So after I wrote Housing in Ireland I reread the Irish Times article that had made my blood boil and I read the comments section where there were links to this website explaining what REITs are (I actually just thought it was part of the name of the company) and this article on intallaght.ie. Well, whatever about everyone else, I definitely need to be paying more attention.
In the last post I talked about using fiscal policy (taxes) to make our housing market less attractive to institutional investors. It appears this will not be possible because of the legislation used to facilitate REITs setting up here. Before I go on let me explain what a REIT is, and just so as you know I find the best way to learn is to teach so you may well know this stuff already but I’m trying to learn exactly how we are where we are and how we can move on.
A What Now?
A REIT is an acronym for Real Estate Investment Trusts and essentially it’s where a company manages a rental property on behalf of passive investors, the money earned from the property must, in part, be paid to investors in the form of dividends (the same way most investments work), and part of the money made must also be used to manage the property (this so far seems to be the positive aspect to REITs). They were first created in America in the 1960s and at that point the legal vehicle used by the real estate investment company was a trust. The law and business has moved on and so most REITs now don’t need to set up any trust. This is the case in Ireland. Is that important? No. It’s just important to understand that the real estate management company is an investment company, it makes money by attracting investors, by making the rental property appear like a good investment, that it offers a good return and, where at all possible, it offers increasing returns.
Beginning to get a little worried?
But why? Sure isn’t it great to have professionals looking after the property, ensuring that people aren’t simply paying cash in hand to landlords, and they aren’t having to put up with shenanigans like the landlords calling around for a cup of tea at lord knows what hour? Um, I’ve rented in Dublin for a number of years, the last time I paid cash in hand was back in 1999 – nearly 20 years ago now (okay, not quite 20) and I’ve never had landlords who called around unexpectedly.
One of the main issues tenants have with landlords is not getting the deposit back at the end of the tenancy – I think around half the cases the PRTB deals with concern disputes between landlords and tenants over deposit retention. And there is supposed to be a scheme in the pipeline that should resolve this in most cases, hopefully (if it ever gets up and running).
I was renting in Dublin until December 2012, when I was looking for a new place and had already handed in my notice where I was living and then … couldn’t find anywhere. My parents have a flat here – they live in Galway – so I moved in temporarily on 1/1/2013, spent a few depressing months very earnestly looking for a flat or a room but it was impossible to find anything within my price range. 3 years later I’m still here. It’s great that I have someplace but, honestly, I’m not sure where I would have gone otherwise.
But why be worried? What difference will it make if you’re renting from the lady down the road or from some real estate agents or from a REIT? Because the rent prices in Dublin are already too high for a huge number of people living here and it’s very hard to see how REITs won’t add to the inflationary pressures on the rental prices. Also, they buy properties in bulk and avail of discounted prices, meaning, while at the moment they only have a small number of properties, there is the possibility of REITs snapping up available properties at prices the ordinary householder looking to buy can’t get, and then charging premium rents to the tenants of those properties. So they could aggravate the housing supply issue and if they’re also charging top rents for the properties they’re acquiring that means that people looking to buy will accept higher property prices because the mortgage repayments will still appear more attractive than the cost of renting.
What about implementing a tax policy to make it difficult for REITs to operate here? Well, you probably know this already, I just read about it since reading Meet the landlords buying in bulk and changing the market, the reason why REITs have only started entering the market here is because until recently institutional investors were effectively double taxed on property investments in this state. I’m not certain how the taxation policy worked but until recently institutional investors were subject to more taxes than normal landlords. Legislation was brought in to end this double taxation policy and, while I haven’t read through it, going by what is written about it, this legislation means we won’t be able to impose further taxes on these types of landlords. There is some information on REITs in this PWC brochure. It seems that it may be possible for non-resident shareholders to avoid paying tax on their investment – for example if they are resident in the Caymen Islands that doesn’t have any direct taxes, would they have to pay any tax on their investment? It looks like they wouldn’t have to…
So there is nothing we can do? Of course there is. We can’t impose taxes but we can introduce rent control – as in rent caps. I personally have been in favour of introducing rent caps since – well since 2013. But mightn’t rent caps be anti-constitutional? They might be, but lots of things in the past have been anti-constitutional in this state, like divorce, like same-sex marriage, but we had a referendums and made sure they would be allowed by our constitution.
Yes, I know a lot of people aren’t crazy about the idea, but how do you feel about REITs? A proper policy of rent control could ensure a reasonable and steady return on investment for small investors, have a stabilizing effect on house prices (because renting could become a more attractive long-term option) and it would not be at all attractive to investment companies who want to produce financial reports, like this one, showing increasing returns.
REITs are still a small part of the housing problem here, and in fairness establishing a stable affordable rental and bought housing is possible even with them being here – they may not want especially to be in the market if it’s that controlled but the issue is that we do need more control over the prices and standards within the market.