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Ireland Strategic Investment Fund Investments

Dáil Éireann Debate, Wednesday - 18 May 2016

Wednesday, 18 May 2016

Questions (5)

Michael McGrath


5. Deputy Michael McGrath asked the Minister for Finance the level of draw-down of loans to developers for residential housing related projects from the fund for house building established in 2015 by the Ireland Strategic Investment Fund; his views on the operation of this fund; and if he will make a statement on the matter. [10763/16]

View answer

Oral answers (5 contributions) (Question to Finance)

I presume the Deputy is referring to Activate Capital, Activate, which is a non-bank financing platform established by the Ireland Strategic Investment Fund, ISIF, and the global investment group KKR to invest on a commercial basis in residential development projects in Ireland to help address the current supply shortages in the main urban centres. Activate is focused exclusively on lending for Irish residential projects and will target, in particular, new residential development in Dublin, the greater Dublin area, Cork, Limerick and Galway which have been identified as the areas of greatest demand. Activate is a €500 million fund, which is financed through a €325 million loan note provided from ISIF and a €175 million loan note provided from KKR. The €500 million fund represents the peak funding outlay at any one time. As borrowings are repaid, additional lending capacity over and above the original €500 million will be created.

Activate will provide up to 90% of project funding and will provide funding for both the acquisition of land and to bring projects through the planning process. The Activate base lending rate is approximately 10% and, as would be expected for projects of this nature, there is participation in equity upside if projects are successful so that the fund shares in any gains alongside the project promoter. The pricing for Activate facilities reflects the provision of up to 90% of overall development cost and the fact that it is, in effect, taking a combination of debt and equity risk. Activate also offers the advantages of deliverability and speed of execution. The Activate model is capable of substantially quicker credit turnaround times than current average timeframes in the market on foot of the requirement, typically, for project promoters to deal with more than one lender and sometimes multiple lenders. It is estimated that Activate will, in this way, be capable of financing the construction of over 11,000 new homes in Ireland.

Activate has been operationally up and running since January 2016 and in that time has created a significant pipeline of investments. Activate recently announced the completion of three transactions that will deliver approximately 800 new residential units in the Dublin area.

Additional information not given on the floor of the House

Activate has stated that a number of other transactions are progressing. In terms of disclosing the commercial detail around the draw-down or pricing of loans, this is commercially sensitive information and therefore not appropriate for release.

Most Members of the House will agree that the single most important issue facing the country is the housing crisis. It has many facets, but one essential ingredient in resolving the crisis is the boosting of supply, including private supply. One of the barriers to increased housing supply by the private sector is access to finance. I welcomed the fund last year notwithstanding that it had real limitations and I welcome the fact that it has announced its first three projects. It has been very slow to come on stream and the uptake has not been great so far to say the least. Hopefully, it will move on from here.

At a time when the State can borrow ten-year money at less than 1% and given that finance is a key barrier to private housing supply coming on stream at the volume required, there must be a more ambitious way to tackle the issue. We need to get a new funding model in place so that construction projects can proceed. The traditional banks are now giving 60% to 70% of the cost of a development by way of a loan and developers and builders are having to access the remainder at very high cost from funds. The Minister knows that himself. The fund that is there, welcome as it is, is extremely limited, narrow in focus and not ambitious enough. I ask the Minister to look at it again, hopefully to redesign it and make it more ambitious.

I thank the Deputy. The fund is only up and running since 1 January 2016 and as such is only five months in operation. Already, it has funded 800 new homes with a potential to fund 11,000. There is a roll-over effect as money is repaid and can be lent again. One can argue about the interest rate, but equity is always dearer than normal lending. The banks do perhaps 65% after which money gets dearer for the equity piece. However, the interest rate is being suppressed by arrangements whereby the investor can share in the upside as well as the promoter or building developer. I see it as only one option. The new housing committee is considering all aspects of the supply shortage in housing and is also looking at new financial models. The NTMA is doing some work on possible new models also. I will keep the Deputy informed if those come to fruition.

I welcome the fact that the NTMA is looking at the option of new funding models. That work is badly needed. We are all well aware of the mistakes made in the banking system overextending itself to the construction industry up to 2007 or 2008 and nobody is advocating a repeat of that history. However, we now have the opposite problem that access to finance is a huge issue. If we are going to bring private housing supply to the level we need it to be at, we must tackle this issue. I welcome the suppressing of the interest rate under the Activate Capital fund albeit it is still high. However, that is only part of the overall funding mix for any particular development.

We need a new and more ambitious model. People looking in on us will point out that the State can avail of historically low interest rates on its borrowings. Given the fact this is the most important issue facing us, more can be done. I would support any initiative that helps to provide credit for viable and credit-worthy projects.

The new Minister for housing is dealing with these issues with all expedition. As the Deputy rightly stated, the model for building houses is broken. Many of the small builders in the supply stream went bust and have not returned to the business since the economy's recovery. The finance model is also gone. As such, we must find new ways. As can be seen in Dublin, most current construction involves a developer as an organiser, with subcontractors carrying out the work. Units of subcontractors are coming on stream when their input is required. There has been a major shake-up but the industry is getting there and a number of good, sound builders are back in business. Some of the larger builders are also involved, for example, Cairn Homes and Hines in Cherrywood, where there are 4,800 units. They have a different financing model, as they can raise money on the markets quite cheaply.