October 24, 2016
Finance Bill — We’re finally keeping it realPosted in Sunday Business Post · 102 comments ·
Are we witnessing the beginning of the end of yet another sorry saga in Irish economics and finance? Will the finance bill published Thursday, which slapped a right and proper 20% withholding tax on the profit of property funds operating in Ireland, signal a shock selling of Irish commercial property?
If it does, and prices tumble, we should rejoice in falling prices of commercial property in the capital. When the property market is owned by a small number of foreign funds, here to make a quick buck, falling prices benefits almost everyone who lives in the city and penalizes a few wealthy offshore outfits, whose bottom line is none of our concern.
It’s only fair that vulture funds are taxed on their profits when they dispose of their assets. After all, that’s what happens to the rest of us if we make a capital gain, why should structure vehicles be any different?
The major question is why did the Irish government give them a tax break in the first place? The prices in Ireland had fallen so low that funds needed no excuses to come in here.
Think about what happened over the past few years as the Euro fell against the dollar because the growth prospects of the US economy were so much better than those of the EU.
American vulture fund borrowed in euro and watched their borrowing cost fall as the euro exchange rate plunged. Then they took this “free” money and off they went to Ireland, where the bankrupt locals had no credit and they bought up bundles of loans from their government – the very people who are supposed to be protecting the financial interest of the Irish people.
Remember Nama – an agent of the state – was supposed to get credit going? Well, it is getting credit going all right – but it is foreign credit!
On top of this, the State gave the funds a tax break so they paid no tax on whatever capital gains they made here!
We became pawns in the global credit cycle, again. But this time we didn’t even bother to get a bit of tax back.
Most vulture funds have a rule called the three-thirty rule.
This means they buy and hold for a maximum of three years and once they make 30 per cent they are out. This is their twist and this is why properties in Greenwich, Connecticut are a wee bit on the pricey side.
Listen, I don’t blame the funds. This is what they are mandated to do. They have to make as much lucre as they can for themselves and their shareholders. The global system is rigged and they are on the top — they fund the political campaigns and they get the codes written to suit their interests
So the vultures, having bought up the glittering swanky office prizes in Dublin – and with various geniuses heralding their brilliance even though it was nothing more than having access to capital at a time when our country was on the canvas – are now thinking it’s time to scarper.
The strategy of the funds is to buy as cheaply as possible and sweat the asset until the yield on the property rises. Once the yield or the income of the property rises, they can re-rate the price of the property upwards. In finance this is almost formulaic. But in reality it is far from a formula.
Re-rating the property value upwards at a time of low inflation will involve putting up rents.
This is exactly what has happened.
However, the real gravy was earned a few years back. Insiders in the business will tell you that there has been a marked slowdown in foreign interest in Irish property in the past few years as prices went ever higher. In the recent past, one broker told me they would have as many as five structured funds bidding on the same piece of commercial real estate. This year, that’s down to one or two at best.
Therefore, the question is whether the new tax will prompt foreigners to sell. In a way they are now trapped because the market is illiquid. It will be extremely difficult to offload commercial property now anywhere near 2015 prices.
Now consider what the 20% withholding tax has done to the investment model of the funds and the story these funds have told their investors.
Most of these funds will have gone out to the market looking for money assuming that 0% withholding tax was, like the 12% corporation tax rate, set in stone.
This would have generated incredible returns for investors.
Now that the tax has rightly been imposed, the moneymen will have to totally recalibrate their numbers for Irish investments. As the market was weakening already, this just might be the move that will trigger mass selling.
But they will only be able to sell if they cut prices. The vultures are now caught. This is no bad thing so long as the Irish banks don’t finance Irish investors to take the foreign funds out at these prices.
The natural owners of Irish property are Irish people, but there is no rush to buy yet. The foreign funds bought at a significant discount and therefore, even if prices fall, they will still be in the clover.
Falling commercial property prices is exactly what Dublin needs right now. With lower prices comes lower rents and with lower rents comes lower costs. If we are to be in a competitive position to take some Brexit-related business having fairly priced office space is crucial.
So let’s congratulate the government for finally taxing the super-normal profits of structured property vehicles and treating them like citizens of this country.
If they sell, so be it. If prices fall, rejoice and let investors come to Ireland for real, permanent business, not just fictitious, transitory tax breaks!