Thursday 12 December 2019

Tax immunity end: Landlords move in, landlords move

With tax immunity set to expire, investors are snapping up property says Donal Buckley

Conor Skehan, chairman of the Housing Agency, has also dismissed claims that there is a housing “crisis”
Conor Skehan, chairman of the Housing Agency, has also dismissed claims that there is a housing “crisis”
Hopeful buyers clamour to bid for properties at an Allsop auction.

Thanks to the end of year expiry of a tax immunity for investment properties, there's been a rush on to buy up property for investment purposes.

Under current stipulations, those who buy a property before the end of this year and hold it for seven years won't have to pay any Capital Gains Tax (CGT) on the profits from the eventual sale of those properties.

Estate agents report that this has been a key incentive behind many who are now trying to buy a property and also a factor in squeezing up property prices.

Investors now account for almost one in five purchasers – or 19pc – according to the latest figures just published by Sherry FitzGerald.

That's a big jump upwards from the 13pc of purchasers they made up in the same second quarter of last year, according to the latest research from Sherry FitzGerald.

Furthermore they account for a bigger share of a bigger market as the volume of overall sales increased by 37pc in the opening quarter when compared to the same period in 2013.

The return of investors to a market share approaching their participation level during the boom years (20pc to 25pc) also comes just as a new financier has arrived on the market to provide them with mortgages.

Dilosk, which is not a bank, has taken over the ICS mortgage provider brand and a €250m mortgage book from the Bank of Ireland.

Marion Finnegan, chief economist with Sherry FitzGerald, expects investor activity to "continue and perhaps even increase as the year progresses given the expiration of the CGT incentive at the end of the year".

However, with Finance Minister Michael Noonan warning that he won't extend the CGT waiver deadline beyond December 31, this may take some heat out of investor activity next year.

Indeed, if the banks continue to increase the supply of repossessed investment properties next year, this might also help to relieve steam from this section of the market.

Brian Dempsey of Douglas Newman Good says another key factor driving investors is the poor return from their savings.

"Many of them are fed up with the combination of the low deposit rates offered by the banks, the high DIRT tax on this interest, and also feel that bricks and mortar investment is a safer bet," he adds.

"Because deposit rates are so low, some are not even thinking in terms of the percentage yields and how they compare to deposit rates. They are just thinking in terms of the prospect of rental income of €1,000 to €1,500 a month which would ensue that at the end of 10 years the property will 'wash its face' or in other words pay for itself.

"Some are not even concerned at the annual costs such as the annual property tax on value of the property, service charges for apartments, maintenance costs as well as the combination of universal social charge (USC) and the annual profits tax on rental income," he adds.

Karl Deeter of Irish Mortgage Brokers says investors started to "go mad" last autumn to get into the market when they thought the CGT deadline was last December and before Minister Noonan extended it to next December.

"Now the combination of the CGT waiver and low deposit rates are pushing them into the market whether they like it or not," Deeter adds.

He cites the example of someone with €200,000 in savings. Even if they got as much as 2.5pc on deposit, over seven years the lump sum would be worth €221,587 which represents a net return of about 11pc".

In contrast he believes property investors can still buy properties yielding 9pc a year. So on €200,000, that works out at €18,000 in rent. Allow for payments for USC, property tax and other costs including maintenance and vacancy amounting to 60pc of the rent.

Over the seven years the investor earns a total net rental income of €50,400, even if rents don't rise.

Then if prices have risen by a compound rate of 42.5pc over seven years, the investor can sell it for €285,000.

Furthermore unlike the income from the bank deposit, the €85,000 profit from the sale of the property is not taxable.

When this profit is combined with the net rental income, the investor gets a total return of €135,400. So the same €200,000 on deposit would generate a return of €21,587 after tax.

So when you wonder why property prices are rising, it's worth remembering that when you mix all the taxes, returns, yields and the like that it boils down to this: deposits will get you about €20,000 and a property will probably get you the pre-tax equivalent €271,180.

The recent Daft rental report suggests that buy to let investors could expect to generate a 7.1pc average yield (percentage return on the investment) for two bedroom apartments in south Dublin City at May of this year while those in North Dublin City were 7.4pc.

Barry Finnegan of Sherry FitzGerald says that yields are even keener at between 6 and 7pc in the north docklands – down from 8 to 9pc a year ago.

While private investors in Googleland have seen yields fall from 7-8pc last year to around 5-6pc.

But the big investment funds are buying prestigious apartment blocks at even keener yields.

For instance when IRES REIT paid €50.1m for 84 apartments and six commercial units at The Marker in Grand Canal Harbour, the net yield was estimated to be as low as 4.8pc.

A block of 25 apartments and two commercial units at Oxmantown Green, on the corner of Blackhall Place and Blackhall Street in Dublin's north side, were bought by a private investor in the second quarter of the year for around €6million, suggesting an initial yield of around 6.1pc.

But not all investors are happy with the market and some are selling off and getting out.

Already buy-to-let sales are well exceeding investor acquisitions. Sherry FitzGerald figures show that as many as 32pc of vendors in the year to date were selling investment properties which is higher than the 28pc long term average for investor sales activity.

Marian Finnegan says that these sales also help to explain "the depletion in rental properties on the market, a factor which is underpinning rental inflation".

Brian Dempsey expects increased investor activity from cash rich country parents during the next few months as they shop around for flats for their offspring who will be going to college in Dublin in the autumn.

While Karl Deeter believes that the investor activity will continue even after the CGT deadline on December 31. "There will be other reasons to attract investors," he adds.

What it does show is a rapid change in the profile of Irish landlords – and the effects of this going forward remain to be seen.

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