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Thursday, 16th January, 2014

 

To ask the Minister for Finance if any impact analysis has been carried out on the effects of real estate investment trusts on rental prices here; and if he will make a statement on the matter

Mick Wallace: The Government might view real estate investment trusts, REITs, as a quick fix measure to get rid of properties on the books of the National Asset Management Agency, NAMA, and the banks, but questions must be asked about the increased corporatisation of property, with little financial gain for the State. REITs are not taxed on their rental income as long as they pay 85% of it to their shareholders as a dividend, they are exempt from corporation tax as long as their income relates to rental income and non-resident investors are also exempt from Irish capital gains tax. There must surely be implications for the rental market in the years ahead.
 

Michael Noonan: The tax framework for real estate investment trust companies was announced in budget 2013 and introduced into law in March last year in the Finance Act 2013. The first REIT launched in July 2013 made its first property purchases in October 2013, so there has not as yet been sufficient time to determine the impact, if any, REITs have had on rental prices in Ireland.

My officials will be monitoring the uptake of REITs in the Irish property market, but it is not expected that REIT ownership of property will reach the level of concentration at which a distortion of competition in the market may occur. REITs are established in approximately 35 countries worldwide and in general the percentage ownership of property by REITs in those jurisdictions tends to be relatively small, often less than 10% of the total stock. The Deputy will be aware from his own experience in the property market that prospective tenants will shop around all potential landlords for the best deal available, so it is expected that rental values in the Irish market should continue to be determined by normal market forces and not by the presence or absence of REIT landlords.

I also wish to highlight to the Deputy that potential benefits for property tenants were a motivating factor in the introduction of the REIT framework last year. REITs are specifically designed for the long-term holding of income-producing property. They are not designed to hold development activities or to be a vehicle for short-term speculative gains, so they can provide greater scope for stable, long-term tenancies. Globally, REITs are characterised by professional management of the property assets they hold, as the objective for the REIT management is to produce stable, long-term income flows for shareholders. It is hoped that the introduction of this type of professional property management into the Irish market will, in the long term, help to standardise and improve management standards across the rental property sector as a whole, which would be of benefit to both investors and tenants.
 

Mick Wallace: The Minister says that the amount of property held by REITs around the world tends to be small. However, given that such a bank of property is going to flood our market from NAMA and the banks in the next few years, that will probably not remain so here. The rationale behind REITs is to allow people to invest in property without having to manage it themselves. It is a stockmarket version of absentee landlordism. The investors do not have to pay a lot of tax but are buying up large sections of property here.

Some of my property has been sold to foreign investors for less than half of what it could be built for today. The Government says there has been a vote of confidence in Ireland Inc., but does the Minister not think it has been completely confined to property and bonds, rather than to real business? Perhaps we are selling ourselves short. I am not sure that we need to subsidise property tax breaks to such a degree in order to get them to invest here.

Michael Noonan: There is a huge overhang of property, including portfolios held by NAMA and properties being held as collateral for impaired loans across the banking system. The banks have been deleveraging rapidly, especially Ulster Bank. There is potentially an enormous amount of property on the market. Part of the Government's job is to clear the overhang first because there will be no property development in this city or country until that is cleared. It is surprising that the overhang is being cleared so fast.

The advantage of REITs is not only what the Deputy referred to. The big advantage of REITs is twofold. First, the small investor can go in, so one does not need to put up €200,000 or €250,000 to buy an apartment if one wants to invest in property. One can buy REIT shares and put in €1,000, €5,000 or €10,000 as a small investor. One is then in for the dividend.

Second, REITs is not exclusively in apartments, it is spread across a range of different properties. If there is a collapse in one area the REIT is at least protected by values in another area. It is something that is being done in all developed countries now, but it will not dominate the market. It is just another initiative and it is working so far.
 

Mick Wallace: I understood that the original plan behind NAMA was that it would hold properties for a while, rather than flooding the market. Building work is starting again because there is a demand for certain types of property in certain areas where it is not available at the moment. In addition, there is too much property in places where it is not required. However, many large tracts of property that will be sold off will not be bought by Irish people. They will be purchased by foreign investors who will reap benefits at the expense of the Irish people. These people will end up with a lot of rental property, which will give them a monopoly in the game.

The Minister will recall that the really big problem with our building bubble was that a small group of people gained control of most of the land in this city and they land-banked it. They owned over 90% of the land with a potential for development and thus controlled the price of it. Prices went crazy. I ended up paying €5 million for one fifth of an acre because the market was being driven by a small group of people. We now have these people coming in and taking control of the rental market. This is not a normal situation because we have so much property to sell to them.
 

Michael Noonan: The Deputy is pointing to possible future fears but I am fully aware that there are risks in everything. Life is risky. If a Minister wants to avoid risk he or she will do nothing. Of course there is risk in REITs but the risk is managed and is minimal as far as I am concerned. Only two REITs have been established so far and both are capitalised at around €400 million. Two REITs with a total investment of €400 million is not going to distort any market or give anybody control.

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