Real estate funds prepare to fight Central Bank rules on borrowing
Proposed limits on the amount of debt regulated property investment funds in Ireland can hold will threaten the viability of residential development and slow the delivery of new projects, industry sources say.
The rules, which were outlined by the Central Bank in November, would cap leverage at 50% of a fund’s value – well below the average level for those investing in large multi-family housing developments. Industry figures are now lining up to challenge the Central Bank’s proposals as part of its consultation process, saying new regulations will worsen the risk-reward relationship in Ireland.
“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 company.
“They will either look to other geographies or reallocate investment to other sectors.”
CBRE’s Market Outlook for 2022, released on Tuesday, highlighted growing regulatory and planning uncertainty in Ireland as factors negatively affecting future residential property financing in Ireland.
Ms Hunt said property funds and their representatives were carrying out their own analysis of the financial impact of the CBI’s proposals and would make submissions to the consultation.
But she was convinced that the answer would be negative.
“If you’re an international investor considering Ireland, you’re going to be interested in the high frequency of regulatory changes,” she said.
“For private equity-type investors, that’s going to be a challenge.”
Funds that invest in Irish business and commercial property are typically around 40% leveraged and will not be affected by the changes.
But those involved in the residential sector borrow on average 70% of their funds, reflecting the type of high risk/high return investor attracted to the Irish market.
“If you have to prepare for returns, these changes mean lower returns,” said Colm Lauder, principal real estate analyst at Goodbody.
“In this environment, Ireland’s competitive advantage is eroding, due to the lower yield premium.”
However, the loss of leverage would be mitigated by the fact that the Irish residential market has done well and values are up, meaning leverage has naturally come down, Lauder added.
According to sources, high leverage is common in the Irish market as construction costs are high and reliance on debt financing makes some schemes more financially viable for investment funds.
Without the availability of high levels of borrowing, they said, funds are likely to “geographically diversify capital” – in other words, invest it elsewhere.
As a result, the Central Bank rules could lead to lower supply over the three years of their implementation until the market rebalances.
Alternatively, funds can also choose to move to domiciles with lighter regulations, thereby avoiding leverage rules altogether, they said.
“These funds are not the only players in the market, however,” Ms. Hunt said.
“The investment will not stop.”