Central Bank to impose new rules on overseas property funds

Funds now hold 40% of commercial residential property assets, worth €23bn, in Republic

Governor of the Central Bank of Ireland Gabriel Makhlouf. Photograph: Nick Bradshaw

Governor of the Central Bank of Ireland Gabriel Makhlouf. Photograph: Nick Bradshaw


The Central Bank is to impose new financial rules on property funds, warning that a mass sell-off of assets by these entities had the potential to destabilise the sector.

In its latest financial stability review, the regulator said property funds now held 40 per cent of commercial residential property assets in the Republic, worth an estimated €23 billion, marking a significant shift from the Celtic Tiger era when domestic investors dominated the sector.

Most of the investment has come since 2014 and has benefitted from the use of tax efficient investment vehicles.

While the arrival of overseas investment “represents a beneficial diversification”, the Central Bank said there was a cohort of property funds that had high levels of debt and “these vulnerabilities” had the potential to grow in the absence of policy interventions.

“In the presence of such vulnerabilities, the property fund sector could respond to future adverse shocks through sales of property assets over a short period of time,” the regulator said.

“This type of selling behaviour has the potential to amplify adverse shocks to the commercial real estate market and the wider economy,” it said.

The Central Bank said it was currently consulting on new macroprudential policy measures aimed at safeguarding the resilience of the Irish property fund sector, so that it can better absorb – rather than amplify – adverse shocks.

Separately, the regulator has cleared the way for retail banks here to participate in the Government’s controversial share-equity scheme despite warning the incentive could push up house prices.

It said it had considered “the interaction” between its mortgage rules and the Government’s proposed scheme and had deemed it would be “disproportionte” to preclude banks from participating.

“This reflects our overall judgement based on financial stability considerations, including the characteristics of this form of financing, other safeguards in place such as bank capital, as well as the initial scale and scope of the scheme,” it said.

The Government set aside €75 million in Budget 2021 for the shared-equity initiative, which involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property. The banks are also expected to underwrite part of the scheme.

The Central Bank warned that the Government’s scheme would operate by shifting the demand for house purchases “and, so – in a supply-constrained market – has the potential to increase pricing pressures.”

Mortgage lending rules

As part of the its review, the regulator also decided to leave its mortgage lending rules unchanged for another year, noting the benefit of the measures were evident in payment break take-up rates during the pandemic.

Borrowers with high LTI (loan to income) and LTV (loan to value) at origination exhibited far higher take-up rates of payment breaks in 2020 than those with smaller mortgage burdens, it said.

However, the regulator is to tweak the operation of rules permitting lenders to carry over any unused allowance year to year. Banks are allowed to lend a proportion of money outside the rules.

It said “structural and cyclical forces” were continuing to place upward pressure on house prices.

While noting the Government’s Housing for All plan had ambitious plans to increase housing supply, “which, all else being equal, should serve to ease the rate of house price growth, relative to what it might have been, over the medium turn.” This would, however, take time to be delivered and for the effects to feed through, it said.


On inflation, Central Bank governor Gabriel Makhlouf noted that inflation is “now running well ahead of many developed economy central bank targets.”

He explained that “while our baseline scenario is that these inflationary pressures will gradually fade, we must also acknowledge the uncertainty involved and the prospect of the risks that would ultimately be associated with a more prolonged inflationary period.”