• Tax Strategy Group Paper – Real Estate Structures – Budget 2020
Article:

TSG Paper – Real Estate Structures – Budget 2020

19 July 2019

On Wednesday 18 July 2019 the Department of Finance published the Tax Strategy Group Papers for Budget 2020. There were 12 papers in total, with one paper focussed on Real Estate Investment Trusts, Irish Real Estate Funds and Section 110 Companies as they invest in the Irish Property Market.

This paper arose due to a commitment made during Dáil debates on Finance Bill 2018. Following discussions on the various collective investment structures used to invest in Irish property assets, and of the anti-avoidance measures introduced in Finance Act 2016, Minister Donohoe committed to undertake a review of Irish Real Estate Structures.

The paper includes an overview of the various structures, their tax treatment and available data. The paper is intended to form a basis for future policy discussions therefore presents the available information without drawing conclusions or recommendations.

As a result, the paper does not make any recommendations, or give any indications, as to likely changes in the tax regimes for real estate structures to be expected in Budget 2020. Nonetheless, it contains some interesting information and comments on these structures, which we have set out below.  

Real Estate Investment Trusts (REITs)

  • The paper contains a comparison table of international REIT structures. What is apparent from the table is that the Irish structure is not out of sync internationally. All other structures also allow for zero taxation at the level of the REIT for income and gains from qualifying assets, and the Irish withholding tax rate is similar to rates applied elsewhere.
  • Ownership by Irish REITs represents approximately 1.43% of national apartment stock, therefore, participation is relatively minor.
  • Since 2015, REITs have paid out just over €200m in dividends, resulting in withholding tax payments of €36m.

Irish Real Estate Funds (IREFs)

  • The number of funds with significant Irish property holdings increased from 132 in 2016 to 148 in 2017.
  • The estimated value of property held by IREF’s at the end of 2017 was €16.8bn, of which 89% is commercial property, and 11% is residential.
  • In 2017, IREF withholding tax deducted amounted to €9m.

Section 110

  • The number of section 110 companies holding Irish mortgages is relatively small. In 2017, there were 72 in total – 26 Commercial Mortgage Backed Securitisations (CMBS) and 46 Residential Mortgage Backed Securitisations (RMBS).
  • Changes to tax legislation in 2016 has led to a reduction in activity, rather than an increase in tax raised, with 39 companies electing out of the section 110 between 2017 and 2018.
  • Since 2015, section 110 companies have paid over half a billion in tax – most of which is Corporation Tax.

There has been a lot of recent commentary on the presence of institutional investors in the residential property market, mainly suggesting that institutional investors may be buying up property that would otherwise be available to individual home-buyers. Therefore, the paper also considers available data on landlords and tenancies in Ireland, and on institutional investment in the housing market.

Current data available shows that the majority of landlords (over 70%) hold only a single rental property, with over 96% of landlords holding 5 or less. These figures are broadly in line with the position in May 2017, thus indicating that there hasn’t been much change in the composition with the residential property market still being dominated by small scale landlords.

Furthermore, the purchasing activity of institutional investors represents a small proportion of the housing market overall. However, it is acknowledged that such investors do play an increasingly important role in the private rented sector. It is advised that institutional investment in apartments is likely to be the driving force behind a significant recent increase in the number of apartment units granted planning permission in Dublin, and the forward funding models used by such investors is providing much needed funding for property development.

While the purchase of an entire apartment block or development inevitably creates an impression that the investment is disproportionate to other activities in the market, the paper acknowledges that this needs to be seen against a background of still muted supply and a continuing shortage of rented residential accommodation.

The full text of the TSG Paper can be found here:

https://assets.gov.ie/19114/2de9c469825a47418526e1d5c217b44c.pdf