Introduction
The provision of social housing can be designated as a service of general economic interest and can be publicly funded under the Commission decision 2021/21. Member States have to show that there is a real social need and limit access to social housing to those persons who cannot afford what the market provides; i.e. low-income or vulnerable persons such as single parents.
Yet the recent increase in the price of residential housing in many Member States and the chronic shortage of affordable housing in urban areas make it difficult for Member States to designate as an SGEI housing for the majority of their population.
A solution to this problem is simply to support the development of affordable housing without imposing public service obligations on developers and managers of residential buildings. In 2020, the Commission approved such a scheme in Sweden [see SA.56305]. More recently, the Commission approved a similar scheme in Ireland.
The Irish scheme was notified to the Commission in December 2022 and the Commission approved it in decision SA.102927.1 The purpose of the scheme was to remedy a housing shortage in Ireland. The Irish authorities argued that there was a “viability gap”. The total cost of placing a two-bed apartment on the market was about EUR 411,000, including VAT. That amount, however, was lower than the sale price of new apartments on the market. Under central bank rules, mortgage providers were not allowed to offer loans that exceeded 3.5 times the salary of the borrower. This translated into a threshold of EUR 117,000 of household income [it appears that the average salary is around EUR 50,000 which implies a household income of EUR 100,000, assuming two average salary earners per household].
In order to incentivise the development of affordable housing, the Irish scheme proposed to organise a call for expression of interest in five cities to select developers. The highest ranked proposals would be offered funding. The ranking would be inversely proportional to the construction costs, implying that the most efficient developers would be ranked higher.
Viability gap
As mentioned above, Ireland argued that there was a viability gap in the property market in Ireland. This viability gap is expressed as follows: “(57) The viability gap is calculated on the basis of the following formula: C = A – B, where C is the viability gap, A is the cost of delivery and B is the sales price to an eligible purchaser.”
“(58) Considering that it will take some time to build the relevant apartments, market prices are likely to change during this time period. The viability gap that will determine what level of subsidy is actually paid to a successful developer for an apartment will be measured on the basis of the actual sales price paid by the eligible purchaser when the apartments are completed and sold. The subsidy is subject to a ceiling of EUR 120 000 per apartment. The subsidy can be increased by 20%, where the viability gap exceeds EUR 120 000 in Cork, Limerick, Galway and Waterford, implying an absolute maximum subsidy of EUR 144 000 per apartment in these four cities.”
Amount of aid per developer
“(63) The amount of subsidy that will actually be paid to the developer will amount to the difference between the delivery cost included in the Designation and Development Agreement and the actual sales price achieved when the apartment is sold to an eligible purchaser. Where the actual sale price is more than the anticipated market price, the amount of the subsidy will be reduced by the difference. Where the actual sale price is less than the anticipated market price, the amount will be increased (subject to the funding ceiling, see recital (58)). The developer will bear any delivery cost increases, howsoever arising, that may occur after the date of the agreement. The Irish authorities have committed that to prevent any possible overcompensation, the amount payable in respect of any designated unit will be reduced by an amount equal to the difference between the actual and the original delivery costs.”
Eligible buyers
“(65) Under the measure, the eligible purchaser (also referred to as “owner occupier”) is a person (or persons) who – solely or jointly – purchase(s) one apartment with the intention to occupy it as his/their normal place of residence. Pursuant to the scheme, the owner occupier buying the apartment is required to live in the qualifying residential property for a period of at least five years from the date of payment of the subsidy.”
Restrictions
“(66) If the property is sold within ten years of purchase, the owner occupier will be required to make a repayment to the Housing Agency (acting on behalf of the Department of Housing, Local Government and Heritage (the “DHLGH”)) calculated pro rata as a portion of the increased value referable to the subsidy amount.”
The total budget of the scheme was EUR 450 million.
Existence of State aid
There was little doubt that the scheme involved state resources and that it could affect trade and distort competition. The Commission explained why chosen developers would obtain a selective advantage even though they would be chosen competitively.
“(84) An advantage for the purposes of Article 107(1) TFEU is any economic benefit which an undertaking would not have obtained under normal market conditions, i.e. in the absence of State intervention. Only the effect of the measure on the undertaking is relevant, and not the cause or the objective of the State intervention. Whenever the financial situation of the undertaking is improved as a result of State intervention on terms differing from normal market conditions, an advantage is present. To assess this, the financial situation of the undertaking with the measure should be compared to its financial situation without it. Moreover, to fall within the scope of Article 107(1) TFEU, the economic advantage must favour “certain undertakings or the production of certain goods”. Hence, only those measures favouring undertakings which grant an advantage in a selective manner fall under the notion of State aid.”
“(85) The scheme ensures that the beneficiaries receive a subsidy that will amount, at most, to the difference between the delivery cost included in the Designation and Development Agreement and the actual sales price achieved when the apartment is sold to an eligible purchaser (recital (63)). Undertakings receiving support under the scheme receive an economic benefit that they would not have obtained without State intervention and in normal market conditions. Their financial situation is improved as a result. In addition, only undertakings active in the property development sector proposing an apartment development meeting the selection criteria may benefit from the support (see recital (71)). The measure thus favours a distinct and separate group of undertakings, and the Commission therefore considers that it provides a selective economic advantage to the beneficiaries.”
Compatibility with the internal market
Ireland did not notify the scheme as a service of general economic interest. The reason is most likely that access to newly built apartments is not limited to low-income persons, even though the notification mentioned the long waiting list for social housing and the large number of homeless persons. Therefore, the Commission assessed its compatibility with the internal market on the basis of Article 107(3)(c).
The Commission, first, examined the positive effects of the aid and concluded that the scheme did facilitate the development of an economic activity, that it had an incentive effect and that it did not infringe any other provision of EU law. In relation to the latter, the decision explained that “(101) there is no requirement for applicants under the scheme to be established in Ireland, or use Irish goods or services (beyond the inherent requirement that the apartments must be situated in specific Irish cities), thereby respecting freedom of establishment, as stipulated in Article 49 TFEU.” “(102) Furthermore, the scheme will apply to all applicants developing apartments for sale to owner occupiers in Ireland. The aid therefore does not unduly restrict the freedom to provide services under Article 56 TFEU.”
Then, the Commission examined whether any negative effects of the aid were kept to the minimum possible level. First, it found that the scheme was appropriate to remedy the identified viability gap and the aid was necessary to remedy market failure as the market itself could not address that gap.
The aid was proportional as it was subject to the constraint of the viability gap. Then, the Commission assessed favourably the aid-limiting features of the scheme.
The ranking system rewarded lower-cost developers: “(121) The ranking criteria used at Stage two include marks for “Delivery Cost per apartment”, which decrease with the level of delivery costs per apartment (recital (54)). This system tends to reward lower-cost developers and limit the intervention of the state to the minimum necessary to ensure increase of supply, thereby allowing the Irish authorities to fund a maximum amount of projects within the available budget.
Allocation of risk: “(122) The developer bears the risk of any increase in construction costs after the delivery cost has been recorded in the agreement with the Housing Agency (recital (63)).”
Maximum aid amount: “(123) The scheme includes two elements ensuring that the subsidy is proportionate: first, the amount of subsidy can never exceed the viability gap (recital (63)) and there is a ceiling on the amount of subsidy, which is EUR 120 000 per apartment. In Cork, Limerick, Galway and Waterford, the subsidy can be increased by a further 20%, implying an absolute maximum subsidy of EUR 144 000 per apartment in these four cities (recital (58)).
Restriction to owner occupier: “(124) A transaction only qualifies under the scheme if the purchasers are owner occupiers, which means that they must live in the apartment as their principal residence for a specific period of time (recital (65)). This prevents the scheme being used for speculative investments. This is also ensured by the mechanism according to which the individual purchaser will have to refund a specified percentage of the capital gain if the apartment is sold before an allotted time.”
With respect to other negative effects of the scheme, the Commission noted that “(128) the subsidy is solely available for the delivery of a specific type of apartments in five cities in Ireland, for which planning permissions have already been obtained (recitals (52) and following), that the amount of the subsidy is limited to – at most – the actual viability gap experienced when the apartment is sold to an eligible purchaser (recital (63)) and that the scheme provides for a funding ceiling (recital (57)). Considering the above, in particular the fact that the subsidy is limited to covering (at most) the viability gap in view of allowing the actual construction of apartments, it seems highly unlikely that developers benefitting from the scheme could use their advantage to cross-subsidise other developments and distort the price of such developments. The risk of State funding crowding out private funding also appears to be unlikely, as the subsidy covers developments which are inherently unprofitable and, therefore, are unlikely to obtain private funding. Finally the risk that the measure would affect the market for the construction of houses is highly unlikely: indeed, it targets the lack of housing in the urban cores in Ireland and in such areas, apartments provide more
appropriate solutions, compatible with compact urban growth than houses (see further in recital (5)).”
“(129) As regards the market for the sale of apartments, the Commission notes that it could in theory be affected by the measure (recital (104)) due to the increase of the supply available, which could potentially lead to a reduction in the overall price of apartments. The Commission however notes that considering the fact that the measure subsidises the cost of delivery and does not target the market price of the apartments as such it is unlikely that such a distortion would have more than a marginal effect on the market.”
Conclusion
The Commission found the positive effects of the scheme to outweigh the negative effects and proceeded to approve the scheme.
