Reit, bank links 'could risk stability'
There are financial stability risks arising from the links between banks and real estate investments funds and trusts, the Central Bank has warned.
The regulator said in a note that resident non-bank institutions held approximately €29m of professionally managed Irish property assets at the end of 2018.
Between them, Reifs and Reits hold about 75% of investment in Irish commercial property assets of entities that are here, with overseas institutions providing approximately half of the identifiable funding associated with these investments directly, the Central Bank said.
"While a greater level of foreign investor involvement in commercial real estate markets comes with benefits, it may also give rise to increased vulnerabilities," the note said.
The diversity of financing sources outside domestic banking is positive for financial stability, as liquidity is increased and direct losses resulting from any future shock shared more widely, the Central Bank said.
Foreign financiers may withdraw from an overheating market sooner, thereby dampening a boom in commercial property prices, it added.
However, it warned that there is a view that the presence of foreign investors, growing interconnectedness and the rise in cross-border flows to commercial real estate markets can increase risks to financial stability.
It could do so by amplifying boom-bust cycles or exposing the domestic market to international financing conditions and overseas crises, the regulator said.
"A rise in market uncertainty or a change in global financing conditions, resulting in more favourable yield prospects abroad, may motivate foreign investors to remove their funds from commercial real estate markets more quickly than domestic investors, increasing the volatility of the commercial real estate cycle.
"A sudden stop or reversal in foreign investor demand would increase the probability of declines in commercial real estate prices, which could be transmitted to domestic financial markets and the real economy through a number of channels.
"For instance, a decrease in collateral values, could give rise to a tightening of credit by banks, which would likely have a negative macroeconomic impact, quite possibly in the shape of a reduction in investment, consumption and/or income, ultimately leading to a rise in loan defaults," the note said.
It added that reductions in the value of pension or investment funds and a downturn in real estate construction activity, along with a drop in employment, are other possible outcomes.
