Paul Murphy (Dublin South West, Socialist Party)
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11. To ask the Minister for Finance the cost each year of tax exemptions for real estate investment trusts; and if he will report on the impact of REITs on the housing market. [4697/15]

Michael Noonan (Limerick City, Fine Gael)
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The tax framework for Real Estate Investment Trust companies was introduced into law in Finance Act 2013.  My officials have been advised by the Revenue Commissioners that there is no tax return data available yet in relation to the three REITs that have been established: 

- The first REIT to be listed on the Irish Stock Exchange was the Green REIT plc in July 2013 but my understanding is that this REIT did not make its first property investment until November 2013. 

- The second Irish REIT, Hibernia REIT plc, listed in December 2013 and did not make its first acquisition of property until the early months of 2014.

- The third Irish REIT, Irish Residential Properties REIT plc, listed in April 2014 with an existing portfolio of over 300 residential units and commenced to make further property acquisitions shortly thereafter.

The first REIT corporation tax returns and accounts are not expected before the end of the first quarter of 2015 and it should be noted that such returns and accounts will be of somewhat limited value in attempting to ascertain tax costs associated with REITs.  The function of the REIT framework is not to provide an overall tax exemption, but rather to facilitate collective investment in rental property by removing a double layer of taxation which would otherwise apply to property investment via a corporate vehicle.

As such, the estimated cost attached to REITs relates not to an exemption from tax, but rather to the move from direct taxation of rental income in the hands of investors, to the taxation of dividends distributed to investors from REIT profits arising from that rental income.  The REIT legislation requires that 85% of all property income profits be distributed annually to shareholders. 

As regards the taxation of the REIT itself, REITs are investment vehicles that are specifically designed to hold rental investment property.  They are focused on long-term holding of income-producing property.  They are not designed to undertake development activities, or as a vehicle for short-term speculative gains.

A REIT is allowed to do a very limited amount of development of its rental assets up to 30% of the value of any property without impairing its REIT status.  This is allowed in order that a REIT may finish out a nearly-complete property, or carry out periodic refurbishments.

If the REIT exceeds these limits and does not subsequently hold the completed property for at least three years as a rental asset, any gain on the sale of the developed property will not qualify for the REIT exemption and will be subject to tax under the normal rules.

With regard to the housing market, the Deputy will be aware that Construction 2020 Strategy: A Strategy for A Renewed Construction Sector sets out the Government's strategy to address a number of issues being faced in the property and construction market and remove blockages from the system in order to get the market moving and increase supply.  Some 75 time-bound actions are included in the Strategy, my Department is party to a range of actions which, among other issues, focus on:

- housing supply, with particular attention directed at planning issues and appropriate and sustainable development financing;

- transparent and sustainable mortgage lending;

- the application of the tax code to the construction and property sectors; and

addressing legacy issues associated with the property bubble.

This includes facilitating the sustainable and professional development of the private rented sector.  Historically the private rented sector in Ireland has been characterised by small-scale landlords. Attracting large scale investment in professionally managed residential property, for example using Real Estate Investment Trusts and other options for long-term investment, can have an important role to play in helping to deliver the professional high-standard sector that tenants deserve.  

I have introduced a number of targeted initiatives in various budgets since 2011 to aid in revitalising the property and construction sectors and to help increase the supply of suitable residential housing stock in certain urban areas where supply limitations are most pronounced, including the introduction of the REIT tax framework in Budget 2013.  

The acquisition and management of properties by professional REITs is part of a more sustainable, long-term property rental market for both investors and property tenants.   While commercial property investment has been a key focus for some of the REITs launched to date in Ireland, residential property also forms part of the sector's interest and exposure.  For example, since its launch in April 2014, Irish Residential Properties REIT, the first Irish REIT with a primarily residential property investment focus, has built up a portfolio of high quality Dublin residential properties.  It recently reported that as of September 2014 it had acquired 1,204 residential units which it was professionally operating with an occupancy rate of c. 99%.

We must remember that the REIT regime is in its relative infancy in Ireland.  We expect the sector to continue to develop over time and in so doing to increase the supply of professionally managed, good quality, secure and affordable rented accommodation.