Dáil Éireann Debate, Tuesday - 24 July 2018
213. Deputy Michael McGrath asked the Minister for Finance his views on the view of ECB President, Mr. Mario Draghi, that commercial real estate here is vulnerable to a fall in value; if the Central Bank is giving consideration to imposing lending caps to apply to non-bank lenders to the commercial real estate sector; and if he will make a statement on the matter. [33254/18]
Amharc ar fhreagraMy Department and the Central Bank continue to closely monitor developments in the commercial real estate sector. According to data collected by MSCI/IPD, there has been a moderation in capital value growth in the market, with capital values growing by 2.1% on an annual basis to Q1 2018.
This moderation is due to the strong levels of construction activity over recent years, particularly in Dublin, with continued investment in the pipeline. According to CBRE, at the end of Q2 2018 there were 31 office schemes under construction in Dublin city centre, extending to more than 370,000m2. Although such levels of investment are strong, there is thus far no reason to suggest that this investment is speculative or poses a clear risk to financial stability. For example, according to CBRE 54 per cent of office space due to be completed in 2018 is pre-let and indications are that a substantial proportion of the pipeline is similarly pre-let.
Ireland has seen a strong level of international investment in its commercial real estate sector since 2013. Much of this investment has been in the form of non-bank lending. Given the requirement for domestic banks to reduce their exposure to the sector in the aftermath of the crisis, the absence of such investment would have meant very little activity. Foreign investment sped up the recovery in the market and helped the economy recover more generally.
While a higher level of foreign investment and non-bank funding can contribute to a greater dispersal of risks, it can also lead to increased vulnerability to changing international financing conditions. Recent research by the IMF suggested there was a high level of synchronicity between Irish and international commercial real estate markets. Interestingly, the period in which the research was carried out covered both the pre- and post- crisis period, suggesting there was a relatively high degree of synchronicity irrespective of the source of investment.
The Central Bank is engaged in the continuous monitoring of developments in the commercial real estate market – with a particular emphasis on increasing understanding of the investor base, funding sources, exposures and business models of banks and other financial institutions, as well as the interconnectedness of the market here with other markets across Europe. Work is on-going to address data gaps both domestically and at a European level, which will bolster authorities’ analysis and monitoring of the market.
Ultimately, the non-bank, cross-border elements of recent commercial property investment complicates the adoption of macroprudential measures in one jurisdiction, to effectively target the source of any related systemic risk. The investigation of whether new macroprudential instruments are required and need to be implemented is part of the ongoing discussion of these matters at the European and national level. Amongst the factors being considered is the regulatory perimeter of domestic and EU authorities and whether effective measures can be addressed to market participants outside those perimeters.
In recognition of this, as well as an acknowledgement of the importance of the commercial real estate sector to the economy, the Department of Finance and the Central Bank will continue to closely monitor activity in the sector.
