Property funds and the Irish commercial real estate market

Pierce Daly, Kitty Moloney and Samantha Myers
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Pierce Daly: Central Bank of Ireland
Samantha Myers: Central Bank of Ireland

No 1/FS/21, Financial Stability Notes from Central Bank of Ireland

Abstract: Irish property funds’ investment in Irish commercial real estate (CRE) has grown in recent years. This growing form of financial intermediation has brought many benefits, including diversification of the financing of CRE away from domestic to international investors and a reduced reliance on debt financing by Irish retail banks. This investment supports domestic economic activity. However, like all forms of financial intermediation, property funds can also contribute to the build-up of risks that need to be monitored. The main contribution of this Note is to review and assess the financial stability risks associated with Irish domiciled investment funds investing in Irish property assets. The analysis is based on the results of a bespoke survey of these property funds carried out by the Central Bank in 2020. In the Note, we show that there is a cohort of property funds that have reported significant levels of leverage. In addition, while the lower frequency of dealing periods limits liquidity mismatches across the sector to some extent, there is a cohort of funds where some of these mismatches remain apparent, given the very illiquid nature of property assets. These characteristics increase the risk that – in response to adverse shocks – some property funds may need to sell property assets over a relatively short period of time, amplifying price pressures in the CRE market. Property funds have a number of options to mitigate this risk, including liquidity management tools. The analysis in this Note supports the need to explore the costs and benefits of possible macroprudential policy interventions in this area, to strengthen the property fund sector’s overall resilience to potential future shocks.

Date: 2021-02
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