knowledge 28 November 2022 |

Central Bank introduces Macroprudential Measures for Irish Property Funds

These new measures consist of (a) a 60% leverage limit on the ratio of Property Funds’ total debt to their total assets (the “Leverage Limit”) and (b) a CBI Guidance on redemption terms for Property Funds to avoid liquidity mismatch (the “Guidance”).

 “Property Funds”, for the purpose of the new measures, are alternative investment funds (“AIFs”) which are domiciled in Ireland, authorised under domestic legislation and which invest 50% or more directly or indirectly in Irish property assets.

Background

On 25 November 2021, the CBI issued CP145 ‘Macroprudential measures for the property fund sector’. At that time, the CBI stated that the proposals set out in CP145 were intended to safeguard the resilience of the Property Fund sector to enable it to better absorb future adverse shocks and serve its purpose as a “valuable and sustainable source of funding for economic activity”. CP145 proposed a Leverage Limit of 50% and a draft Guidance. Further detail on CP145 is available in our earlier briefing (here).

Revisions to CP145 Proposals

The CBI received 20 responses from stakeholders on the proposals contained in CP145; details of these responses are set out in the CBI Feedback Statement (here). The CBI notes that most respondents opposed the introduction of the Leverage Limit, while responses to the Guidance were mixed.

Based on the responses to CP145, the CBI confirms that it has retained the core elements of the proposed measures, subject to the following adjustments:

• the CBI has decided that the Leverage Limit will be set at 60%, instead of 50%, as was originally proposed under CP145;

• the CBI is extending the implementation period for the Leverage Limit from three years to five years in respect of existing Property Funds.  New Property Funds approved after 24 November 2022 will need to comply with the 60% limit referred to above from the outset;

• Property Funds that hold at least 80% of their total assets under management in social housing will not be considered in scope for the Leverage Limit provided they satisfy certain criteria (see further detail under the heading ‘The Leverage Limit’ below);

• Property Funds that borrow on a loan-to-cost basis to fund development activities may use a different methodological framework for the purpose of calculating the Leverage Limit; and

• subject to prudent liquidity management by the fund manager, the liquidity timeframe set out in the Guidance may not be required in certain cases (see further detail under the heading ‘Guidance on Redemption Terms for Property Funds’ below).

Key Aspects of the New Measures

1. The Leverage Limit

As noted above, the CBI has calibrated the Leverage Limit to 60% of total debt to total assets.

The CBI states that the Leverage Limit will be imposed by way of condition of authorisation under Regulation 26 and, as appropriate, Regulation 9 of the European Union (Alternative Investment Fund Managers) Regulations 2013.

The Leverage Limit will be subject to a five year implementation period for existing Property Funds, which will last until 24 November 2027. The CBI expects that Property Funds will make gradual and orderly progress towards lower leverage levels over the implementation period. Those Property Funds identified with leverage close to or above the Leverage Limit will be required to submit plans to the CBI on how they will deleverage or maintain leverage below 60% throughout the implementation period. The CBI states that it will actively monitor and follow up to ensure appropriate progress is being made throughout the implementation period and expects that deleveraging should be significantly progressed by the end of year three.

From 24 November 2022, the CBI will only authorise new Property Funds with leverage below the 60% limit.

Property Funds investing at least 80% of AuM in social housing (“Social Housing Funds”) will not be in scope of the Leverage Limit if:

• the Social Housing Fund clearly states in its prospectus that it has an investment objective of investing in social housing;

• the Social Housing Fund holds long term leases – the properties owned by a Property Fund (or properties that are being developed by a fund) are leased (or pre-leased) to a local authority for a fixed period of time (depending on the type of lease held). The CBI notes that these leases are drawn up under the standard or enhanced leasing model used by local authorities;

• the income is guaranteed; and

• there are no loan-to-value covenants or repayment-on-demand features associated with the debt.

The CBI also confirms that Property Funds pursuing development activity may use a different methodological framework for the purpose of calculating leverage on those specific assets.

The CBI states that the implementation of the Leverage Limit will be assessed on at least an annual basis. The CBI confirms that this assessment will be supplemented with a tailored return where further information will be sought, including, for example, information on meeting exclusion criteria (for Social Housing Funds), the use of the different methodological framework in the case of development activity and the indirect holdings of funds and the maturity of shareholder loans.

2. Guidance on Redemption Terms for Property Funds

The final Guidance is set out in Appendix 1 to ‘The Central Bank’s macroprudential policy framework for Irish Property Funds’ (here). The Guidance requires Property Funds to generally provide for a liquidity timeframe, that is, the timeframe between the dealing deadline and the payment of redemption proceeds, of at least 12 months, taking into account the nature of the asset held.

Certain variations to this requirement are provided for:

• subject to prudent liquidity management by the fund manager, the liquidity timeframe may not be required for Property Funds where (i) the designation of the redemption dealing day is at the discretion of the Directors (and not the option of the investors) and (ii) the property fund has sufficient liquid assets not generated by disposal of Irish property assets for the purpose of funding the redemption; and

• Property Funds that cannot sell their assets within the minimum liquidity timeframe should consider having longer timeframes in place.

The CBI will provide for an 18 month period for existing Property Funds to implement the Guidance. The CBI expects Property Funds authorised on or after 24 November 2022 to comply with the Guidance immediately.

Next Steps

The CBI states that it will closely monitor the adoption of the measures, their impact and conduct a periodic review of same. Property Funds should note that the CBI confirms that it does not intend to recalibrate the Leverage Limit regularly. However, the CBI does allow that in the event of a sudden adverse commercial real estate market shock, the CBI may temporarily remove the Leverage Limit, or, if there is evidence of significant market overheating, the CBI may tighten the Leverage Limit.

The CBI states that it will continue to engage with individual Property Funds and their managers as part of its supervisory engagement to assess progress in implementing the Leverage Limit and the Guidance. The CBI confirms that it will deal with breaches of the Leverage Limit in accordance with the wider supervisory practice for investment funds.