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There are yet more Irish laws that allow foreign property investors to operate here tax-free

Certain funds in operation here are seeing foreign property investors paying no tax on income. The value of property owned in these funds is in the region of €300 billion.

shutterstock_398070964 Shutterstock / RMcCoy Shutterstock / RMcCoy / RMcCoy

WITH THE IRISH government’s decision to appeal a ruling by the European Commission that Apple owes this country €13 billion in unpaid taxes, the idea of Ireland as a tax haven is very much to the forefront of the public consciousness at present.

Yesterday, Michael Noonan attended a summit of European finance ministers in Bratislava, Slovakia, and to the surprise of no-one taxation was heavily on the agenda.

It would be understandable if the durable minister had felt a little uncomfortable – if we’re a little unsure of the Apple appeal here in Ireland, in appealing it the might of the European Commission is being directly contradicted.

Last week, the government moved to close a ‘loophole’ within Irish tax law, known as the Section 110 ruling, which allowed vulture funds to buy up mortgages here but pay no tax having registered as a company with charitable status.

The existence of such funds had been raised on numerous occasions in Dáil Éireann by TDs such as (now) independent Stephen Donnelly and Sinn Féin’s Pearse Doherty.

But now it seems that those ‘loopholes’ may be just the tip of the iceberg.

A number of investment vehicles are available to foreign property investors here which allows them to pay no tax on profits.

The instruments in question, Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset Management Vehicles (ICAVs) are official regulated fund structures.

The value of property held here by such funds is in the region of a staggering €300 billion.

And make no mistake, the Dublin office property market in particular is big business. 27% of Dublin’s office space has changed hands in the last 40 months according to property advisers Savills.

That equates to total spending of €5.3 billion. Over 25% of Dublin’s office stock has changed hands since 2013.

Savills Savills Savills

Click here to view a larger image

And in the first quarter of 2016 fully 67.8% of the money spent on Dublin office property came from abroad.

So just how much tax is being avoided using these structures? That’s a very difficult question to answer, but you’re probably talking in the hundreds of millions. And it’s all legal.

How these funds work

To take one example, Kennedy Wilson Europe Real Estate (KWER), a global player in property management with interests in Britain, Italy, Spain, and Ireland, manages its Irish property portfolio via two separate QIAIFs.

Davy Stockbrokers describe QIAIFs as “an Irish regulated fund structure and the vehicle of choice for private and institutional investors who are undertaking large scale investment in real estate “.

In Kennedy Wilson’s case, the company owns a property portfolio here worth roughly €1 billion.

Rent from those properties was in the region of €26 million for the first six months of 2016 (two properties owned by KWER here are the Stillorgan Leisureplex in south Co Dublin, and Portmarnock Golf Club). And no tax was paid on that rent.

“Investments in Ireland are held through two Irish qualifying investor alternative investment funds, which are exempt from any Irish taxation on income and gains,” the company says in its half-year results for the first six months of this year.

In the same section KWER states that it is subject to 25% corporate tax on profits within its Spanish subsidiaries, and 20% on rental income from its UK investment properties. From that point of view Ireland is naturally an attractive prospect.

The Group is subject to corporate income tax at 25% on taxable profits generated within its Spanish subsidiaries. Income tax is payable at 20% on rental income deriving from UK investment properties.

Revenue

Registered QIAIFs and ICAVs in Ireland are listed by the Central Bank once a month on its website. Other examples of QIAIFs operating in Ireland include:

  • IPUT property fund. One of Ireland’s largest property vehicles, with holdings worth €1.8 billion in Ireland. Most of its property is office buildings based in Dublin, with public buildings accounting for 6% of its rental income in 2015. Non-resident investors account for 27% of the fund.
  • Cedar Real Estate Fund. A fund worth in the region of €100 million. And landlord to certain Central Bank buildings for which they receive €2.65 million in rent per year. The fund is ultimately owned by Starwood Property Trust, an American vulture fund based in Connecticut. As such all rental income is tax exempt.
  • Irish Residential Properties (IRES) REIT (Real Estate Investment Trust). Ireland’s largest non-government landlord with a property of portfolio of 2,288 apartments in Dublin with annual rent payable of €40 million. A Canadian property investment group called CAPREIT owns 15.7% of IRES.

Why do these funds exist?

This isn’t an easy question to answer. QIAIFs were initially set up in the 2000s as a means of attracting foreign investors to Ireland.

ICAVs were established by the last government in 2015.

“Why are they there? Well a huge selling point is the number of people employed in funds-management in Ireland,” a senior financial source told TheJournal.ie.

That figure is roughly 38,000 people by the way, according to the Department of Finance, a huge figure by any estimation.

“From a point of view of simplicity, Ireland’s regime is as simple as they come, and non-resident investors enjoy tax-free status on any income gains here,” the source said.

Half the world’s hedge funds are either managed from here or domiciled here. We’ve a very attractive tax regime here with a huge services industry built around it.
The regime is very straightforward and investors are very comfortable with that.

Sinn Féin finance spokesman Doherty meanwhile says the regime was set up “as a way of triggering investment”.

“My own view is that successive governments put up a “For Sale” sign on Ireland to push up property prices and get the market moving,” he told TheJournal.ie.

08/09/2016. Sinn Fein - Billboard - Apple Tax Ruli Pearse Doherty and Louise O'Reilly of Sinn Féin Sam Boal Sam Boal

I also believe it exists to help NAMA get a better return on sales, and to help put a better view on banks’ balance sheets.

“These are sophisticated funds for sophisticated investors who know what they are doing,” Doherty adds.

We’re talking about companies that have tens of millions of rental income every year and they aren’t paying any tax on it – that is not acceptable.

Trouble brewing

Pearse Doherty objects to the word “loophole” as in the context of the Section 110 companies.

“That wasn’t a loophole, that was deliberate legislation, and it took the ramping up of political pressure to have it closed,” he says. “This is a similar situation.”

There was very little more that could have been done with Section 110 anyway as most of them have been sold off.

A freedom of information request submitted by Doherty to the Department of Finance (DOF) earlier this year suggests that Revenue officials are also beginning to worry about the tax situations of foreign investment vehicles here.

One email from Principal Officer with Revenue Áine Hollingsworth to the Department of Finance in April of this year cites a need to “come up with realistic and implementable anti-avoidance abuse rules for property funds if that is desirable”.

This concern seems to have been triggered by a report in the Sunday Times concerning the legal avoidance of Capital Gains Tax by billionaire Denis O’Brien on the sale of a property in Dublin earlier this year. That was achieved through the use of an ICAV, the Real Estate Development and Investment Fund.

14/07/2016. The National Treasury Management Agenc Minister for Finance Michael Noonan Rollingnews.ie Rollingnews.ie

Another email from Hollingsworth to the DOF from end-April suggests that the Revenue officer is “anxious to start on this ASAP”.

Also during April, Doherty submitted formal questions to Michael Noonan in the Dáil concerning the operation of property asset funds here, specifically QIAIFs and ICAVs.

Noonan responded:

ICAVs were introduced in 2015 as a measure to develop and enhance Irish competitiveness in the funds industry in Ireland and to promote employment in the State.
Qualifying investor funds, once authorised by the Central Bank, fall under the definition of an ‘investment undertaking’… the legislation provides a tax exemption to the undertaking itself and to certain investors, for example investors not resident in the State.

“I am… advised by the Revenue Commissioners that they are currently examining recent media coverage concerning the use of investment funds for property investments.  Should these investigations uncover tax avoidance schemes or abuse then appropriate action will be taken and any necessary legislative changes that may be required will be put forward for my consideration.”

What should be done? What can be done?

As already mentioned, these kinds of investment funds are now well-established in the country, as is the supporting industry surrounding them.

Dismantling that industry is not really an option. But changing the tax laws might be.

“The solution is a simple one,” says Doherty. “Charge the same withholding tax seen elsewhere in Europe where non-resident investors are accumulating profits outside their own jurisdiction.”

That tax ranges in level from 20% in Britain to 25% in Spain to 30% in France.

“We need to ensure that those who are getting generous returns on property investment here are liable here for economic activity that has taken place here,” says Doherty.

At present people renting properties here are paying into these funds and not a penny is going to the state. That has to change.

The financial solution may be a simple one, but the political solution is likely to be anything but.

It took extreme political pressure to action the closing of the Section 110 loophole. It is likely to take the same again and more to change the tax laws surrounding these funds.

Read: “It’s ridiculous”: Ex-HMV staff left waiting for pay as company goes into liquidation

Read: “We’re on our knees and begging” – motorists being driven off the road by insurance costs, committee hears

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51 Comments
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    Mute Jacks R. Back
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    Sep 3rd 2020, 12:08 AM

    We had co-living before. We called them tenements.

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    Mute Mary Nugent
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    Sep 3rd 2020, 1:39 AM

    @Jacks R. NAMA sold all of it off c/o ff/ g Noonan at the helm with Capt. Enda Kenny.

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    Mute Wreck Tangle
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    Sep 3rd 2020, 12:46 AM

    Co-living works well in other cities. I lived in about 40 Sq m when I first moved to Zurich. It was great. Small, in the city, very practical, nice neighbours who I shared certain spaces with but also and most importantly, it was affordable.

    Difference in Ireland is that developers are using this route not to create affordable housing for young, single people, they are trying to maximise their yield per Sq m. Terrible stuff.

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    Mute Karl Harvey
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    Sep 3rd 2020, 2:35 AM

    @Wreck Tangle: this is totally different as well, price aside. You lived in 40 square meters. The majority of these will be 16 square meters! Then some will be 18 square meters, and about 4 of them will be 24 square meters. Big difference between those numbers and what you lived in.

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    Mute Kevin Thompson
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    Sep 3rd 2020, 7:40 AM

    @Wreck Tangle: how much did you pay per month?

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    Mute Wreck Tangle
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    Sep 3rd 2020, 8:32 AM

    @Kevin Thompson:

    1,100 Swiss Francs (think it was about eur 1k at time). Net salary is around 3* Ireland and average rent in Zurich City for 80-100 Sq m is probably around chf 2.8k so it’s a completely fair deal.

    23
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    Mute Karl Harvey
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    Sep 3rd 2020, 12:17 AM

    More like “Price Gouging Leeches seek meeting with useless puppet over ‘not enough propaganda to make our expensive shoe boxes desirable’”

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    Mute windbag
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    Sep 3rd 2020, 12:36 AM

    Misinformed… I don’t think so.. I lived in one of these in Holland for awhile and it was a nightmare..

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    Mute Nigel Barlow
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    Sep 3rd 2020, 1:20 AM

    @windbag: in what way?

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    Mute Bleurgh
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    Sep 3rd 2020, 6:36 AM

    @windbag: lived in one in Holland too in my early 20s and I loved it, didn’t know anyone and was a great way to meet people and was cheap! It was perfect for a certain time in my life.

    41
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    Mute Frank Scanlon
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    Sep 3rd 2020, 12:14 AM

    Absolute disgrace if any of these ‘developments’ get the go-ahead. As regards the report commissioned by Bartra, leave it so

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    Mute Rochey77
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    Sep 3rd 2020, 10:38 AM

    @Frank Scanlon: theres already some completed and some under construction

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    Mute EillieEs
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    Sep 3rd 2020, 3:15 AM

    I wonder what percentage of applications currently under review is for these hostel-type accommodation? Between student apartments, hotels and these co-living developments it seems couples and families are being pushed out of the city; developers are being allowed shape the future of the city.

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    Mute Ciara Ní Mhurchú
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    Sep 3rd 2020, 9:59 AM

    @EillieEs: Single people are being pushed out too. No hardworking Dub wants to live in a pokey studio flat either.

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    Mute NotaWarder
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    Sep 3rd 2020, 10:13 AM

    @EillieEs: City probably not the best place to raise a family

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    Mute Sam Greene
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    Sep 3rd 2020, 11:26 AM

    @NotaWarder: yes it is. You get to spend more time with your kids, Instead of commuting for hours.

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    Mute Padraic O Sullivan
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    Sep 3rd 2020, 6:26 AM

    1. Teagasc recommends stable units of 18sqm for horses. These units are 16sqm.
    2. Covid has obviously put a dampner on the situation. Say there is a kitchen unit per 25/30 people. Good luck having breakfast/prepping your sandwich while social distancing.
    3. Under what laws are the renters protected. If I’m not mistaken, the PRTB aren’t gonna protect you, it’s a private contract between you and the owner.
    https://www.irishtimes.com/news/social-affairs/co-living-residents-may-fall-outside-rental-protections-1.3990143

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    Mute Rochey77
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    Sep 3rd 2020, 10:39 AM

    @Padraic O Sullivan: i don’t know if you’ve ever seen horses though, they are pretty large

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    Mute Bob Murray
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    Sep 3rd 2020, 7:12 AM

    Irish developer looks for meeting with ff minister because he wants to alter reality….hmmmm….where have I heard this before?

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    Mute Adam Conroy
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    Sep 3rd 2020, 7:56 AM

    Pull the other one it’s got bells on. There’s one reason and one reason only that developers want this…it suits them fine to build overpriced boxes for people to live in, rather than proper apartments or houses.

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    Mute Podge
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    Sep 3rd 2020, 9:23 AM

    @Adam Conroy: they’ll increase the housing stock which will reduce the demand strain which will decrease the price in the long run. How many people could you house in traditional housing developments on that land? The more people we get out of traditional housing that don’t need to be there the more the traditional housing stock is available to families/young people looking to start a family.

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    Mute Sam Greene
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    Sep 3rd 2020, 11:28 AM

    @Podge: do t know many single people living in 2 or 3 bed houses? Do you? This is all about profit for the least amount of space.

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    Mute Podge
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    Sep 3rd 2020, 11:38 AM

    @Sam Greene: yes. And I was one of them for many years. Obviously they rent out a room and share with others. Very hard for a family to compete with 3 working single people for a 3 bed house.

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    Mute Gary Kearney
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    Sep 3rd 2020, 12:27 PM

    @Podge: A small box is not housing

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    Mute Podge
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    Sep 3rd 2020, 12:39 PM

    @Gary Kearney: So how big does a room have to be to be considered housing under whatever definition you’ve come up with in your own head?
    I live in a small apartment. I know many people who live in small apartments. I know people who share bedrooms with 2/3 people. It’s not the best form of housing but it’s all housing.

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    Mute Paul Mc
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    Sep 3rd 2020, 12:44 AM

    No brown envelopes were involved that’s a giving.

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    Mute RogersRabbit
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    Sep 3rd 2020, 3:22 AM

    The minister rushes to be lectured by these people.

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    Mute Ann Experiment
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    Sep 3rd 2020, 12:09 AM

    Mehole.

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    Mute George Vladisavljevic
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    Sep 3rd 2020, 8:22 AM

    As I have said in the past, make the out of Dublin TD’s stay in these accommodations while they are up thee instead of renting apartments and hotels and see how it goes. After all, what is good for the goose is good for the gander.

    It will also save the state money if they go out and buy a few rooms and share them among the TD’s and other public servants and staff.

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    Mute jgc
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    Sep 3rd 2020, 8:07 AM

    #coliving Looks like very expensive Direct Provision accommodation: so that the rising affulent can experience tennent style living in order to be prepared for the next pandemic

    45
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    Mute Emer Caffrey
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    Sep 3rd 2020, 4:25 AM

    Looks ugly for starters

    76
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    Mute Lydia McLoughlin
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    Sep 3rd 2020, 7:50 AM

    You just smell the BS when he blew smoke up the b’side of the Minister when he put in that paragraph about “… strong and stable government…’ The government are just a front, puppets for the perceived elite and not fit for purpose.

    64
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    Mute Eoin Ryan
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    Sep 3rd 2020, 10:38 AM

    They should be banned. Worst idea I’ve heard. We are going backwards here in Ireland.

    38
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    Mute Podge
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    Sep 3rd 2020, 9:10 AM

    Many people talk about how we need houses not this type of accommodation. What people fail to realise is that getting people who don’t need to be in traditional houses into other types of accommodation frees up traditional housing.
    When I first moved to Dublin at 22 I would have happily moved into one of these as I didn’t know many people in the city. A few years on and I’m living with my girlfriend, we don’t need a house at the moment as it’s just the two of us. An apartment would be the most ideal (the standard is better than a lot of the houses converted into one beds).
    Instead I’ve lived in three different places in Dublin and all three were old houses that would have been perfect for families. The current house was converted into 5 different one bedroom/studio apartments.
    I don’t know how a couple with kids are supposed to compete with investors who can put 6+ working people in a house and charge them €700+ each.
    The more housing stock we have the more prices will come down.

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    Mute Sam Greene
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    Sep 3rd 2020, 11:31 AM

    @Podge: so basically they are student accomodation, under a different guise. We need more families in the city, not more single person acconodation. .

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    Mute Podge
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    Sep 3rd 2020, 11:45 AM

    @Sam Greene: Yes, so how can we get more families into the city? How about we build other types of accommodation so that people living in houses who don’t really care about living in a house can move? Dublin is full of houses where each bedroom is rented out to single people or couples. Like I said above I’ve lived in many and the current house I’m living in would make for a lovely family home except it was converted into a bunch of 1 bedroom/studio apartments.
    There’s not enough houses – build houses is such a one dimensional view.

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    Mute Cynical
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    Sep 3rd 2020, 1:05 PM

    For anyone using foreign examples of good co-living spaces, please realise business people in Ireland like to do everything a lot worse than the rest of Europe.

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    Mute John Mulligan
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    Sep 3rd 2020, 9:25 AM

    People should go and look at one, and then give their view.
    I was initially sceptical about these developments, and indeed they should be well scrutinised, but I looked at one in London in January and I was impressed.
    They aren’t designed to house families, they are somewhere between a hotel and an apartment, designed for single occupancy for shortish lets.
    A lot of people move to Dublin for one or two year contracts in the IT sector, and having this option means they aren’t occupying an apartment that might suit a family. These developments are targeted at a specific sector, same as student accommodation is targeted at students.
    Opposition to co-living developments makes a great rallying cry for certain groups, but they are either misinformed or deliberately ignoring the reality.

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    Mute Jose Maria
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    Sep 3rd 2020, 11:21 AM

    Dublin, one of the youngest cities in Europe and with no co-living places.

    I guess the people that don’t agree with that is because they prefer to live in bunk beds or in old houses.

    Student residences are nice for people until 24 and co-living places are nice for expats and people until their 30s.

    Is it that difficult to understand?

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    Mute vanc
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    Sep 6th 2020, 12:08 PM

    We need affordable housing full stop. Not everyone needs a 3 bed semi-detached or a 2bed appt. These units are smaller than a hotel room for 1.5-2k per month. You could actually long stay in in a b&b for that!

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