While some details remain to be clarified, including the precise nature of the reporting and its timing on an annual basis, some of the key points set out in the Central Bank’s macroprudential policy framework for Irish property funds published today, 24 November, 2022 (link here), are set out below.

The new measures will apply to Alternative Investment Fund Managers (“AIFMs”) of Alternative Investment Funds (“AIFs”) that are domiciled in Ireland, authorised under domestic legislation, and investing 50 per cent or more directly or indirectly in Irish property assets. As such, Irish authorised funds investing less than that amount in Irish property assets, or investing in non-Irish property assets, are not in scope for the new measures.

  • The Central Bank is introducing a 60 per cent leverage limit on the ratio of property funds’ total debt to their total assets (the “leverage limit”) and Central Bank guidance to limit liquidity mismatch for property funds.
  • For the purposes of the calculation, leverage will include debt from any source including banks, alternative lenders and shareholder debt.
  • The limit will be tested annually by means of a return to be filed with the Central Bank in a format to be finalised by the Central Bank in H1 2023.
  • This leverage limit will be subject to a five-year implementation period for existing funds, which will expire on November 24 2027. The Central Bank expects that funds will make gradual and orderly progress towards lower leverage levels over the implementation period.
  • The Central Bank will only authorise new property funds with leverage below the 60 per cent limit.
  • Subject to certain criteria, including the existence of a guaranteed lease, Irish property funds investing at least 80 per cent of their assets under management (“AuM”) in social housing will not be in scope for the leverage limit.
  • Property funds pursuing development activity may use a different methodological framework for the purpose of calculating leverage on those specific assets.
  • The Central Bank has also issued guidance on liquidity which set out that the Central Bank generally expects property funds to be either closed-ended or open-ended with limited liquidity and to have a minimum liquidity timeframe of at least 12 months, taking into account the nature of the assets held.

The introduction of the leverage limit, while representing a significant change in Central Bank policy, provides some much needed clarity in the Irish property fund sector and the more flexible leverage limit of 60 per cent and the longer transitional period of five years are welcome changes from the initial, more restrictive, proposals.

While closed-ended structures with higher leverage limits than the proposed 60 per cent will still have significant challenges ahead in reducing those leverage ratios without forcing sales of assets, the Central Bank’s guidance notes that forced asset sales run contrary to the objectives of the leverage limit and, as such, it is expected that these funds will need to engage with the Central Bank on what is proposed.

As a first step, all Irish authorised funds investing in Irish property assets should identify whether they are in scope for the proposals, and then determine if their current or planned borrowing is within the proposed limit or would bring them close to or above the 60 per cent leverage limit.

In addition, all AIFMs with AIFs in scope should review the liquidity terms of their funds to determine if such terms are in line with the proposed guidance on liquidity and liquidity mismatch, and in particular, they should ensure the Irish property funds that they manage, where necessary, extend their notice and/or settlement periods, to better align with the liquidity profile of their assets.

Finally, there will be some further analysis of the Central Bank’s guidance required to determine details such as timing, the precise nature of calculations for development assets and indeed the wider implications for any  portion of “over-leveraged” funds that will remain once shareholder debt is reduced (if that occurs) and once all easily implementable strategies to reduce leverage are undertaken.

Should you need any assistance addressing any of the above issues, or indeed anything stemming from the Central Bank’s guidance, please do not hesitate to reach out to any of our team below who can assist.