Wednesday, 14 November 2018
Home Building Finance Ireland Bill 2018: Second Stage
I am pleased to present the Home Building Finance Ireland Bill 2018 to the House. This is a very significant Bill providing for the establishment of Home Building Finance Ireland, HBFI, which will provide a much-needed boost to the availability of finance for residential development in the State. The availability of appropriate development finance for commercially-viable residential projects has been identified as a key contributory factor for the ongoing shortfall in residential supply. The introduction of HBFI will provide a crucial boost to the availability of this important source of finance. In the absence of this key policy response by the Government there is a concern that these constraints could limit the market’s capacity to respond to current and projected housing demand, particularly bearing in mind projected growth in the population and the positive outlook for the economy in the coming years.
Development activity continues to be impacted by the legacy of the financial crisis. While traditional banks are returning to providing senior debt financing for residential development, the number of active lenders in Ireland has reduced from 12 a decade ago to three today. Furthermore, by the middle of last year land and development exposures across the main banks had reduced to just €2 billion, or 1% of their total lending. While this refocusing by the main banks is entirely appropriate, not least from a financial stability perspective, it does pose significant challenges to builders and developers seeking to fund viable residential developments but not possessing the levels of equity now required by the banks. While alternative lenders have entered the Irish market to satisfy some of this excess demand, it is estimated that the scale of provision by both the banks and these lenders continues to be well below that required to fund the estimated annual shortfall of between 15,000 and 20,000 units.
HBFI is expected to provide finance to viable projects where developers are in a position to put up 20% or more equity into projects, thereby bridging the gap that exists in bank finance and increasing the pool of finance available from lenders in this space. The problem of a shortage of access to supply of appropriate finance has been particularly acute for smaller development projects and those located outside the major urban areas. HBFI will be established to address these concerns and will reduce this shortfall by focusing on those areas of the market that are currently under-served by the banks and alternative finance providers. HBFI will target smaller builders and developers, with no one borrower to represent more than 5% of HBFI’s lending capacity. HBFI will fund of up to 80% of development costs, meaning that borrowers must still provide significant levels of equity or raise third party equity in the market to access HBFI funds.
Thanks to the considerable efforts of NAMA in delivering more than 8,000 units of residential housing in recent years and its commitment to facilitating the delivery of some 20,000 units by the end of 2020, the State now has market leading expertise and experience in providing this form of development finance on a commercial basis. It is expected that some staff will transfer from NAMA and this will be of great benefit to HBFI to allow it to be up and running in as short a timeframe as possible. HBFI will be established as a private company under the Companies Act 2014 with the shares held by the Minister for Finance. It will have an independent board, appointed by the Minister in compliance with State board appointment guidelines, with all of the powers necessary to conduct its business. HBFI will be funded through the provision of debt and equity funding of up to €750 million that will be made available from the Ireland Strategic Investment Fund, ISIF. The redirection of this funding to HBFI from lSlF is a continuance of the refocusing of that entity towards projects of national strategic importance. Funding for lending purposes will be provided by way of a repayable loan from ISIF to HBFI on commercial terms and the returns expected to accrue to the State from the funding of HBFI will be commensurate with the commercial returns for loans to entities with similar risk profiles.
It is important to recognise that HBFI will not provide low-cost or subsidised funding to developers or to the construction industry. HBFI will charge commercial rates for its lending and establishing HBFI in this manner will ensure that it is compliant with state aid rules and provides an appropriate level of return to the State for the risk it is taking on. A unique feature of HBFI will be its ability to fund smaller developments and with this in mind, it is expected that HBFI will provide funding for projects with a minimum capacity of only ten units, equating to a loan facility of approximately €2 million. Projects would be expected to have full planning permission and the sponsors to be fully tax compliant.
As an independent entity HBFI will have full flexibility to provide any type of funding which serves to increase the supply of residential development generally. This includes projects that deliver social, affordable or low-cost housing and also to fund remedial works on residential developments, provided they are commercially viable and meet its eligibility criteria. However, it is important to recognise that HBFI will not be directly involved in development. Its role will be solely as a commercial lender and therefore it will not have any role in designing the housing mix contained in the schemes it funds.
It is believed that with €750 million available, HBFI will not be constrained and will fund any project that fits its eligibility criteria. The key is for HBFI to fund all eligible projects and that, in turn, will have a positive impact on the supply of housing of all types across the market spectrum. As indicated, HBFI will ensure that its total exposure to any one borrower does not exceed 5% of its total lending, ensuring that lending can be spread across as many developments as possible. The specific interest rates charged by HBFI will be bespoke and will reflect the credit risk of each particular development project, the quality of collateral, the creditworthiness of the borrower and the track record of the borrower in the delivery of residential development projects to date. In order to ensure compliance with state aid rules the lending terms and conditions will also be benchmarked to the market.
The Government recognises that the funding of residential development is clearly undergoing a temporal dislocation and for this reason a formal review clause has been included in the HBFI Bill. The review process will commence in 2020 and subsequently every two years, whereby the Minister for Finance will assess the extent to which HBFI has made progress toward achieving its overall objectives and the impact HBFI is having on residential development funding in the State.
A number of provisions have been included in the Home Building Finance Ireland Bill 2018 which relate to the local property tax, LPT.It has been determined that provisions concerning the local property tax, LPT, are not appropriate for inclusion in the Finance Bill and as the proposed provisions must have an operative date of 1 January 2019, they need to be provided for in law before that date. Hence their inclusion in the Home Building Finance Ireland Bill 2018.
The first set of provisions relates to a one year extension of the LPT mortgage interest deferral relief in respect of 2019 LPT liabilities. Currently, the income threshold for deferral of LPT liabilities can be increased in the case of property owners paying mortgage interest. This mortgage interest deferral relief provided for by section 133 of the Finance (Local Property Tax) Act 2012 is being extended until 31 December 2019 in line with the standard income threshold. The next valuation date for LPT is 1 November 2019, which will determine tax liabilities for the years 2020 and 2021. Arrangements for this are being considered as part of the review of the LPT being carried out by an interdepartmental group, as well as how payment deferrals will operate going forward.
The second set of provisions relates to continuing to provide for the administration and collection of LPT in line with PAYE modernisation changes that are due to come into effect on 1 January 2019. These provisions are procedural in nature, do not make any changes to the LPT system and are necessary to facilitate the continued operation of the PAYE system, including the deduction of LPT by employers and its remittance to Revenue. The legislative changes underpinning the continued administration and collection of income tax under PAYE modernisation were enacted in the Finance Act 2017. The changes proposed here simply mirror for LPT the changes already enacted for income tax in the Finance Act 2017.
In the interests of allowing adequate time for discussion of the Bill I will now turn to the detail of the main provisions. The Bill has seven Parts. Part 1 contains three sections and sets out the preliminary and general provisions. It allows the Minister for Finance to commence the Bill or particular Parts at different dates and also provides that expenses incurred by the Minister in the administration of this Act will be sanctioned by the Minister for Public Expenditure and Reform and paid out of the moneys provided by the Oireachtas.
Part 2 provides for the establishment of Home Building Finance Ireland, HBFI, and sets out its functions. Section 7 sets out the functions of HBFI which will be to lend on commercial terms for residential development in a manner that aims to contribute to the economic and social development of the State and enhance the competitiveness of the economy. It also provides that HBFI will have ongoing regard to Government policy on housing when lending.
Part 3 sets out the funding arrangements for HBFI. This Part provides for the initial issue of shares in the new company to the value of €20 million to the Minister on incorporation. This €20 million of equity capital will come from the Ireland Strategic Investment Fund, ISIF. This Part also sets out the limited circumstances in which the Minister can dispose of shares in HBFI and for the payment of any dividends from the entity to be paid into the Exchequer. It also provides for the ability to raise limited funding on capital markets should it be required to meet demand.
Part 4 sets out the procedures for the preparation of financial statements and ensuring the public accountability of HBFI. It provides that HBFI must submit its accounts to the Comptroller and Auditor General for audit and that those accounts will also be presented to the Minister and laid before each House of the Oireachtas. It also provides that a senior member of the staff of HBFI will be answerable to the Committee of Public Accounts, where requested.
Part 5 sets out consequential amendments to the Taxes Consolidation Act 1997, the National Treasury Management Agency (Amendment) Act 2014 and the Freedom of Information Act 2014. These amendments provide an exemption for withholding taxes to apply to HBFI consistent with other State-owned entities and also provides the Minister with the power to direct the ISIF to provide credit to the HBFI on commercial terms and to provide equity funding to HBFI. The amendment limits the total funding, which must not exceed €750 million.
Part 6 sets out a number of miscellaneous provisions, including the making of an offence to disclose confidential information of HBFI or to lobby the agency with the intention of influencing the making of a decision. This Part also provides the basis for a biannual periodic review of the agency.
Part 7 provides for certain provisions in respect of the LPT, which I have already described in detail.
Addressing the shortfall in the supply of housing requires a broad cross-governmental response and a strategy to make best use of the resources available to the State. While the establishment of HBFI will not solve this problem single-handedly, it will play an important part in the overall strategy to increase the supply of new housing. While this initiative may have taken longer to bring forward than some may have hoped, I am satisfied that we have now provided a sound basis for the creation of this important agency to supply much-needed funding for residential development in a manner that delivers a commercial return for the State and is in full compliance with state aid rules. I commend the Bill to the House.
The execution of any housing policy by this Government is to be welcomed and everyone should give it a chance. Home Building Finance Ireland, HBFI, was first announced over a year ago and it is fair to say the Government has been lukewarm in supporting it and lacked any sense of immediate purpose. We applaud the purpose of the Bill, which is to lower the cost of funds for building by investing €750 million from ISIF in the construction sector. Currently, banks will lend only between 60% and 65% of the capital required at an interest rate of between 4% and 7%. The developer must then borrow the rest from an international fund, often at rates of more than 10%. When this is added up it makes any project totally unviable.
Given the Government's tight-fisted track record, we have to question whether the HBFI will spend what has been promised. The precursor of the fund, Activate Capital, has a total of €500 million in State funding, yet it has contributed to the construction of only approximately 3,600 homes since January 2016. We have every right to expect HBFI to be successful and it must not become a flop similar to Activate Capital.
Homelessness has been allowed to reach unprecedented levels while the number of homes being built is tens of thousands behind what it should and needs to be. Fianna Fáil pushed a pro-social and affordable housing agenda throughout the budget process. The Government has had six separate housing plans and more than a dozen launches. We have yet to see any real substantial change for the 120,000 people on social housing waiting lists and the large cohort of people on average incomes who are unable to buy a home and see more and more of their income going towards servicing rent costs.
While the Bill is a good first step and I welcome it and applaud everyone involved in it, the Government needs to be bolder in its approach. Tinkering around the edge of this issue will not solve the problem. Fianna Fáil is committed to increasing the supply of homes by not only reducing the cost of finance but also by reducing development levies, introducing a new special saving incentive account, SSIA, scheme to help people save for their deposit and strengthening rental protections. There is no silver bullet for this problem to which there are many facets.
I welcome the Bill and its attempts to provide much-needed revenue for developers to get back to building houses. However, more is required and I would welcome the Government taking more urgent action to do what is needed. I look forward to more substantial progress on this issue as soon as possible.
This is a welcome Bill, which was first announced in budget 2018. Building more houses is the answer to the housing crisis. Anyone who has been trying to work to get builders and developers, those who have been pilloried over the years, off the ground knows that in the past couple of years these people were finding it extremely difficult to get finance. Banks were not lending to them and are still not lending.As mentioned, banks require at least 40% to 50% equity or capital before they will lend the balance. Some builders were getting finance from vulture funds of up to 15% to 17% which was making it unviable for them to commence building. They would sites not only in Dublin but also in various parts of the country.
We need to have an overall strategy for building houses. We need all parts of the industry to be functioning, including the small builder who builds ten or 20 houses a year. They need to be able to access finance, but they have not been able to do so heretofore.
When we look at the type of loan being made available, I ask the Minister of State to look at a couple of issues. I refer to the overall package of €750 million. He says no one builder will have more than 5% of the pot. If there were 20 builders each getting 5%, the chances of the small builder getting anything would be reduced. There should be priority given to small builders because in the future they will be building in the areas into which the big builders and vulture funds will not go such as small towns and villages. A certain percentage of the fund should be set aside for those with the capacity to build ten to 20 houses a year, not those who are building 200 to 300 houses.
I am also worried about the Minister of State's reference to a figure of 5%. Five per cent of the pot amounts to €37.5 million, which is a lot of money. That means that the fund is only geared towards the builders who can provide an asset base. The Minister of State might look at that issue and reduce the figure from 5% to 2% or 1%. That would make more sense because it would give the small builder a chance, which I know was the intention behind the Bill.
NAMA is mentioned in the Bill, but this is a role it could have carried out. The problem was that it only looked after the clients who were in it. It did not provide funding for small builders who still had outstanding loans with various banks but who were not big enough to be in NAMA. It should have provided the State funding that was in place to help in that regard. It could have been done four or five years ago, but, sadly, that opportunity was missed.
The Bill has passed through the Dáil and is now going through the Seanad. How quickly does the Minister of State expect it to pass through this House? He can see that there is very little interest in it, but it is an important cog in the overall process of building houses. When does he expect the fund to be up and running in order that small builders can receive loans? A couple of them have been in contact with me to ask me about the Bill because they would love to see the fund up and running as quickly as possible. From a funding perspective, there will be a total budget of €750 million, with €20 million in the pot from the beginning. Will that be the limit on how much can be loaned at the start or will the €750 million be in it from the get-go?
I refer to the local property tax. I know that next November we will again have a discussion on the serious increase in the valuations of properties. Years back, this role was carried out by local government. Councillors made decisions at the annual budget meeting as to whether they would increase rates. The calculation of the local property tax involves the use of a multiplier. The Minister of State can correct me if I am wrong in that regard. Perhaps it is the only thing that should be changed, rather than the valuation of a property. The multiplier could be decided on by the local authorities. I am fairly certain that a multiplier is used in the calculation of the local property tax. It could be used by the local authorities and council members in deciding what the charges should be on the properties within their functional areas.
I again thank the Minister of State for coming into the House. I am very much in favour of the Bill and surprised that it is not gaining more traction because it is a cog in moving forward with a view to generating more house builds. As a result we will have fewer issues with affordability and homelessness and other such concerns.
I address the question of the Government doing more. I have to disagree with the Senator because the Government is fully committed to achieving the objective of building more social and affordable homes, as is obvious from the nearly 26,000 social units delivered in 2017, which represented a significant increase on the numbers delivered in previous years. Further funds have also been provided in the budget for 2019 when €2.4 billion will be invested, more than in any other year. That is the pot for the provision of social and affordable housing in 2019. There is a strong and growing social housing pipeline in place, as evidenced by the quarter two 2018 construction status report. Since the end of 2016, the numbers of schemes and homes included in the programme have doubled. The level of activity on site has also increased significantly, with work on 1,074 homes ongoing on-site in quarter two of this year alone.
On affordable housing, there is a multistrand targeted approach being pursued in the counties most affected by the issue. The measures are targeted at households earning a maximum of €50,000 for a single applicant and €75,000 for double applicants. Significantly, in budget 2019 the Government has trebled to €310 million the funding available in the serviced sites fund for key facility infrastructure on local authority sites to support the provision of affordable homes to purchase or rent.
Much has been done, including the establishment of the Land Development Agency. I know that it is easy to say the Government is not doing enough, but that is not a fair criticism because we are doing a lot. If the Senator had said we were not doing enough quickly enough, that would probably have been more fair, but we tend to not receive fair criticism when it comes to housing. I know that the Minister, Deputy Eoghan Murphy, is doing a huge amount of work in what is a difficult area. People forget that the State had closed down the residential construction sector. It stopped operating five years ago because there was a massive oversupply. In this Chamber Deputies were talking about knocking down estates. Does Senator Wilson remember that? We were going to knock down estates because nobody wanted houses.
Within a short period we encountered a housing crisis. I find it most amazing that we have a housing crisis considering that the population of the State is 4.8 million people and that there are 2.1 million homes. We want to get the Bill through the House immediately or as quickly as we can because we have finished it in the other House and the sooner we can get it through, the better. We want the structures to be in place as early as possible in the new year. I am not able to answer the question about the €20 million limit.
On the use of a multiplier in the calculation of the local property tax, the group has not yet reported on how the local property tax will be altered or changed, but we will find out soon enough.
The expectation is that the fund will be available to small builders who are struggling. There is a lot of chatter about the funding of the construction sector. The sector which provides residential property is the commercial real estate sector. A figure of 60% is being provided for, with the rest to be provided by way of borrowing.One of the things we saw from the banking inquiry is that the bank cannot take all the risk. The era of the bank providing 100% funding with personal guarantees or the like is over. The banking sector will provide 60%. The other 40% comes from either a person's own funds, equity or from private equity funds. That is the way it works worldwide. That is the way we need to get our construction sector working. There is a substantial cost. The mezzanine funding for this model is 40%. Senator Lawlor referred to rates of up to 14% or 16%, which is rather expensive. We hope this measure will help small builders in the less-attractive areas to build developments of ten units and upwards. Reference was made to the figure of €37.5 million. We do not anticipate there will be many applicants for this.