that we can expect some radical changes.

 

All of which could negatively impact the three remaining Irish Real Estate Investment Trusts (REITs), Hibernia, Irish

Residential and Yew Grove, following the takeover of Green REIT last year.

 

Mr Desmond has proposed the following solution:-

 

(i)      Create a major disincentive to investment institutions buying whole apartment blocks directly from developers.

 

It is more convenient for a developer to sell directly to one investment institution, rather than dealing with many small individual investors. In addition, the investment institutions can afford to pay far more than private individuals, as they can deduct the interest on their borrowings from their rental income. Rental yields on apartment blocks in Dublin are currently 3.6%. Institutions can borrow funds at 0.1%, so they are leveraging up on these investments.

 

Desmond's solution is to eliminate the tax deductability of interest for institutional investors and also impose a 50% tax on all rental income over €500,000. This would drive the institutional investor out of the apartment market, and lower prices for first time buyers.

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(ii)     Scrap most of the provisions of the Strategic Housing Development legislation of 2014.

 

The above legislation abolished the 80% windfall tax on development land and also removed the requirement for a percentage of new developments to be allocated to social housing.

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The State as the largest landowner, should build 1,000 houses per month, with a maximum cost of €250,000. Of this amount, €50,000 is paid to the local authority for the site value, and this in turn is used by the local authority to fund social housing.

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(iii)    The State should provide an interest free mortgage of €10,000 to €50,000 (depending on the income of the buyer),             so that the buyer can meet the hefty deposit requirement set by the Central Bank post the 2008 financial crash.                 This is repayable to the State when the house is sold.

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Desmond states that the €4 billion profit realised by NAMA on winding down its operations would largely finance the above.

 

(iv)    Accelerate the use of existing space for rent and avoid hoarding.

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Desmond states that there are many rooms over shops throughout Dublin that are not being used. He would give the owners a tax break incentive to let them out - the first €50,000 earned would be tax free. (This is the only classic 'right-wing' policy solution proposed.)

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Desmond would also introduce taxes to further penalise the hoarding of land by developers and the hoarding of vacant apartments by investors.

Proposal (i) above would eliminate  the most profitable investment stategy used by the Irish REITs since their formation, with a consequent adverse effect on earnings and asset growth.

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It is interesting to note that the management of Green REIT decided to sell out last year to a UK investment institution. The key members of Green REIT were also active in a prior venture, Green Property, whose sale was impeccably timed just before the property market tanked in 2008/2009.

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The reason that Green REIT gave for last year's sale, was that the share price was trading at a discount to the underlying net value of its properties.

I seem to remember the management of Green Property saying something similar when it put itself up for sale... Another well timed exit?