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.