Ireland’s lenders vulnerable to property price declines, says central bank

The Central Bank of Ireland’s latest review foresees continued price declines testing loan-to-value covenants.

Modern buildings and offices on Liffey river in Dublin on a bright sunny day. Bridge on the right is a famous Harp bridge.

Irish banks’ commercial real estate loans are at “elevated risk” as property prices continue to fall in their domestic market and borrowers are challenged in raising collateral, the Central Bank of Ireland has warned.

In its latest Financial Stability Review, published on 7 June, the bank said loan-to-value positions were vulnerable given the “likelihood of further price declines”. The risks come despite greater prudence in Irish lending standards since the global financial crisis and healthier loan-to-value ratios, which would ordinarily “allow for substantial price declines before losses are experienced”, the bank said. 

While the average estimated weighted loan-to-value ratio of bank property loans is around 50 percent today, the review advised caution. “These loan-to-value positions are subject to elevated risks relating to market liquidity when trying to realise collateral values in a stressed market,” it stated.

Commercial real estate borrowers are exhibiting increasing signs of stress, according to the bank, which reported that 23.9 percent of its performing borrowers were considered as being at increased risk [of default] during the first quarter of this year, up from 11.8 percent from the same period in 2020.

The financial stability review, published twice annually, follows that of the European Central Bank’s, which said on 31 May there were signs of increasing credit rise in loan commercial real estate portfolios. That report also said that while bank credit risk was mitigated by “strong collateralisation” these headline figures hid “significant cross-country heterogeneity in terms of both asset quality and collateralisation”.

The review also flagged potential for distress for borrowers working with non-bank lenders. The funding models of non-bank lenders “appear[ed] to be more sensitive to current financial conditions than that of banks”, the report stated.

Property price drops

Prices in Ireland’s property market have fallen considerably in recent months, with overall annual capital values down by 9.4 percent during the first quarter of 2023, according to MSCI. Office and retail vacancy rates, at 10.9 and 8.2 percent respectively, hover above pre-pandemic levels.

In March, Bank of Ireland, the country’s largest lender by assets, based its financial targets on price falls in commercial real estate of 6 percent in 2023 and 2.5 percent in 2024.

Investment across the Irish property market dropped by 18 percent year-on-year during Q1 2023 – at €626.4 million across 32 transactions, according to property adviser Colliers.

The bank noted that Ireland’s dependence on foreign capital could lead to a continued lack of liquidity from buyers, intensifying the extent of further price corrections.

Looking ahead, it said yields across all Irish property sectors would come under further pressure in 2023 while “the attractiveness of alternative investments [to foreign capital] has increased with the normalising monetary-policy environment”.

The bank added: “A sudden stop or reversal in foreign investor demand would increase the probability of further declines in commercial real estate prices.”