CBRE Say Commercial Property Stamp Duty Change May Deter International Investors
Dublin, 10th October 2017 – Commercial property consultants CBRE Ireland today reacted negatively to the Government’s decision to increase the rate of stamp duty on commercial property transactions in this afternoons’ Budget, which they see as having a direct impact on pension funds and the many institutional buyers who have been key to the recovery of this sector over recent years. According to the commercial property experts, the sheer scale of the increase from 2% to 6% from midnight tonight is unwelcome, particularly at this point in the property market cycle.
CBRE say that the increased cost of stamp duty will:
impact negatively on commercial property values & in turn on the value of pensions
do nothing to stimulate housing delivery, which is the most critical issue facing Government
potentially deter international investors
To say that today’s Budget is negative for the commercial real estate market is an understatement. One of the welcome developments over the last number of years is that the Irish commercial real estate market has become professionalised with more than half of all investment now emanating from overseas investors and institutional buyers as opposed to being a domestic debt-funded market as we had when the market crashed previously. This has created a much more stable market. Unexpectedly trebling transaction costs in this manner is clearly unwelcome considering the reputational damage it will do with these institutional investors. A large proportion of the institutional capital coming from Europe and indeed domestically is pension capital, so this is an indirect tax on the pension industry which makes Ireland less attractive internationally. It will certainly have a bearing on investors decision-making, not least the price they will bid and pay for real estate assets from this point forward. The idea that increasing stamp duty on commercial property in this way will encourage developers to switch from developing commercial property to developing residential is simply incorrect and demonstrates the extent to which Government are out of touch with the commercial realities of development and viability.
Data from CBRE shows the impact on transaction volumes when stamp duty was reduced from 6% to 2% in 2011 (the same Budget that introduced the Capital Gains Tax waiver for those holding assets for 7 years, which has today been reduced to 4 years). When stamp duty was reduced in 2011, the volume of investment spend, development land spend and hotel spend increased significantly. With the rate now heading back towards 6%, the opposite effect is likely on the basis that any increase in purchasers’ costs will ultimately result in a decline in capital value.
CBRE say that transaction volumes in many sectors of the Irish commercial property market have started to decline now that the bulk of deleveraging activity has occurred. As opposed to the €4 - €4.5 billion of investment assets that has typically traded in the Irish investment market over the last number of years when NAMA and various banks were deleveraging, the outturn for 2017 is likely to be closer to half that (only €1.3 billion of investment assets transacted in the first nine months of 2017).
Similarly, the volume of hotels traded in the Irish market in 2017 will be considerably less than the volume traded in the last number of years when several hotel portfolios were changing hands. (CBRE Research shows that just over €87 million of hotel transactions completed in the Irish market in the first nine months of 2017 compared to more than €800 million last year).
Therefore, increasing this transaction tax at this point in the cycle might not be as lucrative for Government as they think if they are basing calculations on transaction volumes over recent years, particularly considering that a stamp duty refund scheme is being provided in today’s Budget to shelter certain development sites from this higher stamp duty rate.
Being that residential development land transactions are classified as commercial assets, an increased stamp duty rate of 6% would ultimately have been passed onto the consumers of the end product, potentially putting further upward pressure on house prices at the very time when Government are aiming to make housing more affordable. Therefore, the establishment of a stamp duty refund scheme for sites where development commences within 30 months of site acquisition is welcome. In another significant move today, Government have moved to more than double (from 3% to 7%) the proposed tax on vacant sites, which is due to come into operation from January 2019.
While the property consultants say that there are certain elements of today’s Budget that are to be welcomed, including increased allocations towards the provision of much-needed infrastructure, CBRE are broadly critical of the stamp duty increase announced today saying this is a classic case of Government again intervening in the property market without consultation with the industry and without thinking through the potential ramifications for the property sector and in turn the wider economy.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com
CBRE U.C., (CBRE Ireland) registered in Ireland, no. 316570. PSRA Licence No. 001528 is the country’s largest commercial real estate services company with offices in Dublin and Cork. Currently employing over 135 employees, we work with occupiers, investors and developers of office, industrial and logistic, retail, hotel and healthcare property, providing strategic advice and execution for property sales and leasing; tenant representation, corporate services; property and project management; appraisal and valuation; development services; investment management and debt advisory; business rates and compulsory purchase and research and consulting. Please visit our website at www.cbre.ie