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Cuckoo funds are said to be playing a role in Ireland's housing market, but what impact are they having?

The Government has come under fire for passing an amendment to allow tax breaks for the funds.

Image: Leah Farrell/RollingNews.ie

A TEN PER CENT stamp duty rate on the bulk-buying of homes by so-called “cuckoo funds” was introduced by the Government only two months ago. 

But last night, the coalition voted in favour of an amendment to the Finance Bill which will see these funds awarded tax breaks if the homes are bought for social housing.

Speaking in the Dáil after the vote, Minister for Finance Paschal Donohoe said that funds have a role to play in the provision of rental accommodation which the government believes would otherwise not be built.

“If we acknowledge we need to build homes at scale, at speed, if we acknowledge that there is a burning urgency and need for the supply of new homes to be quickly accelerated, if we look at what the government is already do with the money that we’re making available… is there a role for the private sector in this?” the minister said.

The new stamp duty change is aimed at tackling so-called cuckoo funds buying up housing developments from first-time buyers but opposition members have said the new amendment signifies “the white flag of surrender” to cuckoo funds.

There has been some disquiet over the way in which cuckoo funds have increasingly snapped up big rental properties across the country for ongoing rental income, pushing ordinary first-time buyers out of the market.

Recently, just 22 out of 174 new homes in Mullen Park in Maynooth were available for first-buyers buyers after the majority were snapped up by investment fund Round Hill Capital.

These purchases have contributed to rising house prices across the country, with the average price of a home rising by 7.6% in the year to March 2021. It has also led to a drop in the supply of homes available to buy. 

When cuckoo funds buy homes, they engage in long-term leases of around 20-30 years with local authorities, who rent the homes at market rate, with the fund then owning the property at the end of the lease period.

This is what’s referred to as ‘sale and leaseback’.

Local authorities have become more and more reliant on this method in recent times to help them meet demand for social homes in an already-strained housing market.

According to data released by the Department of Housing quoted in The Business Post, 5,073 social houses were built in Ireland in 2020.

Of those, 77% were built by the private sector. Around 55% were “turnkey units”, where councils and approved housing bodies (AHBs) buy properties from private developers that are then placed on the property market.

This reliance on the private sector to deliver homes has virtually put a stop to the number of social homes being built by the state itself.

The data showed that not a single home was built by Dublin City Council, South Dublin County Council or Dún Laoghaire-Rathdown County Council last year.

But why has this become the main choice of supply? The answer seems to be that it’s quicker.

In order to get direct-build social housing off the ground, it needs to go through a four-stage process called the Social Housing Development Process.

The stages involve local authorities and the Department of Housing going through a series of consultations, which include seeking approval for design expenditure, planning permission, procuring a builder to undertake the development, and finally reviewing the bids and awarding the contract.

This process can take 18 months to complete, sometimes longer. Speaking to The Business Post, head of housing at Dublin City Council Brendan Kenny explained that leasing is much quicker, and that developers are eager to do deals with local councils.

“I’ve some of the biggest developers in the country ringing me on a daily basis asking if we would be prepared to lease significant volumes of property for long-term leasing,” he said.

Previously, Trinity College economist Ronan Lyons also said that cuckoo funds have a role to play in the Irish market.

In a 2019 report he wrote for Daft.ie, Lyons said the solution to the shortage of rental property, particularly in Dublin, would involve large-scale developments backed by international investors.

According to Lyons’ figures at the time, Dublin needed around 1,000 new rental homes a week for rents to remain static, but only around 500 units per week were being built.

He argued that the shortfall could be plugged by new purpose-built rental supply, made by professional developers and backed by international capital, to ensure a much higher level of construction.

“Firms that do this are hardly cuckoos, pushing us out of our nests. They are swallows, each one bringing us closer to a summer,” he said.

‘An abuse of public money’

However, lecturer in social policy at Maynooth University Dr Rory Hearne warned that the Government have become over-reliant on the private sector. 

Speaking to The Journal, he said: “They came up with this idea that you could house people in social housing [through the private sector]. With the state paying €1 billion a year, they’re housing 80,000 to 100,000 people. If they spent that on building, that only builds 5,000 houses.”

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But Hearne says that while current demand is being met through these developments, the long-term cost may turn out to be far greater than the short-term benefits.

“If you are spending €1 billion a year on the private sector to house people in social housing, over ten years, that would build 50,000 permanent homes. At the end of that ten years under the current model, you still have to pay the private sector continually into the future,” he adds. 

Figures released by the Department of Housing have shown that leasing social housing units from the private sector is significantly more expensive than what it would cost to buy them, or build them directly.

Prices quoted include a local authority paying an average of €18,698 per lease in 2020 in Dún Laoghaire-Rathdown, which works out at €373,960 over a 20-year time-frame. 

What’s more, the local authorities do not own the property once the lease expires. After the 30 years are up, the developers take ownership of the property.

“They can sell it, and they can make the profit from selling it, while also making a profit from the state leasing it from them, so it’s a win-win for the developers,” Hearne said. 

Members of the opposition have called the reliance on ‘sale and leaseback’ a waste of taxpayers’ money. 

Sinn Féin housing spokesperson Eoin Ó Broin TD has said the practice represents “appalling value for money” and that it “should be discontinued”. 

Today, Social Democrats co-leader Catherine Murphy TD said it was “an abuse of public money” to continue leasing properties from the funds.

In response, Green Party leader Eamon Ryan called it a “short-term emergency measure”.

“What we will see in the housing for all strategy, which we will publish shortly, is a change in how we do leasing arrangements and a recognition that this is not the approach that we want to take,” he added.

- Contains reporting by Christina Finn and Michelle Hennessy.

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