Thursday 23 November 2017

Tax on commercial property windfall adds up

Stamp duty hikes will have a marginal effect on bottom line
Stamp duty hikes will have a marginal effect on bottom line
Paul Melia

Paul Melia

Hiking commercial stamp duty isn’t about making the cost of housing more expensive, or making new home construction more attractive to builders.

The Government appears to be solely focused on collecting some of the windfall gains being enjoyed by the owners of offices, hotels, shops and land which are enjoying very nice returns from the sale of their assets.

Given that the Government has promised to lower taxes and increase public spending over the coming years, it’s hard to argue with the idea of taking a slice of rising property prices across the commercial sector to fund those laudable aims.

But concerns have been raised that if the rate is increased, as is mooted, that homebuyers will suffer.

Commercial stamp duty is levied on the purchase of non-residential property and includes commercial or business premises including offices, pubs, factories and shops, and land. It is levied at 2pc of the transaction value, and raised €256m last year. Each 1pc increase will raise around €100m.

Because most residential land sales are classified as commercial property transactions, increasing the stamp duty adds to costs, which are inevitably passed onto the buyer in the form of higher prices, it is suggested.

Land already makes up around €50,000 of the cost of a new home, but it’s worth noting that back in 2012 it was around €25,000. Clearly, there has been a thriving market in the meantime.

Of all the supposed problems in the housing market such as a lack of access to development finance, Government levies including VAT, labour costs, planning delays and access to mortgages, the one thing which is rarely cited as an issue is land. There’s a reason why. The Department of Housing says there is sufficient land zoned to deliver more than 400,000 units across the State, but only a fraction is being built upon. In Dublin alone, there is permission in place for 22,367 homes. To secure planning permission, you must demonstrate legal ownership of the land, or have the consent of the owner.

Hiking stamp duty won’t make a difference to the price of houses already approved, although it will affect future transactions. Will it stop land being released over the coming years for homes? Probably not, given house prices show no sign of slowing, and are probably unlikely to ever fall.

Any hike in stamp duty will only have a marginal effect on the bottom line.

Ireland’s construction sector is thriving, with more than 100 cranes dotted across the capital’s skyline. Few are linked to residential sites. Part of the reason is because commercial returns are so attractive.

In recent weeks, Aberdeen Standard Investments – one of the world’s biggest fund managers – revealed that investors in Irish real estate are securing yields of almost 12pc, with growth expected to continue over the near-term, albeit at a lower level.

Architect Mel Reynolds says there’s nothing wrong with the State taking a slice of any profits which arise when these valuable properties are sold, given the fact the State has already done so much to encourage investors into the country.

“Those expecting a profit of x may be hit,” he says.

But he adds that many players active in the market are availing of cheap money anyway.

“It’s a smart move. It would be great to see it ring-fenced for social and affordable housing which we need. Capturing some of the windfall profits is something the Government should be doing. Targeting them in a pro-business way makes sense.”

Irish Independent

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