Budget & Brexit boost for buy-to-let market
A number of factors are expected to make the buy-to-let market more attractive for investors in the coming months.
Next week's Budget is expected to relieve some of the tax restrictions, such as the 75pc limit on mortgage interest tax allowance. Furthermore, if Ireland succeeds in attracting some Brexit exiles from London, this may push rents even higher.
Experts differ, however, as to the extent of investor activity in the Dublin market, with some saying that more are leaving the market than are buying.
Others, such as John McCartney of Savills, point to how Dublin apartment prices are rising more strongly, up 6.4pc in the 12 months to July, compared to 3.8pc for house prices in Dublin. He attributes this to cash buyers, who are reckoned to account for half of all residential purchases and many of these are investors.
Underlining this trend, the latest Daft survey shows strong increases in prices for one-bedroom Dublin flats, a favourite among investors. For instance, in Dublin 1, which also includes upmarket units in the IFSC and Spencer Dock, one-bed prices soared 17.7pc over the 12 months to September to an average of €180,000.
Similar units in neighbouring Dublin 3, which includes upmarket Clontarf, jumped 9.7pc to €216,000. Dublin 4 is the most expensive with a 4.8pc jump to €295,000. With rents in D4 as much as €1,610 per month, such flats are generating gross yields of almost 6.6pc, which makes D4 one-beds more attractive than those in neighbouring D6, where they average around 6pc.
McCartney says that investors can achieve net yields greater than 4.4pc in most areas of Dublin.
"That's three to five times what you can get from bank deposits," he adds.
There are also signs that investors may be churning or selling one investment in order to buy another with greater profit potential.
The latest Sherry FitzGerald house price report shows that 32pc of the agent's vendors in the first nine months of this year were selling investment properties, while investors accounted for 20pc of all purchasers.
These figures support those who are concerned that the numbers of investors selling are nearly double those who are buying. They believe that this exodus is exacerbating both the shortage of rental accommodation and the upward pressure on rents.
Such an exodus is explained by research from accountants PKF O'Connor, Leddy & Holmes, which says residential landlords are much worse off than those investing in, for example, farm land, where rental income is tax free depending on age and 100pc of the interest is allowable.
It cites the example of a buy-to-let investor who buys a €250,000 apartment with a mortgage of €170,000 over 25 years at 5pc annual interest. Such an investor would make mortgage payments of €11,925 a year in principal and interest. Charging rents of €1,400 per month, he would generate a gross annual income of €16,800 a year.
Other expenses, including repairs, maintenance insurance, tenancy registration, agent fees and accountant fees would amount to €5,320, but they would be allowable against tax. In addition, property tax of €300 per year would not be allowable against income tax, which is effectively a form of double taxation.
"When all the figures are calculated, the landlord needs to inject a further €3,431 to keep the project running in year one. Over 25 years this landlord has expended a total of €117,906, plus the original €85,000 (of his own equity), bringing the total to €202,906," says McCartney.
If he were to sell the property at the same €250,000 price after 25 years the gross profit would be €47,094.
In a market where prices are down by between 30pc to 60pc on levels they were at 10 years ago, the boom-time investor suffers a loss rather than a profit. So it's not surprising that in markets where prices have achieved most of their likely recovery, investors should get out as they see little to gain by staying in.
The problem is that if the landlord wishes to get the highest price from a sale, he will want to offer a vacant flat to the market and will need to end the tenancy. However, this would mean that the property lies vacant for months while waiting for the sale to be processed and such vacancies are exacerbating the housing shortage.
Pat Davitt, chief executive, of the Institute of Professional Auctioneers & Valuers who commissioned the accountant's research has called on the Government provide to introduce a range of measures including equality of treatment between investors in residential and commercial property and between landlords and vulture funds.
He has also called for Capital Gains Tax (CGT) relief for investors who sell on tenanted property, as well as income tax incentives for landlords who offer long-term leases to tenants.
Another of his proposals, allowing full interest payments against income tax, is expected to receive a response in next week's Budget.
However, mortgage interest is not an issue for many current investors as they are cash buyers and some are even willing to buy tenanted properties.
McCartney believes that many of those exiting the market are boom-time investors who were highly mortgaged and motivated by the prospect of profits from rising prices.
"Current investors are motivated more by rental yields," he adds.
According to Daft.ie, Dublin rents rose 11.1pc during the 12 months to July, bringing them to a record which is 5.2pc higher than their previous peak in early 2008. The provincial cities are playing catch-up. Cork city saw rents soar by 18pc; Galway rents were 13.9pc higher than a year previously, while Limerick rose 15.5pc.
Consequently gross yields on a two-bed home averages 8.4pc across the country, while one-beds average 9.2pc.