Due to Ireland’s increasing niche within the investment fund sphere, the Central Bank of Ireland (“CBI”) has recently introduced macro-prudential measures which target Irish property funds. By mid-2022 €22 billion worth of Irish property was held by Irish property funds. As leading participants in the Irish commercial real estate market, such measures are intended to address potential vulnerability concerns not just in the market but the Irish economy should Irish property funds be forced to sell their assets in response to adverse shocks in the market.

To mitigate against this systemic risk, the CBI has now introduced a leverage limit of 60% on the ratio of a fund’s total debt to assets and has also introduced guidance to dilute liquidity mismatches within Irish property funds. Below are some of the salient points for Alternative Investment Fund Managers (“AIFMs”) and Alternative Investment Funds (“AIFs”) to be cognisant of moving forward.

Scope of the Measures:

These measures will apply to AIFMs and AIFs that are:

• Domiciled in Ireland;
• Authorised under domestic legislation; and
• Investing 50% or more of their Assets Under Management (“AuM”) directly or indirectly in Irish real property assets.
  • Directly held meaning on-balance sheet holdings of real property assets; and
  • Indirectly held including any investments that are exposed to or hold Irish property assets. Examples include holdings in special purpose vehicles or partnerships

Leverage Limits:

As a leading global funds sector, comparisons may be made with benchmark statistics in non-Irish markets. Irish property funds are more highly leveraged at 45%, as opposed to the European funds average of 17%. To tackle this discrepancy, the CBI is introducing a 60% total debt-to-total assets leverage limit. A five-year implementation period will be introduced to allow for existing AIFMs and AIFs to gradually lower their leverage. The five-year implementation period will last until 24 November 2027 for existing funds but all new property funds seeking authorisation will be required to comply from inception.

It is important to note that property funds investing at least 80% of their AuM in social housing will not be within the scope of the 60% leverage limit. In order to fall within this exemption, such funds must:

• Invest at least 80% of their AuM in social housing assets.
• Clearly state in their Prospectus that the fund has an investment objective of investing in social housing
• Hold long-term leases – whereby the properties owned, or being developed by the fund, are leased or pre-leased to a local authority for a fixed period of time, such leases to be structured in line with the local authority’s standard leasing model.
• Have a guaranteed income stream in the sense that the local authority pays rent to the fund for the period of the lease.
• Have no loan to value covenants or repayment-on-demand features associated with the debt.

Property funds pursuing development activities, such as construction of new buildings, alteration/extension/demolition of existing buildings, may use a different methodology to calculate leverage on development assets.

Enhanced Liquidity Guidance:

The CBI has also issued guidance in relation to Regulation 18 of the Irish AIFM Regulations on minimum liquidity timeframes, with property funds expected to have a minimum liquidity timeframe of at least twelve months. An 18-month implementation period has been agreed by the CBI to allow funds to implement this. This guidance is driven by empirical research highlighting that liquidity mismatches may occur where the liquidity timeframe of a fund is shorter than the expected time required to sell property assets.

The CBI anticipates that enhanced liquidity guidance can serve as a safeguard to mitigate financial stability risks but such guidance is not designed to eliminate risk for investment activities undertaken on behalf of investors. It is expected that property funds authorised on or after 24 November 2022 will have to comply with this liquidity guidance from inception.

Implementation Period:

As flagged above, the CBI is cognisant that such measures will take time for existing property funds to adjust to and therefore a five-year implementation period is allowed for existing funds regarding the 60% leverage limit. An additional 18-month implementation period is also being introduced for the enhanced liquidity guidance to be onboarded. Property funds with leverage currently at or above the 60% leverage limit will be required to submit plans to the CBI to convey how they will deleverage or maintain their leverage below 60% throughout the implementation period.

All existing AIFMs and AIFs within the Irish commercial retail property market will be required to familiarise themselves with these measures, and those seeking authorisation will have to comply from inception.

OCWM Law LLP

For further information contact:

Edel Conway: [email protected]

Or

Philip O’Connor: [email protected]

Or

Carol Maguire: [email protected]

Or

Michael Walshe: [email protected]

¹ https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/nbfi/property-funds/framework