Ireland has seen a strong level of international investment in its commercial real estate sector since 2013. More recently, there has been significant investment in the residential sector. Much of this investment has been in the form of non-bank lending and equity financing.
Notwithstanding the increase in foreign investment in the construction sector, the Central Bank of Ireland’s (CBI) recent Systemic Risk Pack, published in March this year, stated that “Property-related lending accounts for 68 per cent of Irish banks loan book, highlighting a concentration risk amongst Irish resident banks. This compares to a long run average of 62 per cent and a European average of approximately 60 per cent measured at 2018 Q2”.
The domestic banks’ need to reduce their exposure to the property sector in the aftermath of the economic crisis meant that the absence of international investment would have resulted in somewhat lower levels of activity in the commercial and residential sectors. Access to foreign capital, whether through direct investment, equity, or lending played an important part in the recovery of the construction sector. Given the relatively high level of property-related exposure that remains on the domestic bank’s balance sheets, foreign capital will continue to play an important role in the Irish construction sector.
The presence of foreign investors can expose the domestic market to international financing conditions and overseas asset market corrections. The propensity for international investors to diversify across different markets, including Ireland, may see these markets becoming more synchronised with global real estate cycles. With more globally synchronised markets, the potential for spillovers is higher and the scope for loss mitigation through diversification is diminished.
The Department’s assessments of the principal economic and fiscal risks are set out twice yearly in the Stability Programme Update (SPU) in April and in the Budget Economic and Fiscal Outlook in October. The Stability Programme Update 2019, identifies a number of external risks of which two - ‘External demand shock’ and ‘Bond market conditions’ - implicitly encompass risks of this nature. The Summer Economic Statement forms a key element of the reformed budgetary process by providing a policy background for the discussions in the Dáil and, at the National Economic Dialogue which takes place later this month. It complements the SPU.