Budget Submission to the Department of Finance and the Department of Public Expenditure and Reform

Transcription

1 Budget 2014 Submission to the Department of Finance and the Department of Public Expenditure and Reform

2 Mr Michael Noonan TD Minister for Finance Department of Finance Merrion Street Dublin 2 Mr Brendan Howlin TD Minister for Public Expenditure and Reform Department of Public Expenditure and Reform Merrion Street Dublin 2 Dear Minister Budget 2014 On behalf of the Society of Chartered Surveyors Ireland, I would like to submit the attached report for your consideration in advance of Budget The Society is the largest professional body in the construction and property sector in Ireland, and our mandate is to provide thought leadership in these sectors in the public interest. This over-riding public interest mandate has determined the recommendations in this brief submission. They are intended to bring new activity to the sectors, prevent any further erosion of the skill-base and capacity of the sectors, and ensure that the construction sector and property market can perform in the optimum way to ensure economic recovery and improve quality of life. Overshadowing both sectors is the continued absence of private finance. In both the construction industry and the property sector, there is a need to ensure that viable and necessary developments to meet the needs of a new economy can secure the necessary finance to reach a successful conclusion. Employment in the construction and property sectors has fallen dramatically in recent years. Nonetheless, these sectors provide employment for over 5% of the Irish workforce; their jobs must be protected and new job opportunities created if Ireland is to overcome its unsustainably high unemployment level and return to growth. Therefore, the recommendations which we make to you have two themes: the promotion of new financial support to allow the completion of necessary development and the maintenance and growth of skilled employment in the construction and property sectors. My colleagues and I would be delighted to meet with you, and to continue our excellent engagement with officials in your departments, to discuss these recommendations with you in more detail. I hope that you will consider them in advance of the Budget. Yours sincerely Micheál O Connor President Ciara Murphy Director General

3 BUDGET 2014 Contents The Economy Table 1: Economic Growth Forecasts Part One: Construction Table 2: Value of Construction Output Graph 1: Volume of Construction Output Support economic growth through increased, targeted public investment Graph 2: Construction Tender Price Index Rollout of Capital Investment Table 3: Capital Investment in Key Vote Groups to End-May 2013 Graph 3: Public Capital Investment as % of GNP Graph 4: Public Capital and Current Expenditure Graph 5: Annual Change in Public Capital and Current Expenditure Supporting Efficiencies in Public Procurement Built Asset Management Investment in Public Buildings Promoting Private Investment in Construction and Regeneration Promoting Energy Retrofitting Part Two: Residential Property Encouraging International Investment in Ireland Increase the energy efficiency of the built environment Table 4: Office Refurbishment Options Reform of Tax on Agriculture Part Three: Commercial Property Encouraging International Investment in Ireland Increase the energy efficiency of the built environment Table 4: Office Refurbishment Options Reform of Tax on Agriculture

4 Key Recommendations Construction Targeted investment of capital and PPP funds in infrastructure which will support growth and meet the future demographic, social and economic needs of Ireland. Delivery of alternative funding for public works, coupled with measures to support improved bank financing of private construction projects. Published multi-annual pipeline of public and semi-state capital projects, overseen and evaluated through improved governance of the construction sector, an improved planning system and streamlined procurement process. The creation of the post of Chief Construction Adviser to the Government, to co-ordinate meaningful engagement between the sector and the State. Investment in, and rationalisation of, public buildings to reduce running costs and improve the energy efficiency of the public estate. Reduction of VAT to 5% on labour and professional services for property repairs, maintenance, lettings and management of residential property to reduce exposure to the Hidden Economy and drive high standards of energy efficiency in the built environment. Residential Property Introduction of standardised mortgage application forms to ease mortgage application process with unsuccessful applications open to review by an independent mortgage review body. Address supply problems through the promotion of increased urban densities and development of brown field sites; nationwide expansion of pilot schemes to refurbish Georgian areas. Commercial Property Promotion of increased international investment in Irish commercial property through the support of Real Estate Investment Trusts coupled with measures to support small-scale domestic investment by pension and insurance funds in residential and commercial property on a syndicated basis. Reduction of VAT on the retrofitting of private and public commercial buildings to improve the energy efficiency of the Irish built environment; and a managed process of rationalising the public estate to lower running costs. Reform of the taxation regime for inter-generational transfer of agricultural property, including CGT and re-instatement of roll-over relief. 2

5 The Irish Economy in 2013 The Irish economy continues to struggle to grow against a background of continued European and global austerity. Domestically, low GDP growth is forecast for 2013 and 2014, but this will be fuelled by continued strong exports; it is expected that in the absence of growth in indigenous businesses, public and private spending will remain widely depressed. Unemployment remains high, and emigration continues to present significant challenges to the skill-base and capacity of Ireland s productive sectors. Deals on Irish debt which have been secured in 2013 give some room for optimism that increased domestic investment may soon be possible. Furthermore Ireland s improving international reputation may open new funding sources for private investment, particularly from the European Investment Bank. Table 1: Economic Growth Indicators (% annual change) (f) 2014 (f) GNP GDP Domestic Demand Private Consumption Public Expenditure Investment Exports Imports Unemployment Rate Employment Growth Wage Growth CPI Inflation General Government Balance

6 Part 1 Construction Contents Table 2: Value of Construction Output Graph 1: Volume of Construction Output Support economic growth through increased, targeted public investment Graph 2: Construction Tender Price Index Rollout of Capital Investment Table 3: Capital Investment in Key Vote Groups to End-May 2013 Graph 3: Public Capital Investment as % of GNP Graph 4: Public Capital and Current Expenditure Graph 5: Annual Change in Public Capital and Current Expenditure Supporting Efficiencies in Public Procurement Built Asset Management Investment in Public Buildings Promoting Private Investment in Construction and Regeneration Promoting Energy Retrofitting

7 Part One: Construction 1 The Irish Construction Industry in 2013 At the time of Budget 2014, the Irish construction industry will be half-way through its sixth year of recession. During that period, the output of the industry has fallen sharply from a height of 38bn and employment in the sector has halved. It is widely accepted by Government and the sector that in 2013, annual construction output should be in the region of 16bn to 20bn if it is to perform at an appropriate level to meet the needs of the economy. As the CSO Production in Building and Construction Index shows, the bulk of this decline has been in the new residential property sector, but significant and prolonged declines in the volume of construction output have been seen in the civil engineering and non-residential building sectors. Reports produced over the course of the first six-months of 2013 suggest that actual construction output is not likely to exceed 7.5bn this year. Table 2: Estimates for the output of the construction industry in Society of Chartered Surveyors Ireland 8.70 bn 7.50 bn 7.10 bn Central Bank of Ireland 8.80 bn 7.99 bn 7.73 bn BruceShaw 8.70 bn 7.48 bn 7.00 bn Davis Langdon 8.50 bn 7.75 bn 7.50 bn During low levels of private activity, the output of the construction sector is largely determined by changes in Government capital investment and the availability of non-traditional project financing. Thus, it is vital for the future of the sector that public investment in construction is realised, so that each component sector of the industry can perform at an optimum size. 6

8 Graph 1: Volume of Construction Output All construction Civil Engineering Residential Non-Residential Source: CSO (2005 = 100%) While the loss of employment and output are quantifiable, the erosion of the sector s skill-base and its loss of productive capacity are less easily quantified. Measures contained in Budget 2014 should not simply be aimed at increasing the output of the sector, but ensuring that the sector retains the skills and diversity of professional services to support economic recovery. The construction sector has invested heavily in new products and processes during the last decades. This has reduced the cost of construction significantly; the exchequer benefits of this private investment should be harnessed and utilised through continued investment by the State. Recognising the importance of a strong, dynamic, diverse and professional construction sector to economic recovery, the industry has worked closely with Forfás to produce a strategic report on the future direction of the construction industry to This report contains important reforms of the governance of the sector and the way in which contractors, developers and construction professionals engage with Government, including IDA Ireland, Enterprise Ireland and the planning authorities. The Society calls on Government to publish this report and implement its recommendations and, for its part, the Society repeats its commitment to working with Government and all other stakeholders to create better and stronger engagement which will avoid repeating the errors of the past, and help the sector do its part to grow the economy. 7

9 Support economic growth through increased, targeted public investment Ireland s positive demographics will place increased pressure on the State s built environment and the existing physical infrastructure network over the next decades. The Central Statistics Office forecasts that between 2011 and 2021, an additional 143,000 households will be formed in Ireland; as Ireland returns to positive inward migration and homeowners and businesses benefit from improved economic activity, public investment in infrastructure to support this increased demand is required, not only to maintain the quality of our existing infrastructure but to anticipate new demands created by a new economy. The National Competitiveness Council has recently noted: Sustainable public and private investment which supports the development and maintenance of an export-friendly environment by utilising worldclass technology and infrastructure to create and deliver goods and services efficiently to customers is an important determinant of competitiveness. Thus, by investing in our infrastructure now, Ireland can make a real difference to our future economic competitiveness. Future demographics mean that we will experience acute pressure on our stock of public hospitals and schools. By 2021, there will be an additional 76,000 children aged between 5 and 12 years old living in Ireland, and 104,000 additional children aged between 13 and 18 years old. This increase in the number of school-age children is likely to mean Ireland requires an additional 2,000 primary school classrooms and 4,000 additional secondary school classrooms if we wish to maintain current teacher: pupil ratio. An ageing population will have an impact on the type, size and location of health service providers, as well as residential accommodation. Government should prepare to construct these much-needed public buildings now, so that they can be in place ahead of need. A national Predict-Provide model of ex-ante investment in infrastructure should be at the heart of routine forward-looking dialogue between the construction sector, state agencies and planning authorities. A failure to properly target and sequence the development of necessary infrastructure on a regional and sectoral basis will simply repeat past errors of undersupplying the right type of infrastructure. The purpose of infrastructure is to create a national network of public utilities to support economic and social activity, and improve quality of life. As the nature of economic activity changes, so the infrastructural requirement to support that activity must also change. It is important that infrastructure is provided ahead of need, utilising a solid prediction-model. Having almost completed the road and rail networks, and having upgraded ports and airports, Ireland must now continue to invest in its future through the provision of a national broadband network and full national mobile telephone and 3G coverage. According to the National Competitiveness Report 2013: it will be important that advanced broadband services are quickly made available in Irish cities and towns to support the growth of emerging high value information-intensive industries such as digital media, cloud computing, e-games, healthcare and 8

10 education. It is, therefore, worrying that Ireland has one of the lowest fibre broadband connection rates in the OECD-28, and that it fell two places in the rankings between June 2011 and 2012 to 25. This slip in our international competitiveness will undermine the government s policy to make Ireland a high-tech economy, and a country in which high-tech businesses should locate. Graph 2: Construction Tender Price Index Source: Society of Chartered Surveyors Ireland (1998 = 100) During a period of low levels of activity in the construction sector, and low tender prices, planning, design and construction of this anticipated demand for new public buildings and infrastructure should be commenced with immediate effect. By harnessing innovation in design and construction methods, it is possible to construct schools and other public buildings now, and lease them to the private sector for office accommodation before retrofitting them to be used for their original purpose when pressure so demands. There is an opportunity to design world-class innovative building solutions and generate a rental income from the private sector to offset initial construction costs. Rollout of Capital Investment The current Public Capital Programme to 2016 commits the Government to an investment of 17bn, of which some 70% will be spent on construction-related works. Additional announcements in 2012 and 2013 of further capital expenditure on minor works such as road upgrades, local authority energy retrofitting and schoolbuilding extension and retrofitting have been welcomed by the sector. 9

11 According to the Stability Programme Update and other Government plans, the total capital allocation for 2013 is 3.4 bn, some 7.3% lower than According to Budget Day projections, total scheduled capital expenditure to the end of May 2013 should have been 859m. Actual expenditure for this period was 751m, a 12.6% under spend against profile. The Society is concerned that a pattern of monthly under spending has emerged in many line departments, most especially the Department of Environment, Community and Local Government whose capital investment programme is some 25% behind profile. Comparing this year s output to that of 2012, during the year to end-may 2013, total actual public capital investment in Ireland fell by 18.1% compared to the same period of It is vital that if projects receive funding approval, that they are rolled out as per schedule. The Society looks forward to working with Government on identifying blockages to expenditure and remedying them. Table 3: Capital Investment in Key Vote Groups to End-May 2013 Vote Group End-May End May Variance Variance Profile Out-Turn ( m) (%) Communications, Energy and 17m 14m - 3m -15.3% Natural Resources Environment, Community and 116m 88m - 29m -25% Local Government Health 138m 74m - 64m -46.4% Justice and Equality 26m 22m - 4m -15.5% Transport, Tourism And Sport 175m 164m - 11m -6.5% Total Public Capital Programme 858m 751m - 108m -12.6% Source: Department of Finance. Exchequer Statement June 2013 As a proportion of overall Government expenditure, capital investment has fallen from 18% in 2008 to 6% in In 2009, capital investment was cut by 18.6%; further cuts were experienced in all subsequent years to This represents a significant reduction in the public investment in Ireland s economic future. The Society recommends that during a period of tight public finances, rigorous ex-ante analysis of investment must be undertaken. Any further declines in direct exchequer capital investment should be augmented through increased PPPs and other private finance models. As Ireland s international reputation improves, opportunities for investment from international banks, including the European Investment Bank should be further explored. Between 2003 and 2010, total public investment in capital projects was between 4% and 6% of GNP, in line with commitments made in previous National Development Plans which aimed for annual public capital investment to be in the region of 5.5% of GNP. Since 2010, investment has fallen at a faster rate than the economy, so that by 2013, the public capital programme (assuming all allocations are invested as per schedules) will be around 2.5% of GNP. 10

12 Graph 3: Public Capital Investment as % GNP Source: Department of Public Expenditure and Reform, ESRI Graph 4: Public Capital and Current Expenditure ,000,000 60,000,000 50,000,000 40,000,000 30,000,000 Capital Current 20,000,000 10,000, Source: Department of Public Expenditure and Reform ( thou) 11

13 Graph 5: Annual Change in Public Capital and Current Expenditure % 30.00% 20.00% 10.00% 0.00% % % % % Current y-o-y Capital y-o-y Source: Department of Public Expenditure and Reform The Society recognises that funds which will be invested in Ireland s physical infrastructure must be borrowed internationally. This comes at a cost to the tax-payer. Nonetheless, the Society believes that a failure to maintain a commitment to the quality of Ireland s infrastructure will be at a much greater longer-term cost. Past errors of cost-over-runs and a failure to plan, sequence and deliver an agreed pipeline of works can be avoided through rigorous analysis of value for money, engagement with practitioners and finding alternative sources of capital finance. RECOMMENDATION: Targeted investment of capital and PPP funds in infrastructure which will support growth and meet the future demographic, social and economic needs of Ireland Supporting Efficiencies in Public Procurement The construction of new buildings and the installation of new infrastructure is a complex process, with an increasingly burdensome tendering and procurement process. The Society recognises that Government must be diligent in tendering public contracts to ensure the best possible value for money. While supporting value for money, the Society repeats its call for state agencies not to accept tender bids which are below-cost as 12

14 this will inevitably result in additional costs further along the design and construction stage of development due to project failure. Accepting tender offers which are priced at below the cost of undertaking the work may result in the successful tenderer resorting to using the Shadow economy with further negative impacts on tax receipts. In tendering for public works, construction firms and design professionals must be assured that works for which they tender will be commenced and completed as per the timetable announced in Government publications. The promotion of investment in Green Procurement and sustainability have the potential to improve the lifecycle running costs of Ireland s new public buildings and infrastructure thereby making Exchequer savings on overall running costs of public buildings. Building Information Modelling (BIM) is now a key part of public procurement in a number of developed countries, so there is an opportunity for the Irish Government to harness international best practice in designing sustainable buildings. The Society welcomes previous commitments by Government to reimburse the costs of tendering for works by three unsuccessful bidders and Government and EU efforts to reduce bid-costs. Access for small, regionally-based construction firms and design professionals to the public procurement process is vital in order to maintain a diverse and regionally-based national construction sector. The Society recommends that Government redoubles its efforts to ensure that small, indigenous firms are not displaced by larger multinationals in the effort to reduce design and construction costs. The Society recognises, of course, that value for money must be at the heart of the Government s construction strategy, but this must not be with the result of below-cost tendering or the monopolisation of public contracts by a small number of large firms. RECOMMENDATION: Published multi-annual pipeline of public and semi-state capital projects, overseen and evaluated through improved governance of the construction sector, an improved planning system and streamlined procurement process, including the creation of the post of Chief Construction Adviser to the Government, to co-ordinate meaningful engagement between the sector and the State. Built Asset Management Two key efficiencies can be achieved through strategic management of built assets. It is firstly possible to improve efficiency and effectiveness in the management of public land and property assets, and secondly through the use of the value in surplus, under-utilised and non-core Government assets to transform areas and to accelerate delivery of much needed infrastructure. The Strategic Investment Board in Northern Ireland adopted such a strategy to the running of their built state which has subsequently been expanded to cover the following potentials which can come from undertaking an audit of existing State-owned property: 13

15 Rationalisation of accommodation portfolios Redevelopment/refurbishment of assets Re-gearing/renegotiation of leases Master planning of sites Development of service commercialisation opportunities, and Disposal of assets, where appropriate. Investment in Public Buildings In April 2011, the McCarthy Report recommended that there should be one state property management agency and a consolidated register of all state property howsoever owned (Recommendation 51). The Report also recommended that an annual target should be set for the sale of state property over each of the next five years (Recommendation 52), and that a study should be completed on the means and feasibility of privatising the operations of such bodies as the Property Registration Authority Ireland. The Society wholly endorses these recommendations. As noted elsewhere in this Submission, reports produced for the private residential sector and the private commercial sector have shown the positive return on meaningful retrofitting works. Ireland is a net importer of energy, so any effort to reduce the energy needs of public buildings will assist in securing energy independence. Lower running costs will further represent a longer-term saving to the exchequer. The State, through its various institutions, gathers an enormous amount of datasets on property in Ireland, including its type and age, location, ownership, last transaction price and current use. Much of this data is collected at point-of-sale and accumulates with each transaction. The movement towards geo-tagging data has meant that it is now possible to link all of this disparate and historical data and record it centrally, linked to the location of each individual property. The State, which itself is the largest owner and tenant of property in Ireland, does not yet own a map of all buildings under its control. The Sustainable Energy Authority of Ireland suggests that the running cost of Ireland s public built estate is in the region of 600 million per annum, and that a national programme of retrofitting public buildings, and private buildings leased by the State could see that figure fall by one-third. The Society therefore welcomes the fact that the Office of Public Works (OPW) has assumed executive authority for the procurement of office accommodation and the allocation of office space. The potential savings which can be made can be seen in the fact that the first phase of rationalisation generated a 20% fall in leasehold expenditure, annual rental savings of 27.6 million and a property footprint reduced by almost one million square feet. According to recent reports, the total property portfolio held and managed by OPW comprises of 2,255 holdings with 635 buildings housing the Civil Service, 840 Garda properties and 780 heritage properties. Leasehold expenditure has come down from a high of 130m in 2009 to 107m in The total floor area of its office portfolio has fallen from a high of 950,714sqm in 2008 to 879,742sqm at the end of

16 A national energy efficiency framework should include learning lessons from current exemplar projects in the public sector, to seek new ways to stimulate economic activity in the field of energy efficiency and to create indigenous businesses in the retrofits sector. The Sustainable Energy Authority of Ireland suggests that one half of retrofit costs in Ireland are labour. During a period of high unemployment, this represents an opportunity to reduce unemployment in the construction sector. The Society urges Government to continue to work to reduce the size of the State s property footprint and to continue to dispose of surplus property on a programmed basis. In 2012, the shortage of high-quality commercial property has become acute in some areas; in order to promote the efficient use of buildings, the Society recommends that Government works with the private sector in promoting the transfer of surplus office and other properties into the private sector where demand from occupants is strongest. RECOMMENDATION: Investment in, and rationalisation of, public buildings to reduce the running costs and improve energy efficiency of the public estate. Promoting Private Investment in Construction and Regeneration It is recognised by all stakeholders in the construction sector that increases in direct exchequer investment in capital projects are unlikely until the economy improves. This requires greater short-term efforts to offset cuts in direct funding with alternative funding sources, including from private pension funds and through measures to release private savings into new models of Public-Private Partnerships. Despite huge injections of public finance into Ireland s banks over recent years, evidence from practitioners suggests that normal, sustainable lending to the private sector has not yet recommenced. This failure by the banks to fund even the most sustainable, modest and necessary new developments are undermining the completion of many, much-needed new buildings and urban regeneration projects. The banking sector has an important role to play in national economic recovery, in terms of providing capital to businesses which want to invest for their future. Without such capital, potential growth is likely to be undermined. The Society recommends that Government maintains pressure on Irish pillar banks to support the private sector in improving the quality of new and existing buildings through appropriate funding measures. RECOMMENDATION: Delivery of alternative funding for public works, coupled with measures to support improved bank financing of private construction projects. 15

17 Promoting Energy Retrofitting In the United Kingdom, the Cut the VAT coalition comprising of 21 organisations, has been highlighting the opportunity to reduce the rate of VAT on repair, maintenance and improvement work on residential property in order to promote energy repairs and to undermine the growth of the shadow economy. The coalition commissioned Experian to conduct a rigorous analysis of the size of the shadow economy in the sector, and the economic effects of a reduction in the VAT rate. The Experian report highlighted the fact that in the UK, the hidden economy is potentially worth 22.8% of the home repair, maintenance and improvement sector. This represents a multi-billion pound loss to the UK Exchequer in taxes. The report noted that while a reduction of VAT to 5% for this work would result in declines in exchequer income from the legitimate economy, it would have a positive impact in bringing noncompliant work into the tax-compliant sector. One area of construction activity supporting the private housing repair, maintenance and improvement sector in Ireland has been investment in energy efficiency. The Government has committed to achieving a 20% reduction in energy demand across the whole of the economy through energy efficiency measures by It is expected that the residential sector will contribute 35% of the targeted savings. In recent years funds have been allocated for improving the energy efficiency of the residential building stock. This funding has taken the form of direct grant payments to households. It is estimated by SEAI that to date over 300 million in public and private funding has been spent on 270,000 energy efficient measures in 110,000 homes. The existing grant supports in this area are captured under the Better Energy: the National Upgrade Programme - which was launched in May 2011 and replaces previous energy efficiency and renewable energy programmes: the Home Energy Savings Scheme (HES), the Warmer Homes Scheme (WHS) and the Greener Homes Scheme (GHS). The Better Energy programme is designed to support the energy efficiency upgrades of one million homes, businesses and public buildings. The total capital allocation in 2012 for grant supports was 76.1 million for energy efficiency measures in private residential housing, low income homes and the public and commercial sectors. Although the Government is committed to providing a significant level of support in 2012 and 2013, it has also noted that there will be a transition to a non-exchequer based funding model no later than the start of According to the Society s own Annual Construction Report 2012, the total housing RM&I market was worth an estimated 2.83 billion in The RM&I figure covers investment by households in major housing improvements and minor housing repair works as well as public sector investment in refurbishment of the public housing stock. In terms of expenditure by the private sector, the Society estimates that the overall 16

18 volume of housing RM&I expenditure declined by 10% in 2011, as household incomes continued to be affected by adverse developments in the economy. Notwithstanding the boost from energy efficiency measures and a focus on renovation and improvement works by the local authority sector, overall investment in housing RM&I declined by almost 8.5% in volume terms in 2012 as private household incomes and local authority funding continue to be affected by austerity and fiscal consolidation measures. The Society recommends that the reduction in VAT on this form of construction activity could have a significant positive effect in stimulating new activity and promoting private investment in the built environment. Aside from the obvious benefits of such an increase in employment levels, a reduction in VAT in this sector of the economy would mean that the Government would benefit from an increase in income tax receipts, additional spending in the economy and a reduction in the social welfare bill. RECOMMENDATION: Reduction of VAT to 5% on labour and professional services for home repairs, maintenance, lettings and management of residential property to reduce exposure to the Hidden Economy and drive standards of statutory and regulatory compliance in the construction sector. 17

19 SCSI Pre-Budget Submission /06/ :50 Page 19 Part 2 Residential Property Contents Market Supply of Residential Property Mortgage Availability Graph 6: Quarterly Mortgage Lending Recognition of Tenure Mix Change in Ireland Graph 7: Annual Sale Price Change Graph 8: Annual Rental Price Change Help to Buy

20 Part Two: Residential Property 2 The Irish Residential Property Market in 2013 According to the Central Statistics Office, national residential property prices peaked in the third quarter of 2007, following a peak of apartment prices in the first quarter of the year. In Dublin, prices peaked in Q1 2007, a full quarter before the rest of the country saw peak prices. House prices have now been falling for six years, driven in part by a lack of consumer confidence, uncertainty about the future direction of houseprices and by a lack of mortgage availability. Reports over 2013 have suggested that the market in Dublin has begun to stabilise as interest and confidence in property has grown in some areas. In the rest of Ireland, the property market is split as rural areas perform less well than urban areas. During the period of house-price reduction, the private rental market has performed well, so that in 2013, there are areas of undersupply of appropriate property types to serve this changing tenured market. The introduction of the Local Property Tax and the ending of mortgage interest relief in 2012 had only a marginal impact on the property market. The Society continues to believe that a transparent, fair and sustainable property taxation regime can have a positive impact on public finances and local Government autonomy. The Society looks forward to working with Government in advance of 1 January 2015 when local authorities are given power to vary the property tax rate. This is an opportune moment to assess how the energy efficiency agenda could potentially be built into the property taxation regime, and to make meaningful changes to stamp duty on transaction of residential property, the levying of commercial property rates and development contribution schemes. 20

21 Market Supply of Residential Property Ireland will soon experience a shortage of urban properties, and efforts should be made now to reform the planning and development regulations to facilitate urban renewal and brown field developments, to maximise urban densities and supply well-located property types which are most needed. The Society believes that normalisation of market activity can best be promoted through a more timely receivership process, speedier decision-making amongst NAMA and financial institutions and the clearance of insolvent properties from the market. Furthermore, over the next year, reform of the personal insolvency regime and receivership process has the potential to increase the supply of properties coming on to the market and have a wider societal impact on the property market. The Society notes that a policy of greater urban density can only be achieved through a reformed planning system so that necessary residential and commercial property construction on brown field development can take place. In many areas, while the preference of planning authorities is for promoting the development of high-density apartments, there is a greater need to supply high-density housing to meet current shortages. The Society recommends that greater attention is given by planning authorities to supplying high-quality family housing to meet market demand while achieving greater densities. The Society recommends that the pilot scheme announced in Budget 2013 to promote refurbishment investment in some Georgian areas be expanded nationwide, coupled with processes to promote infill developments. RECOMMENDATION: Address supply problems through the promotion of increased urban densities and development of brown field sites; nationwide expansion of pilot schemes to refurbish Georgian areas. Mortgage Availability Despite the large injections of public money into Irish banks, there is concern that anecdotally, even the safest and most modest applicants for mortgages are routinely being refused credit. In 2012, mortgage lending represented approximately 2.96 billion. It has been estimated that as the market recovers, a residential mortgage market size of billion is achievable in Ireland; Furthermore, it is reasonable to assume that Ireland may experience an annual mortgage market of 8-10billion within 5-10 years. This will require strict lending criteria and Government oversight. The Society recognises that by the end of the first quarter of 2013, there were some 142,000 mortgages in some form of arrears, and that the number of mortgages in longer-term arrears continues to grow. The 21

22 Society welcomes initiatives taken by Government to assist those in arrears and repeats its offer to work with Government and all stakeholders to assist those who are in financial difficulty. In the buy-to-let sector, it is notable that at end-march 2013, there were 149,395 residential mortgage accounts for buy-to-let properties held in the Republic of Ireland, to a value of 30.9 billion. Of this total stock of accounts, 29,369, or 19.7%, were in arrears of more than 90 days. This compares with 28,366 (18.9% of total) that were in arrears of more than 90 days at end-december The outstanding balance on BTL mortgage accounts in arrears of more than 90 days was 8.6 billion at end-march, equivalent to 27.7% of the total outstanding balance on all BTL mortgage accounts. This represents a significant challenge to the smooth-running of the Irish property sector. Graph 6: Value of Mortgage Lending Source: IBF/PWC ( bn) The Society recommends that the mortgage application process should be standardised, so that potential mortgagors can make a number of applications to different lending institutions simultaneously. The Society also recommends that Government creates an independent mortgage review body so that unsuccessful borrowers can have their refusal independently assessed. RECOMMENDATION: Standardised mortgage application forms to ease mortgage application process with unsuccessful applications subject to an independent mortgage review body. 22

23 Recognition of Tenure Mix Change in Ireland According to the latest daft.ie report sale prices grew in Dublin by 0.6% during This represents the first increase in prices in any region of Ireland since Quarter 4 of 2007, in all other regions, prices continue to fall, although as the graph below shows, there is significant regional variation. Looking from 2007, as the graph below shows, the Dublin market saw the greatest declines in sale prices from 2007 and has shown the strongest recovery since Evidence from property practitioners in Dublin confirm the heightened interest in property in the capital, and the looming pinch-point where demand outstrips supply of some property types in Dublin. As the information from daft.ie usefully shows, if cities are excluded from the sale price data, rural homes declined in price by -10.3% during 2012, confirming the urban-rural and Dublin- Ireland split in the residential property market. Government, when deciding spatial and property related policy, must recognise this regional variation in the property market, and avoid blanket policies which do not respond to the specific regional and sectoral needs of the residential market. Graph 7: Annual Sale Price Change % 15.0% 10.0% 5.0% 0.0% -5.0% 2007 q q q q q q q q q q q q q q q q q q q q q q q q q1-10.0% -15.0% -20.0% -25.0% National Dublin Other cities Leinster Munster Connacht-Ulster Ex-Dublin Ex-cities Source: daft.ie (% annual change) In 2012, the Society of Chartered Surveyors Ireland undertook a major research project to examine attitudes of the public towards renting or buying residential property. The report found that amongst younger, urban people, renting was seen as a positive option, especially during periods of house-price uncertainty. An examination of the annual change in rents since 2007 shows that while rents fell at the same pace as sale 23

24 prices between 2007 and 2009, they have seen a stronger recovery than sale prices. Nationally, rents increased by 2.2% over 2012, driven by strongest growth In Dublin and Leinster. Unlike the sales market, which is notable for its wide regional variation, the rental market is performing in a more uniform way, with fewer differences in rents between rural and urban properties. The Society of Chartered Surveyors Ireland recommends that recognition is given by Government to the strong rental sector in Ireland. It recommends that the Private Residential Tenancies Board is properly resourced to identify and eliminate unregistered landlords, and reform of taxation on investment properties should be examined to support legitimate landlords who may find themselves in financial difficulty. To support the supply of quality rental accommodation to meet the increased demand, the Society recommends the creation of an investment scheme to assist in the syndication of landlords to purchase multiple properties on a professional business basis. The measure to reduce the VAT rate on residential retrofit work would be of financial assistance to landlords as well as ensuring higher standards of rental accommodation in Ireland. Graph 8: Annual Rental Price Change % 10.0% 5.0% 0.0% -5.0% 2007 q q q q q q q q q q q q q q q q q q q q q q q q q1-10.0% -15.0% -20.0% National Dublin Other cities Leinster Munster Connacht-Ulster Ex-Dublin Ex-cities 24

25 Help To Buy The Society has noted with interest the Help to Buy initiative which has recently been launched by the British Government to facilitate potential home owners to raise the necessary deposit. The intentions of this scheme are for Government to act as a guarantor of a percentage of a homeowner s debt and to be the provider of interest-free loans to potential home-owners. The equity loan aspect of the initiative will apply to first-time and existing homeowners who wish to buy a new-build property. Once borrowers can raise a deposit of 5% of the home s value, they can borrow an additional 20% interest-free from the State, to a maximum of 120,000. This must be repaid when the property is sold. After five years, interest of 1.75% will be applied. The second aspect of the initiative is the government s guarantee. Again, if borrowers are able to raise between 5% and 20% deposit, the Government will provide the mortgage lending institution with a guarantee of up to 15% of the mortgage. This scheme is not limited to the purchase of newly built properties. In both cases, the scheme is limited to those wishing to buy their principal private residence, and is not available on a commercial basis. The Society recommends that Government explore similar options for assisting those who are struggling to raise a deposit to buy their home, or to explore the possibility of providing a form of limited loan guarantee, to assist potential home-owners. To avoid repeating errors of the past, the Society recommends that these initiatives should be limited to first-time buyers of principal private residences, and their impact on the residential property market reviewed on an on-going basis. 25

26 Part 3 Commercial Property Contents Encouraging International Investment in Ireland Increase the energy efficiency of the built environment Table 4: Office Refurbishment Options Reform of Tax on Agriculture

27 Part Three: Commercial Property 3 The Irish Commercial Property Market in 2013 As commercial property investment is intrinsically tied to consumer confidence, investor sentiment and Ireland s international reputation overseas, the Society continues to recommend that measures in Budget 2014 should have a focus on restoring confidence in Ireland s economic future, both domestically and amongst potential international investors. Reforms to stamp duty on the the transactions of commercial property made in previous Budgets have had a positive impact on lowering entry costs into the Irish market. Lower property values, coupled with these reduced costs, have resulted in a growth in international and domestic investment in the market. Initial data for 2013 suggests that transactions in the investment market may reach 610m in 2013, up from 179m in While interest from investors is showing signs of increasing, and yields are improving, there is a dearth of new commercial property coming onto the market. Leading indicators from the construction sector suggest very few new commercial property projects are being commenced, and there is already evidence of a shortage of some property types, especially third-generation offices in key growth areas, including the centre of Dublin. Encouraging International Investment in Ireland In 2013, the IPD/SCSI index recorded a positive return on investment in Irish commercial property. Lower entry costs and reduced transaction taxes have stimulated a greater international appetite for investment in Irish commercial property. It should be noted, however, that difficulties for both international and domestic investors to secure project financing has significantly slowed the process of successfully completing transactions. The Society recommends that Government continues to work with lending institutions, private finance agencies and real estate agents to identify and resolve financing and property transaction bottlenecks, so that Ireland can benefit from increased private investment in our commercial property stock. 28

28 The Society recommends that the legislation giving effect to REITs is commenced, to further attract international investment into Ireland. The REITs model should be supplemented with a smaller-scale investment trust model to give a financial benefit and reduced risk to smaller, domestic investors in commercial property portfolios, including pension and insurance funds which are risk averse and which represent a significant stock of potential capital which could be released into the economy. RECOMMENDATION: Promotion of increased international investment in Irish commercial property through the promotion of Real Estate Investment Trusts coupled with measures to support small-scale domestic investment by pension and insurance funds in residential and commercial property on a syndicated basis. Increase the energy efficiency of the built environment Recommended measures to improve the environmental quality of the residential sector through incentives to undertake meaningful retrofitting projects should be complemented with the reduction of VAT on energy retrofitting of commercial property. This will incentivise the improvement of Ireland s commercial property stock, as well as reducing the size of the Shadow Economy in Ireland. While rents and yields have stabilised, support is needed to increase the commercial viability of improving the quality of existing buildings. It has been well-recognised that IDA has been extremely successful at attracting investment into Ireland. Ireland is now the international hub for many of the world s most important and demanding companies. As a result, the commercial property market is one of the few sectors which is experiencing real transactional and construction activity. Foreign Direct Investment is at the heart of that economic activity and these business wins have generated good demand for office accommodation for business service enterprises establishing a base in Ireland. Demand, particularly seen in Dublin, is for small units between 5,000 and 10,000 sq. ft. In addition, there are a small number of higher profile clients who require significantly larger, bespoke, properties. On the supply side, the continued difficulty in securing finance means that vacancy rates are falling and there is a shortage of prime office space in central Dublin. As a result, there is an opportunity for new construction activity in this area. In the short-term, it is likely that the focus of activity will be on short-term leases and the refurbishment of existing office space. Options open to owners of commercial property have been explored by Davis Langdon in recent months. The table below shows refurbishment options and the potential extension of the economic life of property. 29

29 Table 4: Office Refurbishment Options Repair Minor Refurbishment Re-Model Medium Refurbishment Renew Major Refurbishment Scope Focused on common areas and involves essential repairs only. Often done during occupation Full upgrade of Mechanical and Electrical and finishes. No major structural changes. If occupied, some decanting and phasing Significant Structural alterations/ facades/roof finishes. Renewal of fittings, finishes and Mechanical and Electrical. Extension of Economic Life Increase of approx 5 years Increase of approx. 15 years Increase of approx years Benchmark cost per sq. ft of Gross Internal Area per sq ft per sq. ft per sq. ft. Source: Davis Langdon Ireland Annual Review 2013 In recognition of the shortage of quality office accommodation in many urban centres, the Society recommends that NAMA should commence a process of development of commercial buildings under its control, either alone or as Joint Ventures, to prevent any further market shortage. RECOMMENDATION: Reduction of VAT on the retrofitting of private commercial buildings to improve the energy efficiency of the Irish built environment; and a managed process of rationalising the public estate to lower running costs. Reform of Tax on Agriculture Government proposals to develop the agricultural sector of the economy are to be welcomed, and the Society believes that such proposals can be enhanced through minor revisions of the agricultural properties taxation regime. As the taxation regime for agricultural land and farm buildings has developed, a number of anomalies have emerged. The Society is concerned that not only do these taxation issues have a significant impact on individual families and small businesses, but collectively they undermine the efficiency of the wider tax regime. One significant anomaly is the levying of Capital Gains Tax on CPO compensation, which limits the investment opportunities for farmers who have received compensation for land which was removed, but then effectively prevents them from using the full compensation given. The Society recommends that government explores opportunities to re-instate Rollover Relief to avoid the current difficulties in acquiring land following the CPO process. 30

30 Under the Succession Act (1965) land is automatically returned to parents on the death of a farmer without any spouse or descendents. However, anomalies arise in regard to the Early Farm Retirement Scheme which was abolished in 2009 for new entrants. It appears no allowance is made in the event of the death of a new owner, and in this case, parents of the farmer may be subject to capital gains tax based on the difference between the value of the land on the son s death, and the current market value. The Society recommends that this rule should be abolished or clarified as it should not be left to the revenue commissioners to decide on the application of capital gains tax. A second anomaly exists in regards the transfer of all agricultural property. If property is not transferred as part of the farm, it may be liable to capital acquisition tax and does not qualify for agricultural relief. In Ireland, many farming parents retain their residence as a source of security when transferring the farm over to the next generation. This tax law needs to be reformed, as it causes financial hardship in having to pay additional capital acquisitions tax. This anomaly should be removed to allow protection of parents when they retire. Equally if a farmer s son buys a site to build his own dwelling with the intention of inheriting the family farm in due course his main residence will not qualify for agricultural relief. However, the Society s understanding is if the same site given by way of gift on the farm then that residence will qualify. If a farm makes less than 750,000, the farmer is exempt from capital gains tax. However, if the farm makes in excess of 750,000, the farmer would be subject to marginal relief, provided he owned and farmed the lands for a minimum of 10 years. If, however, the farm had been rented out prior to the selling, then the farmer would not have qualified for tax relief and would be subject to CGT as normal. Many widows/widowers or those suffering from ill health have no option but to let their land. But when they choose to sell up, they are, unknowingly, hit with a tax bill. This anomaly should be reformed as part of Budget 2014 and in an attempt to streamline the agricultural land and property taxation regime. RECOMMENDATION: Reform of the taxation regime for inter-generational transfer of agricultural property, including CGT and re-instatement of roll-over relief. 31