Why landlords are selling up: Taxes, regulation and fear of a Sinn Féin government

It’s the conundrum that has puzzled many; rents are at record highs according to official statistics, and yet smaller landlords continue to sell up.

Indeed, new figures from the Society of Chartered Surveyors Ireland (SCSI) suggest that 40 per cent of property sales in the final three months of 2022 involved landlords selling their investment properties.

And it’s likely to continue. According to a recent market update from Lisney, the estate agent expects more investors to leave the market this year, “which is good news for buyers but bad news for renters and will cause even more difficulties in a severely undersupplied lettings market”.

It won’t be a flood – just 18 per cent of landlords responding to a recent survey from the Residential Tenancies Board (RTB) said they were “likely/very likely” to sell up in the next two years. However, it could be significant enough to tighten the rental market even further.

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So what’s going on? Do landlords have legitimate complaints or is it just strategic cribbing? Here, three landlords give their views on what’s behind the trend.

Fear of change in government

Taxes, regulations, difficult tenants – all are an issue, say landlords.

Limerick-based Kersten Mehl, director of KMPM, and past president of the Society of Chartered Surveyors Ireland (SCSI), currently manages more than 1,000 properties on behalf of clients. He has spent 45 years in the business, starting his own investment portfolio back in the late 1980s, when he bought two properties in Limerick. He sees the exodus on a daily basis.

“Last year was my worst year ever; I lost 60-80 properties,” he says. “Of the people bailing out, I wouldn’t say anyone has economic issues; they’ve just had enough.”

Why landlords say they are selling up – % of responses

• No longer wish to be a landlord – 48
• Taxation is too high on rental income – 45
• Being a landlord is not profitable – 43
• The regulatory environment – 36
• I am retiring and my properties are my pension – 26
• The property is no longer in negative equity – 24
• Too much time needed in managing properties – 22

Source: RTB landlord survey, November 2022

While he sees a number of factors behind the departure of smaller landlords, the “big worry”, he says, is a potential change in government in the coming years, and the impact a Sinn Féin-led government might have on the rental sector.

The party has previously said it will legislate for tenancies of indefinite duration, to provide renters real security of tenure. According to Eoin Ó Broin, housing spokesman for Sinn Féin, in practice this would see the party remove the sale of property as grounds for issuing a notice to quit under Section 34 of the Residential Tenancies Act.

“The landlord would be fully entitled to sell their property, but where a valid tenancy agreement is in place they would have to sell with the tenant in situ, preferably to another private landlord or a social landlord,” he says.

But, if landlords were to be denied tenure, and could not get their properties back from the rental market, it would be “terrifying”, says Mehl.

“That is the biggest unspoken issue facing landlords,” he says, adding that if a property is to stay in the rental market, only an investor can buy it if it’s sold.

But will there be enough interested investors? Midlands-based landlord Pádraig* started off his investment portfolio in his 20s with an apartment in his local town.

“It was kind of the thing to do,” he says, adding that he now has about 20 or so properties, but has recently retired from his haulage business and is thinking about a change.

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There are few investors like him coming into the market.

“There’s no one thinking that way any more; there’s absolutely nobody doing what I did,” he says, adding that if you were restricted to only selling to investors you’d have to “sell at a loss because there is nobody [to buy it]. They’re not in the game at the moment.”

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As a result, Mehl says, such an approach will sharply devalue rental properties.

“That’s going to be a discount of 20 per cent to market value,” he says, meaning that some landlords are looking to sell now.

Of course, such an approach would also have a significant impact on the build-to-rent (BTR) market, with new institutional investors less likely to be attracted to the Irish market with such restrictions in place.

It will also mean that those “dipping in and out” of the rental market, such as those moving abroad to work for a year or two, will end up leaving their homes empty rather than rent them.

“They’ll be terrified that they won’t get into their house,” Mehl says.

Rents are at record highs – but not for all

Given the record levels of rents being sought – at least in urban areas of the country – hearing landlords complain will leave most observers scratching their heads.

Consider the recent launch of Roselawn on the N11 in south Dublin. Rents at the build-to-rent development start at €2,075 for a one-bed apartment, rising to €3,500 for a three-bed.

These hefty rents are also in evidence in the most recent RTB rent index. This showed rental growth of 8.2 per cent in the second quarter of 2022, compared with the same period in 2021, with average rents for new tenancies in Dublin at €2,011. Outside Dublin, rents averaged €1,130 a month.

However, what’s not always explained is that the RTB rent index only applies to costs for new tenancies, such as those in the aforementioned Roselawn.

It doesn’t cover properties that have been rented for decades, and where rents may be significantly below market rates.

This will change – the RTB has recently required landlords to register on an annual basis, and intends to use this new data to create an index for existing tenancies.

“It is expected that this will be available for publication towards the end of 2023,” a spokeswoman says.

This should give a better indication of where average rents are at.

If you’re getting €1,100 a month, and the house across the road is getting €2,000, you’ll say ‘Why aren’t I getting €2,000?’

—  Kersten Mehl, KMPM

For Pádraig, “it’s hardly lucrative any more”, as he says he hasn’t put up rents in years, even though he isn’t in a rent pressure zone. “So I should be able to do what I like. But there’s no point in me putting rents up where people can’t afford to pay – it won’t work out for me in the long term”.

Another thing about high rents are the high tax rates, say landlords.

“The thing about the rents is that I pay 52 per cent tax. So [if] I get €1,000 in rent; well, I get €480 and it’s €520 for the taxman. But out of the €480 I’ve to look after it, insure it, etc. I’m lucky enough that I’ve most of them [properties] paid for [so there’s no mortgage repayments],” says Pádraig.

Rent pressure zones work against renters

For Mehl, the introduction of rent pressure zones has had two major impacts – they pushed up rents and left some feeling they were charging well below market rates.

“Since its inception it has been the biggest accelerator of increase in rents,” he says, adding that traditionally, landlords would have put up the rent when the property became vacant. “Not every year.”

The other issue is the restrictions on rent increases; so, a landlord who had kept rents low suddenly finds themselves way below the market when they take on a new tenancy, with no facility to bring it back up.

“If you’re getting €1,100 a month, and the house across the road is getting €2,000, you’ll say ‘Why aren’t I getting €2,000?’ People feel they’re being denied a market rent,” says Mehl.

This situation also means that when a property does come up for sale, it can be less attractive to another investor, unless it has been making market rent. This is because a new investor can’t automatically bring the rent up to market rates due to rent rules. As a result, most of these properties will typically be acquired by owner-occupiers.

Indeed, in the aforementioned RTB survey, 71 per cent of landlords who have sold out said they sold their properties to an owner-occupier.

Jim* for example, has now sold out of the UK – where he once owned as many as 40 properties – and is going to start moving on his Irish units.

“I will sell with vacant possession as you get a better price. There’s no point in selling a property [as an investment] with someone [a tenant] paying €800 a month when the going rate is €1,700.”

Tax not the worst – but still problematic

While Mehl asserts that tax “is not the biggest problem”, it’s still an issue.

A regularly repeated bugbear of landlords is the tax situation; property tax isn’t deductible, tax rates are too high, and not enough expenses are tax-deductible, to name just three.

For Jim, who started buying his portfolio around 1995 and now has about 40 properties, selling up will mean a sizeable capital gains tax (CGT) bill, given a CGT rate of 33 per cent.

“Some properties I bought for about €100,000; they’re now worth about €220,000, so there’s about €40,000 per unit to be paid in CGT,” he says. “And no allowances available to reduce this.”

It is this lack of relief, a relief that is common in other sectors, that also riles Jim.

I think landlords – accidental or otherwise – tend to be treated as a group of people that are someway antagonistic towards others in society. That’s an incorrect perception

—  Jim, landlord

“My difficulties are that I’m not treated as a business. In the last couple of years I’d have about €300,000 earned in rental income. But I’m not allowed to offset property tax against rental income, and I’m not allowed make any pension provisioning on rental income. So, it’s very much treated as a separate class of income. There are very archaic rules around it. Down through the years I should have been allowed transfer properties into a pension fund,” he says, adding that if he spends, for example, €40,000 renovating a property, he can only claim it back as an expense at 10 per cent a year over 10 years, so just €4,000 a year.

Succession planning is also a difficulty for landlords.

Pádraig has three adult daughters and would like to be able to pass his property portfolio on.

“I’d love to have some of the family looking after it, but there is no way I could give those properties to them without paying tax – there is no business relief, and it is a business.

“You can’t pass it on without selling it off, liquidating the asset, and looking after them [his daughters] in another way.”

Poor sentiment

Landlords also feel their portrayal in the public eye is not warranted.

“I think landlords – accidental or otherwise – tend to be treated as a group of people that are someway antagonistic towards others in society. That’s an incorrect perception,” says Jim.

Pádraig agrees. Now retired from his day job, he’s reluctant to let anyone know he’s involved in his property portfolio, which he says is “equally as stressful”.

RTB is a ‘waste of space’

The Residential Tenancies Board (RTB) was established in 2004 to deal with disputes between landlords and tenants. However, landlords say it works firmly in favour of tenants.

Jim says it’s an “absolute and utter waste of space from a landlord’s perspective”.

“When you have a problem they’re very unhelpful. One particular [tenant] was a person from a very good background, working in stockbroking, but absolutely trashed the house and cost me €15,000. I went to the RTB and they offered me only €1,000, a total joke, as I didn’t even get the money.”

Pádraig agrees. “The RTB are a total disaster and that’s part of the problem too,” he says. “There is a perception out there where the landlord never does so well out of it.”

In response, a spokeswoman for the RTB said it is an independent body “that is impartial in the exercise of its functions”.

An issue Pádraig sees is when he issues a termination of tenancy notice. Depending on the length of the tenancy, this could be as long as eight months, “but you have no idea if that will work out until the very last day”, he says.

Government help?

Given the situation, there have been calls for renewed incentives for smaller landlords.

Minister for Housing Darragh O’Brien recently said he wanted a “fair tax system” for landlords, to encourage them to stay in the business, noting that operating in the sector can be “very expensive”. One suggestion was that landlords could write off the cost of fridges, cookers etc against their taxes, with tax breaks also possible for vacant periods.

But it’s unlikely to be enough.

“They need to target the hardcore investor with a package to remain for 20 years,” says Mehl, while Jim is less optimistic.

“Can the Government do anything? In reality no… anything they do now is doing it too late,” he says.

*Landlords are known to the author but have asked for their names to be changed