| 5.8°C Dublin

Property funds gearing up to fight Central Bank rules on borrowing

Industry says residential investors use more leverage than retail and commercial funds 

Close

Central Bank of Ireland plans leverage rules for property firms

Central Bank of Ireland plans leverage rules for property firms

Central Bank of Ireland plans leverage rules for property firms

Proposed limits on the amount of debt Irish-regulated property investment funds can hold will threaten the viability of residential development and slow the delivery of new projects, according to industry sources.

The rules, which were outlined by the Central Bank in November, would cap leverage at 50pc of a fund’s value – well below the average level for those that invest in large multifamily housing developments. Industry figures are now lining up to challenge the Central Bank proposals as part of its consultation process, claiming that new regulations will change the risk-return relationship in Ireland for the worse.

“Making this change could force some investors to rethink their approach to the Irish market,” said Marie Hunt, executive director of CBRE, the property services firm.

“They either will look at other geographies or reallocate investment to other sectors.”

CBRE’s 2022 market outlook, published on Tuesday, highlighted increasing regulatory and planning uncertainty in Ireland as factors negatively affecting the future funding of residential property in Ireland.

Ms Hunt said property funds and their representatives were doing their own analysis of the financial impact of the CBI’s proposals and would be making submissions to the consultation.

But she was confident that the response would be negative.

“If you’re an international investor considering Ireland, you’re going to be looking at the high frequency of regulatory change,” she said.

“For private equity type investors, this is going to be a challenge.”

Funds that invest in Irish retail and commercial property typically have gearing of around 40pc and will not be affected by the changes.

But those involved in the residential sector borrow 70pc of their funds on average, which reflects the high-risk/high-reward type of investor attracted to the Irish market.

“If you need to gear up to get returns, these changes mean lower returns,” said Colm Lauder, senior property analyst at Goodbody.

“In that environment, the competitive edge Ireland has erodes, because of the lower return premium.”

However, the loss of leverage would be mitigated by the fact that the Irish residential market has performed well and values are up, meaning gearing has naturally fallen, Mr Lauder added.

Sources said high leverage is common in the Irish market because building costs are high and the use of debt finance makes certain schemes more financially viable for investment funds.

Without the availability of high borrowing levels, they said, funds are likely to “diversify capital geographically” – in other words, invest it elsewhere.

As a result, the Central Bank’s rules could result in lower supply over the three years of their implementation until the market rebalanced.

Alternatively, funds may also choose to move to domiciles with lighter regulation, thereby avoiding the leverage rules entirely, they said.

“These funds are not the only players in the market, though,” Ms Hunt said.

“Investment won’t stop.”


Related topics


Most Watched





Privacy