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What's on the horizon for Ireland’s Property Sector?

Wednesday, 05 December 2018

In an extract from an interview with the Sunday Business Post, in advance of the 5th Annual Property Summit, Head of Property Michael Walsh, highlights some of the key changes envisaged for the Irish Property Sector in the next 5 years.

For the full interview and a detailed analysis of the key issues discussed at Summit, see this week’s Sunday Business Post (to be published 9 December). 

Interview with the Sunday Business Post, 4 December 2018: 

"The rate of growth spurned by the markets alone will continue to be modest, assuming market conditions remain favourable" Head of Property, Michael Walsh

You are speaking at the forthcoming National Property Summit in Dublin. What is the focus of your talk?I will be providing an update on the fundamental change to conveyancing practice coming into effect on 1 January next year. I am currently the convener of the Conveyancing Committee’s Pre-Contract Title Investigation Task Force so I hope to explain clearly what the implications for the property market are, as we move to a full pre-contract investigation of title (PCIT) system. My colleague Neil Dunne will be speaking about the Land Development Agency. If we have time I will give a general round up of legal developments since I spoke at the conference last year. 

What immediate changes are necessary to ‘rebuild Ireland’ and resolve some of the worst effects of the housing crisis?Increase credit supply to unit buyers - while there is clearly more to be done and some land is still working its way through the financial resolution process, it seems we are reaching a more mature stage of recovery in the housing market.  Greater building capacity has established itself among developers; however the rate of increase in lending to home buyers remains modest. Following three months of decline, October showed a slight increase e.g. first-time buyers by +5% yoy by volume, +7% yoy by value.  As building output won’t outpace demand at least by much, clearly there cannot be profound change without greater financial capacity on the buy side. Recognising this constraint, the Government established the Rebuilding Ireland Home Loan (RIHL) in February 2018 for first time buyers, with attractive long term fixed interest rates. It is difficult to say whether it is having impact just yet. By Q2 2018 over a thousand loans were approved, but it is not clear how many were drawn down. 

Some of our clients discretely report that individual unit sales are subdued. Evidence of this is the significant increase in bulk residential sale deals in the market to substantial investors. While CBI recently made a decision to maintain the mortgage lending rules, and I can't contest the restraint shown, clearly the supply of housing will only be able to match the demand and financial/borrowing capacity of unit purchasers and PRS purchasers.

Increase credit supply to developers - the availability of credit at reasonable rates for the developer is a real issue. This is nothing new: the Department of Finance said recently “the lack of such finance has been identified as a key contributory factors to the shortfall in residential supply.” The high level of developer equity commitment currently needed for each site is also hampering supply delivery. On a €10m development, leaving aside land value, developers can be asked to introduce up to €5m in equity and possibly mezzanine (more expensive) debt. After the recession we have had, that type of money is not floating around. So, ‘forcing' the developers to develop by means including the vacant sites levy could have the impact of funnelling development sites to the larger, better capitalised developers.   The cost of funds too is high, this impacts directly on the price the developer must charge the unit purchaser and we must remember that onto that price the developer must add 13.5% which the end user pays, a rate much higher than the tourism sector paid during its period of crisis. 

Recognizing at least some of these issues, the Home Building Finance Ireland (HBFI) Bill 2018 is working its way through the Oireachtas. Once HBFI is established it should provide significant amounts of financing for much needed residential developments.

Incentivize apartment development – Ronan Lyons of TCD Department of Economics said on 4 December that “comparing our stock of dwellings with our population, Ireland has no shortage of houses - rather it’s missing about 500,000 apartments”.  He went on to say “that to address the backlog, 25,000 are needed per year until 2040”. With recurring LPT and service charge payment obligations and the same rate of VAT for apartments as for houses, buying an apartment can be a challenge and with development costs continuing to rise, Part V commitments, development contributions et al, the business case for apartment development often does not stack up.  

Battered Residential Investor – Chief executive of Fáilte Ireland Paul Kelly said recently “It seems from the information we've been able to get so far, the vast majority of the stock that's available through Airbnb is less than the 90 days and the vast majority is people who are renting out a room in their house." This would suggest that the forthcoming regulation of this sector is likely to have minimal impact on the private rental sector.  In any case the new regulation is not likely to entice further potential ‘smaller’ investors into the residential sector.  Adding to this the forthcoming Residential Tenancies Bill which will increase sanctions, which are to be welcomed fully, for breaking the law, one wonders if the landscape has improved for the residential investor year on year, other than the reintroduction of full mortgage interest relief. No growth in demand, no growth in supply. 

Planning – we should consider an entire overhaul of our planning system, involving a root and branch review. The approvals timelines are undoubtedly impacting on the housing supply and this is not assisted by the system allowing observations from parties without any reasonable standing. Currently I can object to a housing development in Kerry, for example, that has absolutely nothing to do with me as a Dublin resident. We have seen the Property Director at Lidl, Alan Barry make that very point over the summer (shortly after Apple stepped away from pursuing Athenry owing to the planning issues) in relation to planning objectors, albeit in a retail context, in which he cited delays in €100m+ of investment. The latest information indicates only eleven applications for strategic housing developments are with An Bord Pleanála.

I have long since espoused the view that we need to rethink height, density and connection to current and new public transport infrastructure that thinks big.  Creating a greater nexus between our national spatial and transport strategies and the development plans for our cities and towns is a strong imperative.  We need more strategic development zones and to centralise planning decisiond in relation to more urban areas of strategic importance to deliver macro level change. To be fair, Project Ireland 2040 embraces the concept of compact growth, especially to counteract continuing sprawl. Downstream policy changes must follow quickly. 

Taxation reform – vacant residential properties – is it time to look at LPT reform for properties lying vacant for a prolonged period? Or look at protecting social and health benefits for those who are elderly or sick allowing the rental or sale of homes which lay idle for months or years, when the owners are in nursing homes or long term care. Or should we look at revising the CGT by allowing for a discount for a limit period for vacant second homes to bring the existing stock into use. Should we capital allowances be extended for refurbishment of pre-63 residences which are dilapidated and out use for some time? If the objective is to get more properties to the market for use, we need to expand the pool of contributors to supply. 

What changes do you envisage for the sector over the next five years?
For me the single biggest upcoming game changer is the Land Development Agency (LDA) – it will be a crucially important protagonist in the housing recovery. The rate of growth spurned by the markets alone will continue to be steady, assuming market conditions remain favourable, so the LDA’s impact should be profound with an initial €1.25bn committed for investment.  That type of investment is of similar magnitude of funds invested by capital markets in the entire PLC and REITs in Ireland focused on the residential market. The development of up to 7,500 additional homes per annum will be transformative.  So, bearing in mind gear-up time, with the first units likely to come on stream in 2020, and 10,000 units already said to be in the pipeline, I hope that at excess 20,000 units will be delivered by the Agency within the 5 year period. 
I would like to think that the Home Building Finance Ireland will have well established itself during the period and will have funded many projects. The initial funding ear marked for HBFI, is €750m which could fund up to 6,000 homes. 
In five years most of the land in Ireland will be registered in our registry of ownership – the Land Registry.  This might be aspirational as some first registrations are taking over three years to get through. Further investment in our Land Registry will be needed if we are going to reach e-Conveyancing in the five year period.
We will see the Conveyancing system taking further steps towards an electronic system, which would place us among the world leaders in technology based real estate dealings. The 2019 change to a universal pre-contract title investigation system is an important step in that journey.
We should see more protections in place against property fraud – the PRAI’s planned anti-fraud notification system due for launch in 2019 will go a long way to address this. 

Michael Walsh was speaking at the 5th Annual Sunday Business Post Property Summit at the Aviva Stadium on December 5th. 
For full details on the conference, click here  

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