Irish banks have given €86bn to developers in Republic

PROPERTY LOANS:BY THE end of June official figures showed that Irish banks had loaned €86.7 billion to the Republic's property developers to fund the construction of housing, offices, shopping centres and a range of other business premises.

Despite a falling market, the figure was around €17 billion, or 20 per cent, more than a year earlier, and the calculation did not include the interest due on these amounts.

The figure also did not include commercial property loans outside the State.

Most of the six banks who have had a proportion of their assets and liabilities guaranteed by legislation passed yesterday have been active in backing the purchase of offices and other commercial premises in other countries.

The markets they favoured included the UK and, to a certain extent, the US and Europe. Property values have been falling in all these locations.

Most recent figures show that 80 per cent of Anglo Irish Bank’s €68 billion loan book, just under €55 million, is secured against Irish and British property. Anglo Irish is a particularly active lender to the commercial property sector.

Bank of Ireland’s loan book stands at €135 billion, 71 per cent or €95 billion is secured against property. Of that figure, its Irish home loans come to €27 billion, while its British mortgages come to €34 million.

This leaves it with an exposure of over €60 billion to other property loans in both the Republic and other markets.

AIB’s loan book tops €150 billion, and 60 per cent of this is secured against property.

The most recent figures show that loans outstanding in the Republic were €71.7 billion, with mortgages accounting for €24.5 billion, leaving a balance of €47.2 billion secured against other properties in the State.

Commercial real-estate loans are made up of the money that banks advance to developers who are buying property, either land or buildings, from which they ultimately intend making a profit.

If the developers are building on the property, or adding value in some other way, that money is also borrowed. So any profits from land speculation are virtually always dependent on property values increasing.

Where banks loan money to developers they are essentially joining forces with them in betting that property values will increase.

Up to two years ago, values in the Republic increased dramatically over a decade, and property markets in the UK and US also boomed between 2002 and last year.

The difficulty is that the markets have turned just as dramatically over the last year or two, depending on the country.

This makes commercial property loans potentially one of the biggest flashpoints on the banks’ balance sheets.