Ireland: Stalwart of Irish banking scene picks up the pace

Leading domestic lender Bank of Ireland has set its sights on a sustainable recovery, reports Andy Thomson.

For Paul McDonnell, head of property finance at the Bank of Ireland, one word captures what he believes should be the priority of market practitioners today: sustainability. “You need a sustainable recovery in property markets, which will then assist a sustainable recovery in the wider economy – the two things go hand in hand,” he reflects.

Paul McDonnell and Michael Murray
Paul McDonnell and Michael Murray

McDonnell’s sentiment is entirely understandable when you consider the volatility of the recent past. The financial crisis in 2008 was damaging for the Irish banking industry, although Bank of Ireland Group managed to stay substantially privately owned, the only domestic bank to survive the turbulence without being fully nationalised or liquidated.

McDonnell insists that the bank’s commitment to the property market remained constant throughout this period. “We maintained our presence in property, we never withdrew,” he points out.

“While demand was very sluggish in 2009 and 2010 we made our first post-crisis commitments in late 2011 and activity has been picking up since then. We were the first bank back into the market and probably the only active lender up until 2013. Things have improved since and there is now more liquidity,” he adds.

Bank of Ireland is keen to continue to play its part in this ongoing recovery and claims to be the leading domestic lender, with a market share of around 30 percent.

Competition comes from a small number of domestic players and increasingly from overseas banks, especially those based in London supporting larger clients on loan portfolio and direct asset acquisitions.

There is less international bank activity, McDonnell points out, on the construction and development front “where it is important to have a direct presence and prior experience in the sector”.

Quality of sponsors is key

The quality of sponsors is a recurring theme. The bank focuses its strategy on supporting both international and domestic institutional and professional property investors and developers. International buyers were first to invest significantly in the Irish property market in 2011 and the bank was there to support them – “this helped to recapitalise the market and kick-start market activity”.

While those early re-entry players were largely international private equity firms, the nature of these investors has changed somewhat in the past two years, McDonnell says. “It speaks to the evolution of the market,” he adds. “The first wave of investors in Dublin were largely opportunity funds and hedge funds with a shorter-term horizon than we typically see today.

“The opportunity now is more for medium-term private equity and longer-term institutional money, so the type of buyer has evolved. The mix of investor type is very different to 10 years ago, when the market was dominated by private domestic property investors. Today the market is dominated by institutional players, domestic and international, with the private investor playing a smaller but increasing part.”

Expanding on the type of customer the bank supports, McDonnell says that in the past year the breakdown has been around 40 percent international private investment firms, 40 percent domestic property companies and 20 percent institutional players. However, he believes that the domestic players, both institutional and private, will play an increasing role in the Irish market in the period ahead, not least as some of the early investors exit.

He also considers the market to be “very active and healthy”. In terms of directly traded property, McDonnell notes that according to a January 2016 JLL research paper, in asset terms, around €4.6 billion was traded in 2014 and around €3.4 billion in 2015, with both figures excluding loan sales.

With the market showing such positive signs, McDonnell is keen to stress that this time nothing should be done that might threaten a return to the dark days of 2008. “This time it has to be different,” he insists, underlining the importance of sustainability.

He adds: “We have to recognise where other forms of capital are needed and where the banks fit in. The banks should be doing senior debt, while other non-bank lenders are required to do mezzanine and equity. We also need to recognise that different forms of capital are needed at different stages in the development cycle. For things like land acquisition and speculative development, that’s equity risk and the banks shouldn’t feature there.”

He believes underwriting discipline is “being maintained’ and loan-to-value ratios held at reasonable levels. He also notes that due diligence is being conducted with rigour and thoroughness. In a Bank of Ireland context he points to centralised management of the property lending book, in-house professional property expertise (including a team of surveyors), and best-practice data capture with detailed management information.

High-quality sponsors, disciplined underwriting and in-house expertise: these will be the key building blocks as Bank of Ireland seeks to maintain its market-leading position, particularly in construction and development finance, in the year ahead.

Specialist team banks on growing demand for development finance

“Demand led” is how Michael Murray, who moved to head Bank of Ireland’s corporate banking construction & development finance team 18 months ago, describes the opportunity for the bank when it comes to development finance.

Acknowledging a growing population and recovering economy, rating agency Moody’s recently forecast that housing demand and prices would rise in Ireland for some time. This is partly why Murray, a 30-year banking and property lending veteran, is confident about prospects. “There is increasing activity and more demand for senior debt,” he says.

This is backed up in the residential sector by Murray’s observation that when he established the team, it had funding in place for around 100 residential units on its books. Now, he says, the bank has committed funding to deliver around 1,500 units, as well as roughly three-quarters of a million square feet of commercial space in the office, retail and healthcare sectors.

It was partly due to the growing opportunity in areas such as housing schemes, build to rent, multi-family and student accommodation that Bank of Ireland decided to launch a specialist team focused on development finance. However, while demand in Ireland is strong, the lack of supply has been a hot topic, Murray points out.

“I expected demand for increased working capital from housebuilders, who had started development in 2014 and early 2015 as they accelerated their development plans on the back of strong active demand,” he says. “However, housebuilders have remained cautious and are rolling out schemes in relatively small phases. They are not accelerating their development activity until they see current demand being sustained.”

Data published by the Department of Environment states that housing commencements totalled 7,738 in the first 11 months of 2015, up just 5% year on year and well shy of the around 30,000 units needed to meet demand.

However, he adds: “With the number of housebuilders and scheme commencements increasing, this should see a rising number of new housing unit completions in 2016 and beyond compared to recent years.”

In its recently published first housing report of 2016, Irish property website found that nationally, asking prices grew 7.8 percent in 2015, down from the 15.5 percent growth achieved in 2014. Unlike 2014, there was a role reversal in 2015, with price growth in Dublin slowing markedly (to under 3 percent), while prices outside the capital rose by 13 percent.

Commercial development finance — particularly for offices and retail — is also a key part of the bank’s development finance strategy. Explaining the bank’s approach in this segment of the market, Murray says: “We won’t get into anything speculative but we don’t need it wholly let either — generally around 50 percent let should be sufficient to allow us to finance a commercial development.

“We link up with partners in the private equity world who can provide the speculative element to get deals done, lowering the finance cost on a blended basis with the inclusion of senior debt, which is typically at a significantly lower cost than private equity.”