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The Central Bank plans to toughen the rules for real estate funds using the kinds of macroprudential tools currently used to curb subprime mortgages.
Research by the regulator confirms the need to “explore possible macroprudential policy interventions” for real estate funds, including possible caps on the amount they can borrow, the central bank said.
Pension funds have long been a large part of the commercial real estate market here, owning office, commercial and industrial investment properties and after the crash a new category of real estate investment trusts (REITs) were also active. . Both pension funds and Reits are already subject to specific regulations, particularly with regard to indebtedness.
The new push from the Central Bank will specifically look at Alternative Investment Funds (AIFs) domiciled in Ireland, often international sourced and managed funds that are permitted under domestic funds legislation and that invest in international funds. Irish real estate assets.
A research note on ‘Real estate funds and the Irish commercial real estate market‘ by the Central Bank notes that the new investor class has emerged following the bursting of the Irish real estate bubble which had been inflated by domestic investors borrowing from national banks.
These funds have invested heavily in commercial real estate, particularly with an increasing focus on the purchase of large apartment complexes and rental houses.
The new category of investors could still present risks, in particular the dependence on debt often contracted with international subsidiaries and the risk of potential liquidity asymmetries; for example, if the funds suffered large-scale redemption requests from equity investors and did not have enough liquidity to meet the demand.
The scale of real estate funds means that in a crisis, funds could be forced to sell real estate assets quickly to meet investor demands and this could act to amplify rather than stabilize the situation.
“Given their growing importance, the resilience of this form of financing is more important today for the functioning of the entire CRE market than it was ten years ago”, declared the researchers.
The central bank said it now plans a “comprehensive macroprudential framework for the non-bank sector” that would apply on a multi-year basis, alongside mortgage rules and a bank capital regime designed to increase and decrease the supply of cash. credit depending on economic conditions. conditions.
Speaking last Friday at a virtual workshop on borrower finances, financial stability assessment and macroprudential policies, Deputy Governor Sharon Donnery said the growth of Irish real estate funds since the financial crisis had brought many advantages, but at the same time increased the sensitivity of Irish ownership. market to global shocks.
“Given the growth of Irish real estate funds in recent years, the resilience of this form of financial intermediation is more important today for the overall functioning of the commercial real estate market than it was a year ago. ten years. The analysis of the note supports the need to explore possible macroprudential policy interventions in this area, such as leverage limits and options to limit liquidity mismatches, in order to strengthen the overall resilience of the government. real estate fund sector to potential future shocks, â€she said.
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