I move: "That the Bill be now read a Second Time."
I am pleased to present to the House the Home Building Finance Ireland Bill 2018. It is a significant Bill which provides for the establishment of Home Building Finance Ireland, HBFI, which will give a much needed boost to the availability of finance for residential development in the State. HBFI is being proposed in the context of a major shortfall in the supply of housing in recent years. The CSO recently estimated that just under 15,000 housing units were delivered in 2017. While residential building has increased significantly in recent years, it continues to fall well short of estimated annual demand of between 30,000 and 35,000 units. The availability of appropriate development finance for commercially viable residential projects has been identified as a key contributory factor in the ongoing shortfall in residential supply. The introduction of HBFI will provide for a crucial boost to the availability of this important source of finance.
While the appetite to provide residential development funding among banks and alternative lenders has been increasing in recent years, it continues to fall well short of that needed to address the scale of the shortfall which has been identified. In the absence of this key policy response by the Government, there is a concern that these constraints could limit the market's capacity to respond to current and projected housing demand, particularly bearing in mind projected growth in the population and the positive outlook for the economy in the coming years.
Development activity continues to be impacted on by the legacy of the financial crisis. While traditional banks are returning to providing senior debt finance for residential development, the number of active lenders in Ireland has reduced from 12 a decade ago to three today. It is clear that the risk appetite among the remaining banks in funding residential development is more conservative and significantly reduced from the unsustainable and reckless levels seen in the period leading up to 2008. Outstanding loans to land and development exposures totalled €64 billion in 2008 across the six main retail banks and building societies. This comprised 15% of their total lending. By the middle of last year this figure had reduced to just €2 billion or 1% of their total lending. While this refocusing by the main banks is entirely reasonable and appropriate, not least from a financial stability perspective, it poses significant challenges to developers seeking to fund viable residential developments but not possessing the levels of equity now required by the banks. This trend suggests Ireland's future house building finance needs are more likely to be met by vehicles with a greater reliance on equity investment than previously. Other alternative lenders have entered the Irish market to satisfy some of the excess demand. It is estimated that the scale of provision by both the banks and these lenders continues to be well below that required to fund the estimated 15,000 to 20,000 annual shortfall.
Let me be clear. HBFI will not take on excessive risk for the State. Its introduction will not see a return to 100% lending or anything like it. Developers must still provide significant levels of equity or raise third party equity in the market to access HBFI funds. It is envisaged that a large proportion of HBFI lending will be to development projects with insufficient equity to raise finance from banks or projects that are unable to source funding from the relatively limited pool of alternative lenders in the market at this time. Currently, bank lending to residential projects in Ireland typically requires levels of equity finance of 35% to 50%. HBFI is expected to provide finance for viable projects where developers are in a position to put up equity of 20% or more for projects, thereby bridging the gap in bank finance and increasing the pool of finance available from other lenders. The State's investment will be protected by this layer of equity and through detailed viability testing by HBFI's experienced lending officers.
The problem of a shortage of access to supply of appropriate finance has been particularly acute for small development projects and those located outside the major urban areas. HBFI will be established to address these concerns and will focus on reducing this shortfall by focusing on those areas of the market that are currently underserved by the banks and alternative finance providers. Thanks to the considerable efforts undertaken by the National Asset Management Agency, NAMA, in delivering more than 7,200 units of residential housing in recent years and its commitment to facilitate the delivery of some 20,000 units by the end of 2020, the State now has market-leading expertise and experience in providing this form of development finance on a commercial basis.
While HBFI will be a wholly independent entity from NAMA, it will utilise NAMA's experience in developing its business model in preparation for its launch later this year. NAMA staff have already been involved in assessing development funding proposals for sites throughout the country and will have accumulated a high degree of knowledge concerning relevant planning, legal and financial issues affecting residential development. It is expected that some staff will transfer from NAMA and this will be of great benefit to HBFI to allow it to be up and running in as short a timeframe as possible. Depending on how soon HBFI can be established, it could commence lending later this year. The NAMA residential funding teams have also developed or customised credit approval processes and information technology systems to be scaleable and adaptable to business requirements. These processes and systems are likely to be adapted by HBFI to meet its business needs. NAMA's systems and processes are tried and tested and will be familiar to the Comptroller and Auditor General who will also audit HBFI’s activities.
HBFI will be established as a private company under the Companies Act 2014, with the shares held by the Minister for Finance. It will have an independent board appointed by the Minister, which will have all the powers necessary to conduct its business. The constitution of HBFI will be also be approved by the Minister. HBFI will be funded through the provision of debt and equity funding of up to €750 million that will be made available from the Ireland Strategic Investment Fund, ISIF. The redirection of this funding to HBFI from ISIF is a continuance of the refocusing of that entity towards projects of national strategic importance.
On establishment of HBFI, a small equity investment of €20 million is expected to be provided allowing the entity to commence operations and to cover its costs during its start-up phase. Funding for lending purposes will be provided by way of a repayable loan from ISIF to HBFI on commercial terms. The exact timing and scale of the funding provided will be determined by the HBFI board in due course and will depend on market demand. The returns expected to accrue to the State from the funding of HBFI will be commensurate with the commercial returns for loans to entities with similar risk profiles. With this allocation it is expected that HBFI will have the capacity to fund the supply of more than 6,000 additional homes in the coming years. This supply will make a meaningful impact in addressing the supply shortfall that currently exists. HBFI will provide lending to viable residential developments on commercial, market equivalent terms and conditions. It is important to recognise that HBFI will not provide low-cost or subsidised funding to developers or the construction industry. HBFI will charge commercial rates for its lending and establishing HBFI in this manner will ensure it is compliant with state aid rules and provides an appropriate level of return to the State for the risk it is taking on.
A unique feature of HBFI will be its ability to fund smaller developments or those outside the major urban centres. These projects are currently underserved by the market where there is a clear preference for larger sites and those within the greater Dublin area. It is expected that HBFI will provide funding for projects with a minimum capacity of only ten units, equating to a loan facility of circa €2 million. Projects will be expected to have full planning permission and the sponsors to be fully tax compliant. HBFI will ensure its total exposure to any one borrower does not exceed 5% of its total lending, ensuring that the lending can be spread across as many developments as possible.
The specific interest rates charged by HBFI will be bespoke and will reflect the credit risk of each particular development project, the quality of collateral, the creditworthiness of the borrower and the track record of the borrower in delivery of residential development projects to date. To ensure compliance with state aid rules, the lending terms and conditions will also be benchmarked to the market. Recognising that the funding of residential development is clearly undergoing a temporary dislocation, I have included in the Bill a formal review clause that will commence in 2020, and subsequently every two years, under which the Minister will assess the extent to which HBFI has made progress towards achieving its overall objectives and the impact HBFI is having on residential development funding in the State. This review will help to minimise any distortionary effect HBFI may have on the overall economy. The continuation of HBFI will, therefore, be regularly monitored, with a view to the entity exiting the market in due course when sufficient supply of funding returns.
I will now turn to the main provisions. The Bill has six Parts. Part 1, containing sections 1 to 3, inclusive, sets out the preliminary and general provisions. Section 1 provides for the Short Title and allows the Minister for Finance to commence the Bill or particular parts of it at different dates. Section 2 is a standard provision providing definitions for certain words and terms used in the Bill. Section 3 provides that expenses incurred by the Minister in the administration of the Act will be sanctioned by the Minister for Public Expenditure and Reform and paid out of the moneys provided by the Oireachtas. Essentially, this covers the expenses of the Department of Finance in working to establish HBFI rather than the operating costs of HBFI. Costs directly attributable to HBFI will be the liabilities of HBFI and not the Minister or Department of Finance. This section also provides for the expenses incurred by the National Treasury Management Agency, NTMA, in the performance of its functions under the Bill, which will be charged and paid out of the Central Fund. All expenses incurred by the NTMA will be recouped from HBFI once it is up and running.
Part 2, containing sections 4 to 9, inclusive, provides for the establishment of Home Building Finance Ireland, HBFI. It provides for the formation of both HBFI and any group entities it requires. It also sets out the functions of HBFI which will be to lend on commercial terms for residential development in a manner that aims to contribute to the economic and social development of the State and enhance the competitiveness of the economy. This Part also outlines the composition of the HBFI board and HBFI's relationship with the NTMA and NAMA.
Section 4 enables the formation of a private company under the Companies Act 2014 called Home Building Finance Ireland, HBFI. HBFI will be independent in carrying out its functions under this Act. Section 5 provides that the constitution of HBFI will be consistent with provisions of the legislation. It establishes that no alterations to the documents will be valid without the prior approval of the Minister. Section 6 provides for HBFI to be able to form, promote or take shareholding in various types of subsidiaries such as companies or joint ventures and also sets out the terms on which this can be done. These will be known collectively as HBFI group entities. HBFI is not permitted to guarantee the borrowings or liabilities of any of its subsidiaries without the approval of the Minister.
Section 7 sets out the functions of HBFI. The main function is to lend money for the purposes of funding residential development in the State on commercial terms. In providing this funding HBFI must take into account the risk profile of the project concerned and the market in which HBFI operates. In providing funding, HBFI is also expected to aim to contribute to the economic and social development of the State and enhance the competitiveness of the economy.
Section 8 provides for HBFI to have a board of at least three and not more than seven persons, including its chairperson. The Minister may appoint a chairperson from within the board. The terms and conditions of board appointments will be set out in the HBFI constitution.
Section 9 provides for HBFI's relationship with the NTMA. It sets out that the NTMA will provide HBFI and all of its subsidiaries with business and support services and systems that are considered necessary for HBFI to perform its functions. When assessing resources, it requires the NTMA to review resources that are already being provided to NAMA and allows for the reassignment of those resources, where appropriate, subject to the approval of the chief executive officer, CEO, and board of NAMA. The section also provides for the NTMA to assign staff to HBFI to enable it to perform its functions under the Bill. Again, where staff meeting HBFI requirements are identified in NAMA, this section allows those staff to be reassigned to HBFI, subject to the approval of the CEO and board of NAMA. The NTMA will be reimbursed by HBFI for the costs incurred under this section.
Part 3 of the Bill sets out the funding arrangements for HBFI. Section 10 provides for the determination of the authorised share capital of HBFI by the Minister for Finance and the initial issue of shares in the new company to the Minister. It provides that HBFI will issue shares to the value of €20 million to the Minister on incorporation. This €20 million of equity capital will come from the ISIF.
Section 11 provides that the Minister can dispose of shares in HBFI to a limited number of counterparties which include the NTMA, the Minister for Housing, Planning and Local Government or a body under the aegis of that Minister. It is not intended that the Minister for Finance will sell or transfer shares to the parties listed; however, flexibility to do so has been included. Funds received in respect of the sale or redemption of shares must be paid into the Exchequer.
Section 12 allows for the HBFI board to decide what dividends are to be paid to the Minister. It also provides that moneys received by the Minister in respect of his share in the company, including dividends, shall be paid into the Exchequer in such a manner as he directs.
Section 13 provides that HBFI may borrow money in any currency and through any type of debt it sees as appropriate. The section limits the amount of borrowings which HBFI can have outstanding at any particular time to €750 million. This borrowing would be in addition to the funding provided for HBFI through the ISIF. HBFI will be responsible for meeting liabilities incurred under the section and they will not be guaranteed by the State. If HBFI were to borrow in a foreign currency, the value of the borrowings in other currencies would be valued using the European Central Bank's published exchange rates.
Part 4 of the Bill sets out the procedures for the preparation of financial statements and ensuring the public accountability of HBFI. Section 14 provides that a reference to a HBFI group entity in section 15 or section 16 is a reference to a HBFI group entity which is a company formed under the Companies Act or an existing company under the Companies Act.
Section 15 provides that HBFI must submit its accounts to the Comptroller and Auditor General for audit within two months of the financial year to which they relate. The audited consolidated accounts will also be presented to the Minister and laid before each House of the Oireachtas. For the avoidance of doubt, the section also provides that a reference to "statutory auditor" or "statutory financial statements" in the Companies Act shall include a reference to the Comptroller and Auditor General for HBFI. The section also provides that Chapters 18, 20 and 21 of the Companies Act which relate to the appointment of statutory auditors will not apply to the Comptroller and Auditor General for the purposes of HBFI.
Section 16 provides that in the event that it becomes necessary for HBFI to appoint a statutory auditor, it may do so and that the Comptroller and Auditor General will continue to perform the audit functions set out in section 15 in that scenario.
Section 17 provides that a senior member of staff of HBFI nominated by its chairperson will, whenever required by the Committee of Public Accounts, give evidence to that committee on the accounts and reports of the Comptroller and Auditor General on HBFI.
Part 5 of the Bill sets out consequential amendments to two Acts, namely, the Taxes Consolidation Act 1997 and the National Treasury Management Agency (Amendment) Act 2014. Section 18 provides for an exemption in relation to inbound and outbound withholding taxes. This form of exemption is standard for State owned entities and will allow HBFI to operate in line with other market operators.
Section 19 provides for the Minister to give directions to the ISIF, with which the fund must comply. The section, essentially, provides the Minister with the power to direct the ISIF to provide credit for the HBFI on commercial terms and to provide equity funding for HBFI to fund the subscription of the Minister's shares in the company. The amendment limits the total funding to €750 million.
Part 6 of the Bill sets out a number of miscellaneous provisions. Section 20 provides that the Minister, the NTMA and its employees and staff are not to be considered either shadow directors under section 27(1) of the Companies Act 1990 or de facto directors of HBFI. This ensures the Minister and the NTMA can carry out their various other functions without their involvement with HBFI impacting on these functions.
Section 21 provides that, except as otherwise authorised by the section or another enactment, a person will not disclose or use confidential information obtained in the manner set out in the section. The section permits appropriate disclosure to law enforcement authorities and, where authorised to HBFI, a HBFI group entity, the NTMA or NAMA or authorised or obliged by law. Breach of the obligations under the section may constitute a criminal offence.
Section 22 provides for the issuance of written directions to HBFI that are consistent with the functions of the Bill. HBFI is obliged to comply with directions under the Bill. Such directions will be published and laid before each House of the Oireachtas.
Section 23 ensures HBFI will only continue in existence for as long as may be required. The section provides that the Minister may at any time require HBFI to report to him on the performance of its functions and that, as soon as possible after 31 December 2020 and subsequently every two years, the Minister will assess the extent to which HBFI has performed its functions and the level of availability of residential funding in the market. This process will require a public consultation and ultimately decide whether continuation of HBFI continues to be necessary.
Section 24 provides that, subject to certain exceptions, a person who communicates with HBFI or a HBFI group entity with the intention of influencing the making of a decision on the performance of the functions of HBFI or the HBFI group entity commits an offence. A number of exceptions are allowed for where the person making the communication is an employee or an adviser to a client of HBFI or where the communications are published.
Section 25 provides that certain provisions of the Companies Act will not apply to HBFI. These provisions ensure the Minister's relationship with HBFI does not prevent him or her from carrying out any other of his or her functions and avoids redundant reporting requirements in the administration of HBFI.
Addressing the shortfall in the supply of housing requires a broad cross-government response and requires a strategy to make best use of the resources available to the State. While the establishment of HBFI will not solve the problem singlehandedly, it will play an important part in the overall strategy to increase the supply of new housing. Together with the comprehensive set of actions laid out in Rebuilding Ireland, HBFI will provide further impetus to increase the level of home building across the country. I commend the Bill to the House.