The Irish government increased the tax paid on commercial property transactions, known as stamp duty, from 2% to 6% in its annual budget announcement in the Dail, Ireland's parliament.
Ireland's finance minister, Paschal Donohoe, said the hike would take effect at midnight local time on Oct. 11. Developers also face higher taxes for holding on to undeveloped land, with the "vacant site levy" rising from 3% in the first year to 7% in each year thereafter.
Stamp duty, which had been as high as 9% in Ireland's "Celtic Tiger" boom years between 2002 and 2008, was reduced from 6% to 2% in 2011 to stimulate the country's commercial property market. Investment in Irish commercial real estate increased from less than €500 million in 2011 to more than €4 billion in two of the last three years. "It worked and now that the market is performing strongly, the time is right to focus resources elsewhere," Donohoe said, RTE reported.
To prevent the stamp duty increase from discouraging homebuilders and worsening Ireland's acute housing shortage, Donohoe also announced the introduction of a stamp duty refund scheme for commercial land purchased for the development of housing. Certain conditions will apply to the refund scheme, including a requirement for developers to commence work within 30 months of purchasing the land.
Marie Hunt, executive director and head of research at CBRE Ireland, said the stamp duty increase threatens the progress the Irish commercial real estate market has made in recent years. Overseas investors and institutional buyers are now responsible for over half of all commercial real estate investment in the country, professionalizing the market and bringing stability, she said in a statement. This marked a significant change from the "domestic debt-funded market [present] when the market crashed previously," she added.
"To say that today's Budget is negative for the commercial real estate market is an understatement," said Hunt. "Unexpectedly trebling transaction costs in this manner is clearly unwelcome considering the reputational damage it will do with these institutional investors. A large proportion of the institutional capital coming from Europe and indeed domestically is pension capital, so this is an indirect tax on the pension industry, which makes Ireland less attractive internationally. It will certainly have a bearing on investors' decision-making, not least the price they will bid and pay for real estate assets from this point forward."
Meanwhile, the vacant site levy will mean that the current 3% charge on developers holding registered land will apply to those who don't begin development in 2018. This will increase to 7% from Jan. 1, 2019, if the land remains undeveloped.