Friday 20 September 2019

Paul McNeive: 'Institutional investors are vital in property industry'

The right moves

Paul McNeive
Paul McNeive

Paul McNeive

THERE'S much debate regarding the role of institutional investment in the property market, with claims that investors are skewing the market for home-ownership towards long-term renting and "paying no tax". But institutional investment is a crucial part of mature property markets worldwide, and policy-makers should be careful not to jeopardise this source of funding, based on emotional reactions, largely arising because institutions have begun investing in residential property here.

We have always had institutional investors here - they just didn't invest in residential property. It was at too small a scale and was regarded as more trouble than it was worth. I can remember only one such scheme, and interestingly that became a PR disaster, when the institution began withdrawing. Emotions run high when people's homes are involved. The economic and property collapse saw the arrival of the so-called "vulture funds" from abroad, and most made big profits. I have analysed that before, but the crippling problem in the economy at the time was a lack of capital. The government had to create a market and attract new purchasers, and that meant selling at what appeared to be cheap. My criticism of that phase is that government/Nama, having created a market, were certainly a year too late in slowing down the rate of sales and raising their prices. But the "vulture fund" era has been and gone and it's a tag that should not cloud anyone's assessment of today's investment market.

Today's crisis is a housing and homelessness crisis. Because the economy started recovering quickly and the government wasn't building social housing, and high taxes were making houses unaffordable to buy, the demand to rent has exploded. And because there isn't enough supply, rents have soared, and so, seeing a profitable, and now large-scale market, institutions have begun developing, and buying, apartment blocks. That has become known as the private rented sector (PRS).

It wasn't long before these funds were dubbed "cuckoo funds" on the grounds that, because they were renting out apartments, they were preventing people from buying those apartments. (This despite the fact that for decades, commentators bemoaned the lack of long-term institutional, professional landlords here, as are common worldwide.) Again, the very favourable tax regime was cited, but in 2016, the government (belatedly) introduced a 20pc retrospective tax on income and gains on most of the sector - and they pay stamp duty, Vat and local property tax on every unit they own. So, the institutional investors have, in fact, been part of addressing the housing crisis and have delivered many thousands of apartments since 2015, with thousands more in the pipeline. Many of these schemes would have been unviable with traditional bank financing. We're far better off with more apartments and more tax, than none of either.

We now have 20pc of households renting in the PRS and an average of 37pc in urban areas. I agree this is becoming skewed and we risk losing the social benefits of "home-ownership". Many "institutional investors" would be quite happy to build and sell too, but, as pointed out in the EY-DKM report this week, building apartments in urban centres is unviable, because 30pc of the cost of an apartment goes to the State, in taxes. So we have a dilemma; Government policy is to promote density in urban areas, and reduce our commuter-driven carbon footprint. Some 8,500 work permits were granted to migrants in the first seven months of the year. By definition, they are highly skilled, and highly paid. They want to live in city centres, with no car, and demand an international standard of modern apartment - so we badly need these PRS apartments.

There is a balance to be struck between renting and owning but the State is making ownership unaffordable, and that is exerting downwards pressure on the social housing sector, where we aren't building enough. But don't blame the institutions - they're part of the solution.

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