SMEs with property debt twice as likely to default, report finds

Central Bank research reveals extent property debt overhang on real economy businesses

Irish SMEs that borrowed money to invest in property are almost twice as likely to default as similar-sized businesses without property debt, according to new research from the Central Bank.

In its report, the bank calculates that 20 per cent of SMEs in the Republic have an exposure of some kind or other to property.

These borrowings, many of which stem from loans taken out during the height of the property boom, account for one third of the outstanding bank borrowings of the SME sector.

Economist Morgan Kelly has warned that upcoming stress-testing of Irish banks will further tighten lending conditions here, potentially wiping out many SMEs who are burdened with debts from the property boom era.


The Central Bank’s research indicates the sectors with the highest level of property borrowing are those in business and administrative services, hotels and restaurants, and the wholesale and retail sectors, where 30-40 per cent outstanding loans are linked to property.

It also highlights that larger SME borrowers had a “higher propensity” to borrow for property purchases and mainly for buy-to-let investments.

Default rates for SMEs whose owners have buy-to-let exposures were higher than for those with principal dwelling houses or no property exposure.

However, the research also shows SMEs with borrowings linked to a primary dwelling house of the owner were less likely to default than firms with no property exposure, the research shows.

If borrowings related to business owners’ home are excluded, the report’s authors calculate that some 16 per cent of SMEs have loans that equate to 41 per cent of the total outstanding loans to the sector.

The report defines SMEs are enterprises with fewer than 250 and whose annual turnover does not exceed €50 million and/or whose annual balance sheet does not exceed €43 million.

It excludes real estate firms and financial intermediaries which dominate SME lending volumes in order to give a picture of what the report calls the real SME economy.

It calculates that this group accounts for €26 billion of the €67.7 billion outstanding loans to the SME sector.

Real estate firms account for €29.8 billion of the total debt while financial intermediaries account for €11.6 billion.

In their conclusion, authors, Fergal McCann and Tara McIndoe-Calder, say their report estimates the extent of property debt overhang on Irish real-economy SMEs with outstanding bank debt.

“Default rates are shown to be substantially higher for SMEs with property exposures,” they said.

“Although the analysis presented here cannot draw inference regarding a causal relationship between SME default and property exposure the descriptive evidence shows that property exposures are indeed correlated with higher SME default rates, which are in some cases double the default rate among SMEs without property linkages.”

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times