Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

The economic driver is something I mentioned earlier when I said that people are concentrating on the official or so-called bailout programme but what is more interesting is the parallel programme that the Government is conducting to enhance and strengthen strong sectors of the economy and to repair the damaged ones. There was none more damaged than the property and development sector. It simply got too big. It increased in size to over 20% of GDP. The sustainable rate for Ireland would be approximately 9%, perhaps pushing 10% in good years. Every modern developed economy in the OECD and elsewhere has a dynamic functioning property development sector.

It is one of things that one needs in a developed modern economy. That sector in Ireland is seriously impaired and is probably operating now at about 5% of GDP when the sustainable rate is about 9%, having fallen from over 20% with the loss of 250,000 jobs between 2008 and 2010. The committee will recall that in last year's Finance Bill we took a series of measures such as doubling income tax relief on mortgages for those who bought last year. Members will also remember the capital gains tax window for people who held onto a property for seven years, which meant they would not have to pay tax on capital gains accrued in that period. All of those measures are working. There is a lot of foreign investment money coming into Ireland now, particularly Dublin. The measure is not just for the disposal of assets by NAMA. It is for other assets as well, although NAMA is the big player.

The policy objective here is to further strengthen the property sector in Ireland and to further enhance and repair the development of the property sector. It allows people to invest in property whether they are domestic or foreign, and the risk is spread. Instead of having to buy an apartment - or buy ten apartments, as many people did during the Celtic tiger years - if one thinks the property sector is a place to make a good income or profit, one can put between €10,000 and €20,000 into a REIT. The risk will be spread proportionately across domestic, residential and business properties, hotels and so on. That is the way it operates. The purpose of the REIT provision is to act as a further enhancement.

I note from a previous conversation that NAMA was considering setting up its own REIT through enabling legislation. I have not checked recently whether it intends pursuing that, but there are other private sector interests that will establish REITs. We should encourage the market. If they can bring investment in, whether its foreign or domestic, adding to the aggregate demand for property in Dublin and continuing to remove the overhang of property, a properly functioning construction, development and property sector will be restored more quickly.

I shall read the speaking note, which may be of interest. First, it gives basic explanations, which the members probably know anyway. A REIT is a company that is used to invest in rental property. The purpose of a REIT is to remove the double layer of taxation that happens when a person invests in property through a company. For example, the company pays corporation tax and when the after-tax profits are paid out to the shareholders, they pay income tax. To remove the double layer of taxation the REIT will be exempt from corporation tax. Instead, a REIT company must pay out 85% of its profits to its shareholders, who are then taxed in broadly the same way as if they had invested in property directly. It should be noted that the REIT provision is not a tax relief. It can be better understood as a structural reform of taxation of property investment. A REIT can offer a lower-risk method of property investment for two reasons. First, the risk is spread over assets owned by the REIT instead of concentrating on a single property. Not only are there different types of property; there are also different locations. Even if prices in Limerick are not great, part of one's interest may be in Galway where property is going well. One can see how risk would be spread even in a small country such as Ireland.

Second, the minimum investment is the price of a single REIT share, so small investors do not have to borrow in order to invest. A person can invest at a small level because one is purchasing shares in the REIT company. Third, there are limits on the amount a REIT can borrow, so that rental income cannot end up being swamped by interest repayments. The reason for the limitation on borrowing is to protect the income stream so that 85% comes back to the investors. Then it is in the hands of the investors and so is taxed in the normal way, as if they owned an apartment. As REITs are recognised internationally, this may help to attract foreign capital to invest in the Irish property market. The measure may help to unwind NAMA and provide the best possible return for the taxpayer. There is a NAMA connection but it is indirect. NAMA could have extra purchasers with money and under the REIT scheme they could purchase NAMA properties that are being deleveraged.

As I have said on a number of occasions, in the space we are in - I suppose this is true of all politics - one can decide to do nothing or one can decide to do something, and not everything one tries will succeed. REITs have been successful internationally. They are very strong in the US, perhaps accounting for 5% of property action there. In the United Kingdom REITs do reasonably well. The REIT system is pretty well worldwide at this stage. Approximately 35 other jurisdictions worldwide have REITs or REIT-equivalent structures, including, in Europe, Belgium, Bulgaria, Finland, France, Germany, Greece, Israel, Italy, Lithuania, Luxembourg, the Netherlands, Spain, Turkey and the UK, and in the Americas, Brazil, Canada, Chile, Costa Rica, Puerto Rico and the USA. There is also South Africa. In the Asia-Pacific region there are Dubai, Hong Kong, India, Japan, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, Taiwan and Thailand. We are not taking a plunge into the dark with REITS. There is an awful lot of international precedent for the success of such schemes, but I do not want to exaggerate it either. I believe my figure for the US is right - it is probably less than 5% of property action there. REITs are a niche but they are important, and in a situation such as Ireland's, if we can get extra investment which leads to extra demand for property we can get rid of the overhang. As soon as the overhang is gone, unimpaired builders, if there is such a thing left, will start building again.

I shall repeat what I said this morning: we must take sector-specific action to repair the damaged sectors. The economy will only be right when all of the sectors are repaired, functioning and contributing to the economy. The property sector has become a scapegoat and the developers and builders are blamed for all our ills. If we scapegoat the sector then we will miss a sector that is crucial for economic development and economic growth in all developed economies. What happened in Ireland was that the sector grew too large and too chancy because too many risks were taken with borrowed money. As I said, the sustainable level for the sector is about 9% of GDP. Any initiatives that I can come up with that are secure from a taxpayer's point of view and that will repair the impaired property sector and lead to more demand for property that is currently in an overhang may be beneficial. It is in that spirit that I propose the measure.