Increase in stamp duty on commercial property transactions will result in a slowdown in commercial investment activity – Budget 2018

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Knight Frank believes that the increase in stamp duty on commercial property transactions from 2% to 6% will result in a slowdown in commercial investment activity. While this increase was perhaps inevitable given that the rate had stood at 9% during the peak, a gradual increase would have been more prudent. When valuing a commercial property, stamp duty (like legal and agent’s fees) is treated as a purchaser cost and today’s announcement will almost double purchaser costs to 8.46%. Given the fact that the value of a property is calculated net of purchaser costs, this will in turn result in a decline in capital values. As such this is likely to result in purchasers seeking a discount in future negotiations however, given that the expectations of sellers are likely to remain anchored to present values this could result in a slowdown in commercial investment activity. Despite this, we support the Government’s intention to introduce a stamp duty refund scheme for sites where development commences within 30 months of site acquisition.

We welcome the retention of the Help-to-Buy (HTB) Scheme which has ended months of speculation that it would be abolished. The introduction of the HTB scheme at the beginning of the year has coincided with a tentative recovery in construction activity. As of August, 4,600 units have commenced construction in Dublin, a 43% increase compared to the same period last year. While we acknowledge this is coming from a low base, a momentum appears to be growing behind the construction of housing in Dublin and the withdrawal of the HTB scheme at this point would have had a harmful impact on the confidence and the ability of house builders to maintain and increase their residential building programmes.

We also welcome further efforts outlined in Budget 2018 by the Government to tackle the cost of construction, particularly in relation to the cost of finance. The establishment of Home Building Finance Ireland is a positive development. The initiative, which will be funded by ISIF and assisted by NAMA, will provide €750 million in debt funding at market terms to commercially viable developments and will provide 6,000 homes according to Government estimates. Presently, the practice amongst banks is to provide no more than 60%-65% of the finance towards any development project meaning that the balance must be funded by expensive equity funding which can make projects unviable. Despite this, it is disappointing that the Government didn’t use this opportunity to take further steps to reduce the cost of construction particularly in relation to VAT and development levies which have been highlighted by the industry for some time as an impediment to construction activity.

While we support all measures to increase the supply of development land for housing delivery, the announcement today that landowners who do not develop vacant sites in 2019 will become liable for a 7% vacant site levy is unwelcome. The measure ignores the fact that there could be a multitude of reasons, other than land hoarding, why a vacant site is not developed. Developers could be experiencing difficulties in obtaining planning permission, accessing development finance or dealing with the fact that the site may not be adequately serviced with suitable infrastructure such as water or electricity. As such the imposition of this levy could represent another obstacle to the development of vacant sites and will compromise housing delivery on these sites.

In terms of social housing and in light of the fact that just 650 social housing units were constructed in 2016, the increased resources that have been made available for the construction of social housing in Budget 2018 is welcome, in particular the allocation of an additional €31 million to the Social Housing Current Expenditure Programme. We also welcome the provision of €500 million for the direct building programme, which will see an additional 3,000 new build social houses by 2021, increasing the existing target of social housing homes to 50,000, of which 33,500 will be delivered through construction. While we believe this will make significant progress in accommodating the 5,222 adults who are homeless in Ireland, of which 3,527 are in Dublin, the Government needs to follow through and expedite the deployment of this additional funding.

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