Other Questions

Real Estate Investment Trusts

Mick Wallace


6. Deputy Mick Wallace asked the Minister for Finance if any impact analysis has been carried out on the effects of real estate investment trusts on rental prices here; and if he will make a statement on the matter. [1512/14]

The Government might view real estate investment trusts, REITs, as a quick fix measure to get rid of properties on the books of the National Asset Management Agency, NAMA, and the banks, but questions must be asked about the increased corporatisation of property, with little financial gain for the State. REITs are not taxed on their rental income as long as they pay 85% of it to their shareholders as a dividend, they are exempt from corporation tax as long as their income relates to rental income and non-resident investors are also exempt from Irish capital gains tax. There must surely be implications for the rental market in the years ahead.

The tax framework for real estate investment trust companies was announced in budget 2013 and introduced into law in March last year in the Finance Act 2013. The first REIT launched in July 2013 made its first property purchases in October 2013, so there has not as yet been sufficient time to determine the impact, if any, REITs have had on rental prices in Ireland.

My officials will be monitoring the uptake of REITs in the Irish property market, but it is not expected that REIT ownership of property will reach the level of concentration at which a distortion of competition in the market may occur. REITs are established in approximately 35 countries worldwide and in general the percentage ownership of property by REITs in those jurisdictions tends to be relatively small, often less than 10% of the total stock. The Deputy will be aware from his own experience in the property market that prospective tenants will shop around all potential landlords for the best deal available, so it is expected that rental values in the Irish market should continue to be determined by normal market forces and not by the presence or absence of REIT landlords.

I also wish to highlight to the Deputy that potential benefits for property tenants were a motivating factor in the introduction of the REIT framework last year. REITs are specifically designed for the long-term holding of income-producing property. They are not designed to hold development activities or to be a vehicle for short-term speculative gains, so they can provide greater scope for stable, long-term tenancies. Globally, REITs are characterised by professional management of the property assets they hold, as the objective for the REIT management is to produce stable, long-term income flows for shareholders. It is hoped that the introduction of this type of professional property management into the Irish market will, in the long term, help to standardise and improve management standards across the rental property sector as a whole, which would be of benefit to both investors and tenants.

The Minister says that the amount of property held by REITs around the world tends to be small. However, given that such a bank of property is going to flood our market from NAMA and the banks in the next few years, that will probably not remain so here. The rationale behind REITs is to allow people to invest in property without having to manage it themselves. It is a stockmarket version of absentee landlordism. The investors do not have to pay a lot of tax but are buying up large sections of property here.

Some of my property has been sold to foreign investors for less than half of what it could be built for today. The Government says there has been a vote of confidence in Ireland Inc., but does the Minister not think it has been completely confined to property and bonds, rather than to real business? Perhaps we are selling ourselves short. I am not sure that we need to subsidise property tax breaks to such a degree in order to get them to invest here.

There is a huge overhang of property, including portfolios held by NAMA and properties being held as collateral for impaired loans across the banking system. The banks have been deleveraging rapidly, especially Ulster Bank. There is potentially an enormous amount of property on the market. Part of the Government's job is to clear the overhang first because there will be no property development in this city or country until that is cleared. It is surprising that the overhang is being cleared so fast.

The advantage of REITs is not only what the Deputy referred to. The big advantage of REITs is twofold. First, the small investor can go in, so one does not need to put up €200,000 or €250,000 to buy an apartment if one wants to invest in property. One can buy REIT shares and put in €1,000, €5,000 or €10,000 as a small investor. One is then in for the dividend.

Second, REITs are not exclusively in apartments but are spread across a range of different properties. If there is a collapse in one area, the REIT is at least protected by values in another area. It is something that is being done in all developed countries now, but it will not dominate the market. It is just another initiative and it is working so far.

I understood that the original plan behind NAMA was that it would hold properties for a while, rather than flooding the market. Building work is starting again because there is a demand for certain types of property in certain areas where it is not available at the moment. In addition, there is too much property in places where it is not required. However, many large tracts of property that will be sold off will not be bought by Irish people. They will be purchased by foreign investors who will reap benefits at the expense of the Irish people. These people will end up with a lot of rental property, which will give them a monopoly in the game.

The Minister will recall that the really big problem with our building bubble was that a small group of people gained control of most of the land in this city and they land-banked it. They owned over 90% of the land with a potential for development and thus controlled the price of it. Prices went crazy. I ended up paying €5 million for one fifth of an acre because the market was being driven by a small group of people. We now have these people coming in and taking control of the rental market. This is not a normal situation because we have so much property to sell to them.

The Deputy is pointing to possible future fears but I am fully aware that there are risks in everything. Life is risky. If a Minister wants to avoid risk he or she will do nothing. Of course there is risk in REITs but the risk is managed and is minimal as far as I am concerned. Only two REITs have been established so far and both are capitalised at around €400 million. Two REITs with a total investment of €400 million is not going to distort any market or give anybody control.

It is hard to grow.

I hope it grows further. I believe REITs is a very good way, rather than having someone buying a house up the road and renting it and not having the property properly managed.

It is just speculation.

It is much better if the person who wants to invest in property puts his or her €50,000 or €100,000 into a REIT. It will be properly managed if it follows the pattern of what happened in other countries and the person's risk will be spread. There would then be a proper rental sector. We have a peculiar rental sector in this country. A good bit of it is in the black economy, while more of it concerns people who want it as a supplement for pensions. They are not really people with any expertise in property or the business of renting. The REIT system will raise standards and if something goes wrong I will move to correct it, but so far it is moving in the right direction as intended.

Property Tax Administration

Richard Boyd Barrett


7. Deputy Richard Boyd Barrett asked the Minister for Finance the amount raised from the local property tax for 2013; the amount paid into the local government fund; the amount allocated to Irish Water; if he will provide some estimates for 2014 and the oversight mechanisms that have been put in place to ensure prudent use of these funds; and if he will make a statement on the matter. [1653/14]

The local property tax is the Minister's tax. When it was first introduced in order to neutralise opposition to it, he said all the money was going to local services. Last autumn, we discovered that all the money was going to Irish Water. In recent weeks we have discovered that a huge amount of that money is going to line the pockets of consultants. Can the Minister get his story any straighter than the Minister for the Environment, Community and Local Government, Deputy Hogan, in terms of what he knew about local property tax income going to consultants in Irish Water. Did the Minister for Finance know about this expenditure and, if so, when did he know about it? Did he scrutinise it? Has he assessed whether we were getting value for money for this huge amount of money that has gone into the pockets of Irish Water consultants.

The amount of local property tax received into the Exchequer in 2013 was €318 million. This represents an over-performance relative to the 2013 forecast outturn in budget 2014 which estimated that €300 million would be collected in 2013. This performance is encouraging, both in terms of compliance and revenues raised for the Exchequer, particularly given that this is a new tax.

Receipts from the local property tax received in 2013 will remain in the Exchequer and will be used to meet the many expenditure obligations faced by the State. The allocation to the Local Government Fund for 2013 had already been decided and local property tax receipts were not part of, and were not planned to be a part of, the Local Government Fund receipts and expenditure in 2013.

Section 157 of the Finance (Local Property Tax) Act 2012, as amended, provides that in each financial year commencing with 2014 the Minister shall pay from the Central Fund or the growing produce thereof into the Local Government Fund an amount equivalent to the local property tax, including any interest paid thereon, paid into the central fund during that year.

Budget 2014 forecast that €550 million would be collected in local property tax receipts in 2014. These receipts will be placed in the Local Government Fund which comes under the aegis of the Minister for the Environment, Community and Local Government. Under the Local Government Act 1998 which established the fund, the Minister manages, controls and authorises payments out of the fund. Accordingly, the allocations from the Local Government Fund are a matter for the Minister for the Environment, Community and Local Government.

However, I note that the revised Estimates volume for 2014 published by my colleague the Minister for Public Expenditure and Reform, Deputy Howlin, shows a €490 million subvention from the Local Government Fund to Irish Water. Furthermore, oversight mechanisms for expenditure from the Local Government Fund are also a matter for my colleague, the Minister for the Environment, Community and Local Government. As the Deputy will be aware, these issues have been discussed in great detail at a number of Oireachtas committees in recent days.

The money is collected by the Revenue Commissioners, who then transfer it to the Exchequer, which is under my control. Total receipts from the local property tax in 2014 will be transferred to the local government fund. The Minister for the Environment, Community and Local Government has the legal right to disperse that funding. His agreement with the Minister for Public Expenditure and Reform is that €490 million will be transferred from the local government fund to Irish Water.

What the Minister appears to be saying is that he, as Minister for Finance, has no role in scrutinising the spending of the €490 million that is being handed over via the Minister-----

That is correct. The Minister for Public Expenditure and Reform deals with expenditure budgets.

I find that pretty extraordinary because the money concerned is tax receipts. The Government in levying this unpopular, regressive austerity tax tried to neutralise opposition to it by saying that all the moneys collected would go back into local areas and services. We then discovered last autumn that not a single cent would go towards local services but would be used to meet the start-up costs of Irish Water. I find it amazing that given the change in regard to how and where this money will be spent the Minister for Finance did not discuss with the Minister for the Environment, Community and Local Government the amount that would be required in respect of the start-up of Irish Water. Does the Minister for Finance have no role in spending of that level of expenditure, which he has just informed us is €490 million, €80 million of which we recently discovered will be spent on lining the pockets of consultants? I still do not believe we have been given an explanation in terms of whether that spend was value for money. Enormous amounts of money has been spent on lining the pockets of consultants and it is difficult to see what precisely we are getting for it.

I know the Deputy would like to have a debate on Irish Water, which is the cause de jour.

I am entitled to raise the issue.

I have answered the Deputy's question. If he wants to have a debate on Irish Water he should submit a question on it to another Minister.

My question was what oversight mechanisms has the Minister for Finance put in place to ensure the prudent expenditure of the income from the local property tax in relation to Irish Water. That question was submitted prior to the breaking of the scandal in relation to Irish Water. It is a question which the Minister and his Government colleagues have failed to respond to for the past year and a half.

Again, I ask the Minister does he, as Minister for Finance, have any role in ensuring the prudent expenditure of income from the local property tax, which tax this Government forced down the throats of people and promised would fund local services and is now being spent on lining the pockets of consultants.

The Deputy is engaging in a very emotional mode of questioning. I have answered his question fully. I have, of course, a responsibility because the Revenue Commissioners report to me. The Revenue Commissioners collect the tax effectively and efficiently and report to me. In accordance with Government policy I then transfer that income from the Exchequer to the local government fund. What level of oversight and scrutiny then comes into play is vested in the Minister for the Environment, Community and Local Government. He has the legal authority to oversee the dispersal of that fund.

He does not micro-manage things.

He does it in consultation with the Minister for Public Expenditure and Reform. The Deputy will note from the 2014 Book of Estimates that €490 million will be transferred from the local government fund to Irish Water. The Deputy's question is whether that funding will be used locally. The agencies that provide water supply, domestically and commercially, are the local authorities. That function is being transferred to Irish Water. The transfer of €490 million for the provision of water through a new agency is spending the money locally, because that agency will be doing what is currently done by the local authorities.

Some €80 million of that amount is being spent on consultants.

Banking Sector

Michael McGrath


8. Deputy Michael McGrath asked the Minister for Finance the implications for banks’ capital levels and their capacity to increase lending of the bank asset quality review; and if he will make a statement on the matter. [1628/14]

This question relates to the recent asset quality review of the main Irish banks which is a precursor to the European-wide stress tests next year. My concern is the element of uncertainty created following the announcements by the banks of the affect of the outcome of that review on their balance sheets. All of the banks have stated that they are still above the minimum regulatory capital levels, which is accepted. However, there appears to be a variation between the Central Bank's interpretation of Bank of Ireland's balance sheet in terms of its provisioning for loan losses and the bank's own interpretation in this regard. Bank of Ireland has also stated that engagement on that issue is ongoing.

Having the minimum level of capital does not mean that a bank is properly capitalised to meet the lending needs of the economy. It is important that in advance of the full stress tests later this year we have absolute clarity as to the state and health of the balance sheets of the main Irish banks, on which we rely to provide the oil for the engine of the Irish economy.

I thank the Deputy for his question. As he will be aware, in 2013 the Central Bank of Ireland conducted a balance sheet assessment, BSA, of the PCAR banks, namely, the banks that were subject to the prudential capital assessment Rreview, being AIB, Bank of Ireland and Permanent TSB, which assessment incorporated an asset quality review, AQR. The results of the review were shared with the external partners at end-November 2013 as agreed under the programme and with the participating banks to inform their ongoing capital and financial plans. The Central Bank has not commented on the participant banks in relation to their results of the BSA.

I have seen the results of the BSA as this was a commitment under our funding programme. As with all other such commitments, my Department communicated them to the troika by the appointed deadline. The results are very technical in nature and I am under a legal obligation to keep the details confidential. As the AQR is seen as part of the European Central Bank’s comprehensive assessment, the findings of the BSA are not being published separately. The interpretation of the results is a matter for the Central Bank. However, I am pleased that the Governor has informed me that there will not be an additional regulatory capital requirement in the banks as a result of this process.

Publication of individual BSA results is a matter for the banks to decide. I refer the Deputy to the statements made by the individual banks. As he will be aware Bank of Ireland has issued a detailed public statement on the outcome of the BSA. I am advised by AIB and Permanent TSB that they will consider the findings of the BSA in the preparation of their year-end December 2013 financial statements.

In relation to the banks' capacity for new lending being impacted by the BSA, I draw the Deputy’s attention to the statements made by the President of the European Central Bank, Mario Draghi, at the ECB press conference on 9 January 2014, wherein he specifically addressed this point. Mr. Draghi was asked whether the need to undertake the AQR, being part of the assessment, has delayed the recovery in lending. Mr. Draghi gave a detailed response to this question with reference to eurozone banks. I suggest that the Deputy read Mr. Draghi’s response, which for his convenience, I would summarise as follows: There might have been some short-term deleveraging by the banking system in order to prepare for the assessment but this needs to be counterbalanced by two points: the long-term greater health of the banking system on completion of the AQR and the reopening of the capital markets for banks.

Additional information not given on the floor of the House

As the Deputy will be aware the PCAR banks have returned to the capital markets. I welcome that fact and note that the demand has been very strong for each of the capital market transactions recently undertaken by the PCAR banks. As the Deputy will be aware the level of new lending, in particular new mortgage lending, in the Irish economy was depressed during the financial crisis. Clearly the level of new lending that takes place is influenced by the level of supply of and demand for such lending. It has been evident that there has been an increase in the level of new lending in the Irish market in the second half of 2013 and I expect that the flow of credit into the economy is likely to continue to increase in 2014. My officials critically review the level of new lending - mortgages and SME - regularly and I am not aware of lending being negatively impacted by the BSA.

As the Deputy will also be aware this Government has since it took office pursued a number of initiatives to increase the supply of credit to businesses and individuals. A key aspect of the Action Plan for Jobs 2013 was the facilitation of access to finance for SMEs. The Government has taken a number of significant initiatives aimed at providing equity support to SMEs. In this regard the National Pensions Reserve Fund, NPRF, has set up a number of funds, including the SME corporate fund, which is a €450 million fund, the SME equity fund, a €300 million to €350 million fund, and the SME turnaround fund, a €100 million fund. A number of other initiatives including the credit guarantee scheme and the microenterprise loan scheme have also been implemented by Government.

I thank the Minister for his reply. Can the Minister confirm that the European Central Bank has accepted that the bank balance sheet review will form part of the stress tests that will take place later this year? In other words, does it accept that that box has been ticked and the balance sheets do not have to be reviewed again?

I am concerned that the Central Bank did not announce the results of the balance sheet review and that each of the banks made separate statements. As acknowledged by the Minister, varying levels of detail were provided by AIB, Permanent TSB and Bank of Ireland, which also took issue with the findings of the balance sheet review in terms of the amount of loan provisioning provided for on its balance sheet and stated there would be a need for further engagement with the Central Bank on this issue. This results in an element of uncertainty as we enter into a critical period in the context of the full stress tests this year by the European Central Bank. This uncertainty is regrettable and unnecessary. In my view, the Central Bank should have published the outcome of the balance sheet reviews.

The bottom line is that in the case of two of the banks, we own them fully and we have recapitalised them. In the case of Bank of Ireland, we are still a significant minority shareholder.

First, one would need to distinguish between capital requirements and provisioning. Provisioning against bad debt was what arose from the asset quality review. It was clearly stated by the bank that arising from the asset quality review, no extra capital was required. Obviously, they are interrelated because to make the extra provisioning, a bank draws down on the store of core tier 1 capital. Therefore, the core tier 1 capital ratios have been reduced in the banks but they are still well above the minimum required.

Second, much of the material we are talking about is confidential and commercially sensitive. The Central Bank is independent and it has a relationship with the banks it regulates. The Central Bank deemed it to be appropriate not to publish the findings. Of course, it is up to the banks to publish what they are doing in respect of the additional provisioning required. The Bank of Ireland did so immediately because it had obligations, as a result of the preference share transaction we were conducting with it, to fully inform potential purchasers of the preference shares and of the new situation. It would comply with normal market guidelines to do so. That is why Bank of Ireland came out in greater detail. The other two were not involved in any similar transaction at the time and they are doing what would be normal. They will put the extra provisioning they may or will make into their annual return and annual report for the end of 2013. They will give a good deal of information as well, but they will do it in accordance with their timetables for announcing information about their balance sheets, that is, in the return for the year.

Deputy McGrath's first question was on the asset quality review and whether it will have to be repeated. I imagine it will have to be updated. The asset quality review was for 1 June 2013. Since the stress tests will be in October and November 2014, the asset quality review will be somewhat dated by then. I would prefer if there was an asset quality review, and it was the intention of the European Central bank to have this throughout Europe for 31 December 2013. They may update the June reviews to see what would happen. Obviously, there are downsides to that but there are certain advantages as well since loans supported by property related collateral would have enhanced in value between June and December.

When Mario Draghi spoke in December, he was questioned about the outcome of the balance sheet reviews. He referred to decisive action being required in respect of the Irish banks. That was seen in the context of the balance sheet reviews which had just been published and interpreted by the banks. Will the Minister give us his interpretation of what Mr. Draghi was referring to when he spoke of decisive action being required by the Irish banks in advance of the stress tests? Does it relate to dealing with the mortgage arrears problem or was it respect of loan provisioning and the balance sheet review?

It was Central Bank speak for "Get your provisioning done". It is self-evident, because of the asset quality review, that extra provisioning is required. The banks are doing that now and that is what they should do. I assume Mr. Draghi had the mortgage issue in mind as well because he has been speaking to that topic for some time. From my conversations with Deputy Doherty, I imagine we are all ad idem in the House that the banks need to keep the foot to the floor in solving this particular problem and not resile from the agreed targets.

Mortgage Arrears Proposals

Michael McGrath


9. Deputy Michael McGrath asked the Minister for Finance if he is satisfied with the pace and manner in which the banks are implementing the mortgage arrears resolution targets; and if he will make a statement on the matter. [1629/14]

This relates to the issue that Deputy Doherty raised in respect of the handling by the banks of the mortgage arrears crisis and, in particular, the mortgage arrears resolution targets programme. Following its audit of the arrears targets programme, the Central Bank confirmed that in the first quarter, 60% of the proposed solutions were in the surrender or repossession category. The figure fell to 55% in the second quarter. The bank did not state that it does not regard the threat of legal repossession as not constituting a sustainable solution. It did not go as far as the Minister in that regard. Is the Minister on the one page with the Central Bank on whether the threat of legal repossession does not constitute a sustainable solution? If we can get clarity on that much at least, it would be a good day's work.

As I have indicated, the Government is aware of the significant difficulties some home owners are facing in meeting their mortgage obligations. A comprehensive strategy to tackle the problem is in place and its implementation throughout Government and by lenders is the priority. In that context, the Central Bank mortgage arrears resolution targets, MART, framework is key. Under this rolling process, quarterly performance targets are set to the end of June 2014 to require the banks to propose and put in place durable long-term solutions to address individual cases of mortgage arrears.

The Central Bank has indicated that all six mortgage lenders covered by the MART process have reported that they met the 20% proposed sustainable solutions target for the second quarter of 2013 and the 30% target for the third quarter in 2013. In particular, with respect to the 2013 third quarter target, which is the latest available data, the lenders have reported to the Central Bank that they have issued proposals to 43% of mortgage accounts in arrears as against the 30% target.

The new monthly mortgage restructures and arrears data published by my Department will also provide an impetus for the MART banks to increase the pace of provision of mortgage restructures. That data show that some progress has been made in putting permanent mortgage restructures in place. For example, the number of permanent restructures of permanent dwelling mortgages more than 90 days in arrears has risen from approximately 41,200 in August to approximately 49,300 in November 2013, an increase of almost 20%. The number of permanent restructures of mortgages more than 90 days in arrears has also increased.

The ongoing roll-out of the MART process, in particular the incremental targets to put in place sustainable mortgage restructures, will be important for this end. Of course, the MART process can only work to the benefit of borrowers in circumstances where the borrower works with the lender and engages with the process. Likewise, lenders should communicate and engage with a borrower in difficulty in line with the requirements of the code of conduct on mortgage arrears. Early and effective engagement with borrowers and lenders is, therefore, key to resolving cases of mortgage difficulty. Where there is effective and meaningful engagement regarding a mortgage difficulty, the data show that an increasing number of durable long-term mortgage restructures is emerging.

It will be necessary to build on this in 2014. The issue of mortgage arrears is a major problem that needs to be resolved not only for individual borrowers and lenders but also for the long-term economic and social health of the country. A comprehensive strategy to do this is in place and the Government will ensure it is fully implemented by all the parties involved in the process.

Deputy McGrath raised another question in his introductory remarks. From a statistical point of view the data must be recorded or noted somewhere. The Central Bank is bringing out a report on these issues. The Department of Finance is bringing out a separate report. They are somewhat different in their approach. A high percentage of the repossessions are voluntary surrenders and it is legitimate to take note of these. Obviously, if someone goes to Australia and surrenders his house on the way, it is a permanent solution. It may not be the most satisfactory solution but it is a permanent one. I do not want the banks to include these in some kind of hidden fashion in a general set of statistics. I want the banks to show the data separately. Then we can decide whether they are validly included. It needs to be transparent in order that we know what we are dealing with. To purport to substitute repossessions for restructuring offers was never the intention. The work of Deputy McGrath and the committee illustrated that much clearly and I believe the banks have learned their lesson.

It is important the letters threatening repossession and the cases resulting in voluntary surrender are recorded in a separate category. They are not sustainable solutions. They result in the ending of the mortgage. One could regard them as a permanent solution from the point of view of the banks. However, the Department of Finance and the Central Bank should be adopting the same methodology. We can table written questions on the matter but I hope the presentation of the data of the Minister and the Central Bank will be uniform in terms of the bundles into which they are putting the different cases. Perhaps there are presentation issues, but either way it is important.

The Central Bank should not allow any threat of legal repossession to count as an instance of a sustainable solution. That is what happened, however, in its audits of quarters 1 and 2. In fact, in quarter 1, 60% of the sustainable solutions put forward by banks were in the repossession category, some of them being voluntary surrenders, while the figure for the second quarter was 55%. Moves to repossess should be recorded separately so that we have a clearer view of the genuinely sustainable solutions being offered. We are seeing increased activity levels within the banks, including on the split mortgage side and in terms of the economic concession by Ulster Bank, but it is still difficult to get a final decision from the banks when it comes to individual cases.

My officials have noted what the Deputy said. His approach is the correct one and we will make sure the information is conveyed to the six banks involved and to the Central Bank. There should be no misunderstanding of what the House requires.

Written Answers follow Adjournment.