Irish banks ‘significantly exposed’ to EU commercial property sector

Irish banks’ cross-border commercial real estate (CRE) exposure made up just over half of their total commercial real estate exposure at the start of 2022, the highest share in the EU, according to a report by the European Systemic Risk Board (ESRB).

Luxembourg also had a high exposure to foreign markets, while other countries were most exposed to their home markets.

Banks here are most exposed to Greece, where 50.9pc of their debtors are based, and Luxembourg (26.1pc).

“This means that negative developments in some euro area countries’ CRE markets may directly affect banks in other euro area member countries where the size of these exposures is significant,” the report said.

The ESRB – a division of the European Central Bank set up in the wake of the 2008 financial crisis – also said that Ireland has a relatively high stock of non-performing commercial real estate loans.

CRE loans made up just over 30pc of all non-performing loans in Ireland in the second quarter of 2022. The stock of non-performing CRE loans in Ireland has grown since the end of 2019, while it has fallen in most other EU countries.

Non-performing loans are loans that are unlikely to be repaid, or where repayments are more than 90 days late.

Investment funds make up 50pc of investors in the commercial real estate sector in Ireland, according to the ESRB, followed by banks (35pc) and insurers.

Investment funds tend to borrow the most to fund building activity. Ireland became the first EU country to introduce a borrowing limit for property funds last year, meaning they can borrow up to 60pc of the value of their total assets.

The data on Ireland comes as the ESRB warned of “vulnerabilities” in the commercial real estate sector across the bloc due to slowing growth, higher inflation, stricter lending and building standards, hybrid working and more online shopping.

It pointed to the “risk of an asset price correction” for real estate investment funds.

Last year the International Monetary Fund warned the Government about Ireland’s exposure to cross-border flows of real estate investment activity. The IMF estimates that property funds here hold assets worth around 40pc of GDP.