The central bank limits borrowing for real estate mutual funds to 60 percent

Property mutual funds will be barred from borrowing more than 60 percent of their total investment under new central bank rules.

The move to limited debt has been announced, but the 60 percent limit is higher than many in the industry expected, meaning they can continue to borrow more than initially thought. The funds also have more time to phase in the new rules than originally stated.

The new rule applies to new funds from today, but existing funds have five years to reduce their debt to the new level.

Funds investing in Irish retail and commercial property typically have leverage around 40 per cent and are unaffected by the changes.

But those working in the housing sector can often borrow 70 per cent of their funds, reflecting the type of high-risk, high-return investors attracted to the Irish market. That means the new rules are likely to have an impact on investors who finance and invest in apartments and houses.

Funds now collectively own €22bn of Irish property and while debt tends to be low, the industry is now so large that problems for funds could now threaten the broader economy should they arise.

The regulator is also changing the rules on how quickly funds must release funds to customers, up to 12 months.

The central bank is also increasing its so-called countercyclical capital buffer (CCyB), a tool it uses to cool bank lending to 1 percent.

In theory, this will make it more expensive to borrow from banks at a time when interest rates are rising sharply, but officials believe this will not affect the supply of credit in the current market as banks already have more capital hold as actually present is required by European regulations.

The central bank also believes that higher interest rates are positive for bank profitability.

The new debt ceiling for funds investing in Irish property also aims to strengthen resilience so property funds can better absorb shocks. The central bank limits borrowing for real estate mutual funds to 60 percent

Fry Electronics Team

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