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Commercial stamp duty in Ireland hiked from 2% to 6%

By Kasmira Jefford - Tuesday, October 10, 2017 14:33

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Buyers of commercial property in Ireland were dealt a blow in today's Budget after the finance minister confirmed an hike in stamp duty from 2% to 6%.

Stamp duty on non-residential property was last changed in 2011 when its was cut to 2% in a bid to boost the commercial property market.

"It worked and now that the market is performing strongly, the time is right to focus resources elsewhere," finance minister Paschal Donohoe said.

This new rate, which will come in effect at midnight, is below the maximum rate of 9% charged between 2002 and 2008.

Investors who have bought commercial land for the development of housing will be able to apply for a stamp duty refund,  subject to certain conditions, including a requirement that developers will have to commence the relevant development within 30 months of the land purchase.

The property industry reacted with dismay to the news, with CBRE warning that the decision could potentially deter international buyers and impact institutional capital coming from Europe.

“To say that today’s Budget is negative for the commercial real estate market is an understatement," Marie Hunt, executive director & head of research at CBRE Ireland, said. 

"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 the firm 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 said 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 - €4.5bn 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 €1.3bn of investment assets transacted in the first nine months of 2017). 

Tony Waters, Managing Director, HWBC warned that the hike is likely to adversly affect capital values for the large institutional and REIT investors in the Irish market.

"The government is hoping that the change will incentivise investors into residential projects over commercial and office developments, but there can be no certainty this will be the case," he said. 

"Having said that, the rate was extremely low by international standards and the sector has been the beneficiary of a large rise in values in recent years, so it is no surprise the government has targeted it to help it deliver the tax cuts it wanted to make elsewhere.

By way of comparison, commercial stamp duty in the UK is 5%, and in Ireland was 9% until 2010, when the government started a series of reductions which helped jump start the market from the cardiac arrest of the crash.

Inevitably the devil will be in the detail, but the Minister’s plans to offer a stamp duty refund on land transactions for residential construction looks like a sensible move to avoid higher stamp duty feeding through into higher house prices or reduced supply.”

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