ISIF moves into residential property funding

State run investment fund joins forces to fund development of up to 11,000 homes in urban areas

Dublin’s skyline in 2007. A new €500m fund hopes to bring the cranes back by lending to residential property developers.(Photograph: Eric Luke/The Irish Times)

Dublin’s skyline in 2007. A new €500m fund hopes to bring the cranes back by lending to residential property developers.(Photograph: Eric Luke/The Irish Times)

 

The State’s new sovereign investment fund is to join forces with a US private equity player to provide funding of up to €500 million to residential property developers in an effort to ignite the stalled development market and boost supply.The Ireland Strategic Investment Fund (ISIF), managed by the National Treasury Management Agency (NTMA),will invest two thirds of the total fund with a plan to build as many as 11,000 homes in urban areas. It is expected that the first deal will commence within six-eight weeks.

The move is the single largest financing for ISIF to date, as it will invest €325m, or some 5 per cent of its €7bn portfolio, in the project. US private equity fund, KKR, which entered the Irish market in 2013 when it acquired Avoca Capital, will provide the remaining € 175 million.

Speaking at the launch of the fund on Tuesday, Minister for Finance Michael Noonan said he expects that the initiative will “seriously help with supply”, noting that the number of houses available in some areas has become “quite restricted”.

In 2014, just 9,000 homes were built, against expected demand of about 30,000. During the boom, as many as 90,000 homes were built in a year.

ISIF head of private equity Fergal McAleavey said the goal of the initiative is to address the mismatch between supply and demand by providing funding on a commercial basis to development projects that are capable of delivering over 11,000 new homes.

“This will meet the ISIF’s ‘double bottom line’ criteria of achieving commercial returns while delivering a significant economic impact – in this case by providing crucial infrastructure that Ireland needs urgently,” he said, adding that the initiative also marks the establishment of a “major new non-bank lending platform which can continue to provide financing to the sector for many years to come”.

“This will bring additional benefits to the Irish economy in the form of increased lending capacity and increased competition in the market for residential development lending,” he added.

Activate Capital

The new €500m fund will be run by Activate Capital, led by KKR director and former AIB and Ulster Bank executive Robert Gallagher, and chaired by Dan O’Connor, a former executive chairman of AIB.

Mr O’Connor said that the fund expects to close the funding gap facing developers, who, under the traditional financing model may receive debt finance up to 65 per cent, but then have to come up with equity of 35-40 per cent, which may be expensive to obtain.

Activate Capital on the other hand will lend up to 90 per cent, and pricing, Mr O’Connor said, will compare “favourably” with the UK.

The idea for the fund was first generated by corporate finance boutique Capnua and Mr O’Connor, following a visit to the UK and an observation of the role that “alternative lending platforms” (ALPs) could play in the property market.