Central Bank Measures Target Vulnerabilities in Irish Property Funds Sector

PUBLISHED: 29th November 2022

The Central Bank of Ireland issued its finalised macroprudential policy framework for Irish property funds on 24 November 2022. 

In its policy framework, the Central Bank introduces macroprudential limits on leverage for property funds and regulatory guidance to limit liquidity mismatches for Irish-authorised property funds.  

The framework follows up on a consultation published by the Central Bank a year ago:  CP145, macroprudential measures for the property fund sector.

Overview

The macroprudential policy measures are being introduced to safeguard the resilience of Irish property funds and to reduce the risk that financial vulnerabilities in this sector could exacerbate adverse shocks and lead to forced selling behaviour in periods of stress.

The measures will apply to Alternative Investment Fund Managers of Alternative Investment Funds that are domiciled in Ireland, authorised under domestic legislation, and investing 50% or more directly or indirectly in Irish property assets. Accordingly, only those funds investing more than 50% of their assets in Irish property are in scope for the macroprudential leverage limits.

There will be a five-year implementation period to allow for the gradual adjustment of leverage for existing property funds that are in scope. Property funds currently in excess of the limit are expected to reduce their leverage over the implementation period to meet the new requirements.

Summary of measures

The key points in the macroprudential policy framework are set out below.

• The Central Bank is introducing a 60% leverage limit on the ratio of property funds’ total debt to their total assets to limit liquidity mismatch for property funds.

• The Central Bank will only authorise new property funds if they meet the 60% leverage limit.  It expects property funds authorised on or after 24 November 2022 to adhere to the guidance from inception. The Central Bank will impose the leverage limit by way of a condition of authorisation under the Irish AIFM Regulations.

• For the purposes of the calculation, leverage will include debt from any source including banks, alternative lenders and shareholder debt.

• Subject to certain conditions, including the existence of a long-term lease, funds investing at least 80% of their assets under management in social housing will not be in scope for the leverage limit.

• Property funds pursuing development activity may use a different methodological framework for the purpose of calculating leverage on those specific assets.

• The policy framework includes guidance on the application of the Irish AIFM Regulations in relation to the minimum liquidity timeframe expected for property funds. The guidance sets out that the Central Bank generally expects property funds to have a minimum liquidity timeframe of at least 12 months, taking into account the nature of the assets held.

Comment

These are the first macroprudential policy measures to be introduced under the non-bank pillar of the Central Bank’s macroprudential policy framework. The policy measures highlight that Irish-authorised funds investing in Irish property have become key participants in the Irish commercial real estate market, which is of systematic importance to the broader Irish economy. The Central Bank identified excessive leverage as a vulnerability in the Irish funds sector and views a total debt to total asset value limitation as the simplest, most direct approach against the risk of adverse macroeconomic shocks caused by dislocation in the market.

In view of these measures, Irish-authorised funds investing in the Irish property sector will have to determine whether they are in scope for the macroprudential leverage limit. For those that are in scope, a further analysis will have to be undertaken as to whether their level of borrowing brings them within the 60% leverage limit on the ratio of the funds’ total debt to their total asset.

Going forward, all Alternative Investment Fund Managers of in scope Alternative Investment Funds will have to ensure that the liquidity framework and terms of the funds they manage are in line with the Central Bank’s guidance on liquidity mismatch.

To view the Central Bank of Ireland's issued finalised macroprudential policy framework click here.

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