The European Central Bank (ECB) warned yesterday that the EU-wide commercial property market was at, or approaching, boom levels that are made riskier by the growth of the shadow banking sector since the last crash.
Links between the emerging and loosely regulated non-bank financial sector and the real estate market are storing up potential new risks, it said.
The report said that in the European Union, assets of the shadow banking sector, made up of investment funds and other financial institutions, fell slightly to €41.9trn at the end of 2018, but funds domiciled in Ireland rose by 0.3pc.
Ireland is one of six countries that account for 85pc of total EU investment fund assets, and the report highlighted the growth of so-called cuckoo funds here, largely backed by US and UK investors, as well as the involvement of Russian investors in special purpose vehicles here.
"Some non-bank financial institutions remain vulnerable to a repricing of risk, with potential spillovers to funding conditions of other financial sectors and the real economy," the ECB report warned.
This is especially true in the area of real estate, where a global bubble and loose financing caused the last financial crisis, and it said low interest rates were boosting the attractiveness of these investments. "In EU commercial real estate markets, transaction volumes and prices are near their previous peak in 2007. Given the increasing role of non-bank financial institutions, new forms of interconnectedness and transmission channels may arise," the ECB said.
Irish-domiciled investment firms held €18bn of Irish property assets in 2018, mainly related to commercial real estate, the report said. Citing Central Bank data, the ECB said special purpose vehicles here that were not engaged in asset securitisation had €294bn in assets and around half were sponsored by UK and US investors, with a "significant number sponsored by Russian and Irish entities".
Flows of Russian funds have been behind money laundering scandals that have rocked banks across Europe, especially in Scandinavia, where Danske Bank and Swedbank have been hit.
The prospect of lower interest rates globally has triggered a 'hunt for yield' among investors, and around €13trn of bonds now have negative yields, with countries like Germany issuing at rates below zero, and Ireland itself issuing bonds that carry yields close to zero.
That has seen investment funds push into riskier debt that carries fewer of the covenants in its terms that would protect them in the event a firm issuing bonds ran into trouble.
The risky leveraged loan market has expanded to €1.2trn, and ratings agency Fitch on Tuesday downgraded its rating of cosmetics company Anastasia Beverly Hills, a business endorsed by Naomi Campbell, to single B-plus from double B-plus, in a warning of the risks in the high-yielding bonds market.
Last week, the Central Bank of Ireland said that risks to Irish house prices could emerge from a hard Brexit, and it also highlighted that links between commercial banks here and the shadow banking sector had grown.