Real Estate Legal Outlook 2023 – What you need to know
ESG is having a transformative effect on the real estate sector, influencing both investment and management decisions and also impacting on pricing.
Legislation on the energy performance of buildings as well as legislation to facilitate the physical infrastructure required for the transition to renewables will both continue to be key areas of focus. Progress made in 2022 includes implementation of a new consent regime for the maritime area to facilitate offshore wind projects and in residential development, legislation to support the installation of district heating and cooling in residential buildings and for the installation of ducting infrastructure for electric vehicle recharging points. At EU level there is a proposal by the European Commission to revise and recast the Energy Performance of Buildings Directive, so that we can expect further regulation in this space including, in time, minimum energy performance standards flowing from that.
But EU regulation aimed at mobilising capital towards low-carbon and climate-resilient investment and development is driving the pace of change in the embrace of ESG considerations for the real estate sector more than anything else. To achieve the Paris Agreement goals of reducing our climate impact, the EU is rolling out a reporting and disclosure regime on certain financial and non-financial entities. This is with the aim of increasing transparency and comparability for investors, stakeholders and consumers and channelling all forms of finance from all sources into more sustainable economic activities, enterprise and assets. This is already influencing both investment and management decisions but now is, crucially, also impacting on the valuation of real estate assets in very real ways.
The top domestic legislative change in the real estate sector in 2023 will be the reform of planning regulation by the Planning and Development Bill 2022.
The Planning and Development Bill 2022 signals a complete overhaul of the current planning system and aims to introduce much-needed clarity and efficiency for developers, with the associated benefits for all stakeholders and the real estate sector generally. There will be many changes, but fundamentally, the new legislation should streamline the application process for consent and re-focus the potential for objection and judicial review to matters of materiality. As already mentioned, we also expect legislation to enable and support a transition to renewable energy use. Finally, we anticipate the commencement of the regulation of providers of building works by Construction Federation Ireland, in accordance with its new statutory mandate and powers.
2023 may be the year when ESG and sustainability becomes the principal driver in real estate investment.
As indicated, ESG is set to play a central role in informing investment decisions and changing the investment landscape. At the top end of the investment market, what we are seeing clearly is that the more sustainable the real estate asset, both as constructed and as operated, the more attractive it is as an investment option. Real estate investors are looking at assets to see how they measure up from a sustainability perspective and investing either with a view to expanding their sustainable portfolios or possibly with a view to making the most of the opportunity that someone else’s “stranded asset” might represent.
We expect a renewed focus on active asset management and investment performance with rising interest rates and inflation having delivered a marked change in the new investment market overall from the beginning to the end of 2022.
Irish property funds will also need to comply with the macro-prudential policy framework updated by the Central Bank in November 2022, including the new leverage limit, being a 60% ratio of funds’ total debt to their total assets. There is a five-year implementation period for existing Irish property funds during which time the Central Bank expects that funds will make gradual and orderly progress towards lower leverage levels. The new limit applies immediately for any funds authorised after 24 November 2022.
Increased involvement by the State in the delivery of social and affordable housing programmes will be key.
Recent years have seen a lot of regulatory intervention in the housing market including in the form of taxation measures (to direct capital flows) and residential tenancy regulation (to provide increased protections for tenants). While it is difficult to see interventions continuing as they have been over the past number of years, particularly against the backdrop of a less buoyant investment market, some indicators of potential change might be taken from a recent report on Private Rental in Ireland by the National Economic and Social Council (NESC), which advises the Government on strategic policy issues.
Tackling vacancy is one area of current focus. At the end of January the Government announced a Vacant Homes Action Plan and an Urban Regeneration and Development Fund offering grants for refurbishment of vacant properties. This is against the important backdrop that a new Vacant Homes Tax was introduced in 2022, with returns to be filed by 7 November 2023 and a first due date for payment of 1 January 2024.
Also, announced in Housing for All, a land value sharing levy, where the State will share in the uplift in value from any rezoning decision it makes, is now a priority in the Government’s Spring 2023 legislation programme. The details of how this will operate are still awaited.
Announcing Budget 2023 Minister O’Donohoe also indicated that he was committed to commencing a review of the REIT and IREF regimes, indicating that “institutional investment has played a key role in the provision of housing in Ireland recent years. This review will consider those structures and how best they can continue to support the Government’s housing policy objectives.” Again, it remains to be seen how this review will inform changes to the existing regimes, but any such changes will likely not bite until the 2024 Budget is announced later this year.
Critically, however, recent reports indicate that a significant uptick in housing delivery is required to meet the State’s increasing need. This will be helped by reform of the planning system, but will not be achieved solely by those changes. The complex art of housing delivery depends on many other factors including the availability and cost of finance, land, labour and materials and, crucially, a pool of buyers, willing and able to take on the supply that comes on stream. The easing of constraints on mortgage lending to owner-occupiers implemented in 2022 will see greater potential for owner-occupiers to purchase their own home but interest rises chip away at that increased borrowing capability.
Fundamentally, we expect to see greater participation in 2023 by the State in the purchase of housing for social and affordable purposes, through local authorities, the Land Development Agency and approved housing bodies (which are beginning to flex their financial muscle and becoming more prominent in large scale acquisitions), utilising the structures and schemes provided for under the Affordable Housing Act, among other legislation implementing Housing for All.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.