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Central Bank eases terms of incoming property fund borrowing cap – The Irish Times


The Central Bank confirmed on Thursday it is proceeding with a plan to set a borrowing limit for Irish property funds, even though it has eased the terms of the planned cap and extended the implementation period for the measure.

While the regulator said last year that it planned to introduce a leverage – or borrowings – limit of 50 per cent on such funds, it has now decided to set the restriction at 60 per cent and will give existing funds five years to comply. It has previously envisaged a three-year phase-in of the planned rule.

Officials said that the move to ease the envisaged restrictions partly took into consideration the weakening macro-economic background, as global growth is slowing and interest rates are rising.

Funds invested in social housing are exempt from the new rules, as they are “less systemically risky” as a group, the bank said.

“These measures are being applied to ensure that investment funds are better able to absorb, rather than amplify, downturns in the commercial property market,” said Central Bank governor Gabriel Makhlouf.

“This will, in turn, better equip the sector to continue to serve as a sustainable source of financial intermediation.”

As of the end of June, Irish property funds held €22.1 billion of assets, equivalent to more than a third of the so-called investible domestic commercial real estate market, the Central Bank said in its latest financial stability review, published on Thursday. Some 31 per cent of assets are held in 63 funds with borrowings of in excess of 60 per cent of the total value of assets, it said.

“Leverage is a key source of vulnerability among these investment funds. For instance, falls in [commercial real estate] valuations or losses in rental payments could cause a breach of property funds’ loan-to-value – or debt servicing – covenants,” the report said.

“These covenants are normally present in the funds’ loan agreements. Breaching loan agreement covenants may trigger forced sales of property assets into falling markets.”

“We have a fundamental misunderstanding of our housing need.”

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The 60 per cent leverage limit will apply with immediate effect for any Irish property funds set up from Thursday. The Central Bank has also issued guidance that real estate funds should market investments in a way that gives them at least 12 months to meet money redemption requests from investors – to reflect the time that is often required to sell properties.

The latest biannual Financial Stability Review said that world economy is slowing, with inflation having become more broad-based and persistent in the last six months. Global financial conditions have tightened as leading central banks, including the European Central Bank (ECB), hike interest rates, it said.

While the ECB has increased its main lending rate from zero to 2 per cent since July, Mr Makhlouf said that he has not yet formed a view on the extent to which the bank’s monetary policy committee, of which he is a member, should increase rates when it meets again next month. The consensus view among economists is that the ECB will increase by a further half a percentage point.

The Irish economy is facing increased downside risks given the size of the energy and inflation shock, with growing numbers of businesses expected to run losses, according to the Central Bank. However, the central expectation remains for a growing economy and strong labour market into 2023, although subject to increased global risks, it said.

Mr Makhlouf said that while some mortgage holders are experiencing difficulty as a result of interest rate increase, the wider home loans market remains “resilient”.

“Lower levels of indebtedness [since the financial crisis], a gradual shift towards fixed-rate borrowing, pandemic savings and substantial housing equity, are all ensuring that the mortgage market as a whole has significant capacity to absorb shocks,” he said. “Even in the SME sector, where cost increases will severely tighten profit margins for many, indebtedness has fallen continually for a decade, reducing the risk of macroeconomic spillovers between the financial sector and the real economy.”

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