News & Research

Stamp duty increase on commercial property provides Donohue welcome fiscal space

Posted by admin on 26 Oct, 2017

Killian O’Higgins, Managing Director, WK Nowlan Real Estate Advisors:

“The increase in stamp duty on commercial property gave the Minister for Finance the fiscal space he needed to deliver on tax cuts and socially progressive spending commitments elsewhere, particularly in housing for those homeless or seeking social or affordable accommodation.

Valuations of commercial real estate assets will be hit by the stamp duty increase, and I anticipate some transactions may be delayed as buyers re-evaluate offers and look to renegotiate deals where contracts are unsigned….and in the past, vendors and purchasers have looked to share the pain. Otherwise commercial values are expected to fall by just under 4% and this will be a one-off hit.

Given the strong gains that commercial property owners have enjoyed in recent years, it’s no surprise that commercial property transactions have been targeted in today’s budget. At 6%, the stamp duty rate is below its level in 2010 and returns to a 6% level that existed for many years before the Celtic Tiger and subsequent crash.

Although we will hear about the ‘negative impact’ on foreign investment in real estate, those prepared to see Ireland as a good place to invest will continue to invest – it is just the apportionment of expenditure of, say €100m (excluding fees), will now be €94m to the vendor and €6m to the government as opposed to a €98m/€2m split on Monday. The €100m will still be invested, it is just that the government takes a greater share and the vendor gets less. Those already invested will take a hit, but for many, it is covered a multiple of times by the growth in market values over their period of investment. The reduction in the hold period for land, from seven to four years, to benefit from a CGT exemption will offset negative stamp duty impacts for some market participants.

Let’s face it, none of us likes paying more tax, but as a sector which has enjoyed significant support from Government through difficult times, there are few in the commercial real estate market who cannot afford the hit, although there will always be exceptions. If anything is learned from the past, it is that sectors of the economy doing well should be prepared to contribute more in good times – it justifies support in bad times. Such a rebalancing should be a feature of the way we approach taxation.

Although I will not be thanked by those in the hospitality sector, I remain surprised that similar action has not been taken in this area – a gradual increase in VAT given the recovery in the industry, on the same principle. If exchange rates are the issue, why the fall in UK resident expenditure in Ireland, whilst growing strongly in Eurozone countries such as Germany, Spain and France? Anything to do with our value proposition? – those with better knowledge will, no doubt, enlighten me!

The Minister’s decision to offer a stamp duty refund for transactions involving land for residential use is welcome, and will help ensure the tax changes don’t feed through into higher house prices or inhibit the supply of new homes. It will be important to ensure that lands acquired for student housing are also eligible for the stamp duty refund. For a site of a significant size, despite the best efforts of those involved, it is a challenge to get on site within 30 months, which is necessary to receive the refund. Planning or service connection delays will be the main impediments outside a developer’s control – ask Apple!

The challenge for the Minister is that after record sales/acquisition of investments, commercial investment sales levels are stabilising at a lower level and he cannot rely on the historically high levels of transactions in recent years as a guide to the stamp duty tax take in future – although an increase in residential activity, both sales and lettings would help offset some of the impact. It would be interesting to see the calculations on which the proposed tax take is based.

The stamp duty hike alone will not achieve the government’s goal of rebalancing activity away from office and commercial development into residential activity. Minister Murphy’s proposals for new residential development standards are likely to have much more impact, if the indications provided recently are delivered. The industry looks forward to those proposals and engaging with the minister.

An item which will receive less comment is the increase in the Vacant Land Levy to 7% of value in its second year of operation in 2019 – on a lands worth say €2.5m – that is a €175,000 liability in 2019 and a €75,000 liability in 2018.

The vacant land levy applies from 2018 at 3% but because it has not yet commenced, it has not yet received much attention. It will now be in great focus! Those making genuine efforts to bring forward development need have no fear – it is there to support those interested in development and to promote the sale of land where those who own it, cannot, or will not, develop the land. You will hear much more about the Vacant Land Tax in the coming months, particularly when notices are served on landowners that their lands have been include in the relevant Local Authority’s Vacant Sites register.

17 October 2017