Friday 28 July 2017

Richard Curran: Rental plan is just cream on the cake for many landlords

Minister for housing Simon Coveney Photo: Collins
Minister for housing Simon Coveney Photo: Collins
Richard Curran

Richard Curran

There is a new endangered species in Ireland. Its Latin name is "landlordus Hibernicas residentalis" but it is commonly known as the Irish residential landlord. It seems that in attempting to control spiralling rents that are ruining many people's lives, this delicate and shy creature must be coaxed to remain in business at all costs.

It happened back in 2015 when then environment minister Alan Kelly tried to introduce some kind of rent certainty. His proposals, which would have gone a considerable way towards capping rents, were ambushed by Fine Gael.

The rental scheme that emerged from the coalition discussions was diluted beyond recognition and the situation has just got worse.

It has happened again with housing minister Simon Coveney's proposals to control spiralling rents.

Coveney has a tough, if not impossible job. Accused of giving too much to landlords by some, nonetheless, he had a battle at Cabinet with some colleagues just to get this plan over the line as they didn't want rent caps at all.

He opted to contain rent increases to 4pc per year for three years in particular designated cities. Any less than that and the landlords will leave the market, apparently.

Fianna Fail wanted it to be just 2pc, which is more popular, but then wanted to give sustenance to landlords by providing them with tax breaks as compensation. Fianna Fail and Fine Gael reached a compromise on what areas would be reviewed to see if they should be covered by the rules, but the 4pc increase stands.

One question is where did the 4pc figure come from? Why that figure and why not stick it to the rate of inflation? Bear in mind that average rents in Dublin went up by 15pc in 2014, 8.5pc in the 12 months to August 2015 and are up 11.7pc in the 12 months to September 2016.

When asked about it on RTE Radio's Morning Ireland, the minister suggested that 4pc was a reasonable figure similar to a rate of return that might be sought by the likes of the Irish Strategic Investment Fund.

Of course, this has nothing to do with the rate of return in residential investment property. Many landlords are already making "returns" or yields in excess of that, without any further increases. According to one property website, as of June 2016, the yield on a one-bedroom apartment in Dublin 1 was 8.7pc. On at three-bedroom house in the same area it was 6.1pc. In Dublin 7 the yield on the same size properties was 7.9pc and 5.7pc.

Bear in mind that any investor who bought a property in 2012 or 2013 won't be rushing to leave it behind given that he/she can sell it tax free if they hold on to it for at least seven years.

IRES is a residential property investment company listed on the stock market. It bought 442 apartments in Tallaght a year ago. Tenants in the 85pc of the apartments that were occupied were delivering a gross yield of 7pc. This was expected to increase to 8.4pc on the remaining 15pc through higher rents.

Coveney's 4pc per year is just cream on the cake for many landlords who bought in recent years.

However, there are landlords who are not ripping people off and many other reluctant or accidental landlords who got caught in negative equity on second properties, such as apartments.

They owe a fortune on them and are hoping that rent rises will help them to get out of them. But if they haven't sold yet, and crystallised their losses, they are extremely unlikely to do so now.

Bear in mind that rents in Dublin are on average 9.3pc higher than at the peak of the boom. In Cork they are 8pc higher and in Galway City they are 14pc higher.

Yet, average house prices in Dublin are still 30pc lower than at the peak of the boom. Somebody is seriously cleaning up. This plan puts an end to the free-for-all in the rental market, but it is too little, too late. For many the 4pc is just another dollop of cream on top.

Strong dollar good news for Irish plcs in the US

Whatever about "making America great again", Donald Trump simply cannot buck the basic laws of economics. Since winning the US presidential election, the US dollar has climbed sharply in value. During the week it hit a 14-year high against the euro on the back of an interest rate rise and the fact that the US Federal Reserve signalled up to three more hikes in 2017.

Trump seems to want a strong dollar. Yet at the same time he wants companies to produce more goods in America and increase exports. A strong dollar will undermine America's competitiveness when it companies to selling their US-made products around the world.

The latest speculation is that Trump's Corporation Tax reform will cut the rate but in a way that benefits exporters the most. It may even see big importing companies get a lot less of the tax benefits. This is bad news for US retailers who import most of what they sell.

It could spell trouble for growth in FDI in Ireland. The US is our biggest export market with €26bn of exports last year accounting for nearly a quarter of everything we sell abroad.

A lot of it is pharmaceutical products, chemicals, medical devices and drink. Any US company supplying the US market with product it is having made in Ireland, might not get the tax benefits that Trump's incoming administration is talking about offering.

In the meantime, a strong dollar will be good for any large Irish company that sells a lot of product in the US and gets paid in dollars. This includes the likes of CRH which generates around 40pc of revenue in dollars. Kerry Group has sizeable operations in the US and a client base there too. The American market is also a big play for Glanbia.

No wonder then, that CRH's market value is up nearly €3bn since November 1st. Kerry group's market value is up €600m in the last month. And Glanbia's is up €290m since the beginning of November.

The risk for all of these companies is that Trump may deliver a strong dollar but what other damage might he do to the economy along the way?

Our farmers may be meat in the Brexit sandwich

Ireland's meat exports to the UK could be quite literally "slaughtered" according to warnings from the Irish Farmers Association (IFA). Its president told an Oireachtas committee during the week that 80pc of our meat exports to the UK could be lost and 60pc of dairy exports, in the event of a hard Brexit.

Assuming a reasonable level of exaggeration or hyperbole in these estimates from the lobby group, would still leave Irish farmers in big trouble.

Cross-border trade in meat is enormous. For example, the IFA explained that 350,000 lambs and some half a million pigs were sent North for processing there. In the absence of EU rules, the World Trade Organisation tariff regimes would be applied between the two jurisdictions resulting in between 15pc and 50pc on meat and dairy products.

The really big meat processors in Ireland have facilities in the UK to supply the British market and could offset the financial pain by switching capacity and investment across the Irish Sea or simply north of the Border. Smaller operators would suffer a lot more.

But of course farmers would be hit very hard. Processors here, big and small, would have to squeeze them further on price to continue to make a margin if tariffs were introduced.

It could lead to quite a boom for British farming - which is part of the whole idea.

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