Following the Central Bank of Ireland’s consultation paper on macroprudential measures for the Irish property sector, Ireland’s financial regulator has recently announced macro-prudential measures targeting Irish property funds. These measures take the form of a macroprudential policy framework for Irish property funds. We examine how the Central Bank has now activated a leverage limit and introduced guidance for enhanced liquidity management of Irish domiciled funds investing in Irish property.
Overview of the new macroprudential measures
The Central Bank of Ireland has introduced a 60% leverage limit on the ratio of property funds’ total debt to total assets.
Recognising that existing property funds will need time to adjust, a five-year implementation period is being provided to allow for the gradual and orderly adjustment of leverage for this cohort.
The Central Bank will only authorise new Irish property funds which meet the 60% leverage limit.
Due to their reduced systemic risk, Irish property funds investing 80% of their assets under management in social housing are out of scope from the 60% leverage limit provided they meet certain criteria. The Central Bank will allow a methodological adjustment for development assets to avoid an excessively tight application of the leverage limit for these activities.
The Central Bank has also introduced guidance on the minimum liquidity timeframes expected for property funds. The Central Bank expects that property funds should generally provide for a minimum liquidity timeframe of at least 12 months taking into account the nature of the assets held.
The Central Bank is providing for an 18-month implementation period for existing funds to take appropriate actions in response to the guidance. Newly authorised property funds will have to adhere to the guidance from inception.
The Central Bank has advised that these measures aim to guard against the potential risk that financial vulnerabilities in the property fund sector lead to forced selling behaviour in times of stress. They aim to build the resilience of this growing form of financial intermediation, so that property funds are better able to absorb – rather than amplify – future adverse shocks. In turn, this will better equip the sector to continue to serve as a sustainable source of financial intermediation.
Who is in scope?
The measures will apply to Alternative Investment Fund Managers (AIFMs) of Alternative Funds (AIFs) that are:
- Domiciled in Ireland
- Authorised under domestic legislation, and
- Investing 50% or more directly or indirectly in Irish property assets
The materiality threshold of 50% covers all direct and indirect exposures of AIFs to Irish property assets.
Only funds investing more than 50% of their assets under management in Irish property assets are in scope of the leverage limit.
Funds investing at least 80% of assets under management in social housing will not be in scope of the leverage limit, subject to the following criteria:
- Social housing funds hold long term leases – the properties owned by a fund (or properties that are being developed by a fund) are leased (or pre-leased) to a local authority for a fixed period of time, depending on the type of lease held. These leases are drawn up under the standard or enhanced leasing model as used by local authorities.
- The income is guaranteed - the local authority pays rent to the fund for the period of the lease, regardless of whether the property is occupied, or market conditions for example.
- The debt has no loan-to-value covenants or repayment-on-demand features associated with it.
The Central Bank has introduced a 60% total debt-to-total assets leverage limit which is a measure of on-balance sheet leverage. For the purposes of the calculation, leverage will include debt from any source including banks, alternative lenders and shareholder debt.
The Central Bank will impose the leverage limit by way of a condition of authorisation under Regulation 26 and, as appropriate, Regulation 9 of the Irish AIFM Regulations.
The leverage limit will be subject to a five-year implementation period for existing funds, which will last until 24 November 2027. The Central Bank expects that funds will make gradual and orderly progress towards lower leverage levels over the implementation period.
The Central Bank will only authorise new property funds with leverage below the sixty per cent limit.
Property funds pursuing development activity may use a different methodological framework for the purpose of calculating leverage on those specific assets.
Guidance on redemption terms for property funds
The Central Bank has issued final guidance on the application of Regulation 18 of the Irish AIFM Regulations with regard to minimum liquidity timeframes expected for Irish property funds. The Guidance has been issued in order to further mitigate vulnerabilities stemming from liquidity mismatch in property funds.
The Central Bank generally expects property funds to have a minimum liquidity timeframe of at least 12 months, taking into account the nature of the assets held.
The Central Bank will provide an 18-month implementation period for existing funds to take appropriate actions in response to the Guidance.
The Central Bank expects that property funds authorised on or after 24 November 2022 will adhere to the Guidance from inception.
AIFMs will need to take action to determine whether any of the Irish property funds they manage fall within the scope of the leverage limit and for any Irish property funds currently in excess of the leverage limit, AIFMs will need to put in place plans to gradually reduce their leverage to meet the new limit over the five-year implementation period which ends on 24 November 2027.
In addition, AIFMs managing Irish property funds in scope of the Guidance will need to ensure that such property funds are in compliance with Guidance by the implementation deadline for existing property funds of 24 May 2024.
For further information on the likely impact the new macroprudential measures of the CBI may have on your organisation’s operations and fund management activities, please contact a member of our Investment Funds team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.