Central Bank warns of a financial stability threat due to cuckoo funds

Cuckoo funds or offshore venture funds in Ireland’s commercial property is causing apartments to be bought up by the big businesses that make up the cuckoo funds. The increasing dominance of offshore investment in Irish commercial property is causing risks that they will also import a boom bust cycle. According to research from the Central Bank, the threat is also that house prices will fall and the banks will be weakened.

Warnings have been definably seen as two of the biggest property investors in recent years look to sell a large portion of their office blocks. The Central Bank continues to explain that foreign financed funds are more vulnerable to negative shocks outside of Ireland. In other words, foreign investors are not as concerned with the Irish economy as they are concerned with the general economy and their investments. Foreign investors are not concerned with the health of the Irish economy and could potentially get rid of all Irish assets to pursue easy profits elsewhere.

Although there is high risk associated with cuckoo funds and foreign investors, these investments are becoming more prominent and foreign investors are becoming more powerful. According to the Central Bank the growing presence of non bank investors in the Irish commercial real estate market is welcomed in terms of diversifying funding sources. The probability of the increase in non bank investors to have a negative impact on financial stability is growing. In times of stress, foreign investors may try to sell of their assets due to the high liquidity of the real estate investment funds. Furthermore, the Central Bank’s report noted that funds with higher leverage may need to sell their assets if the cost of debt rises, in other words if global risk is repriced.

The report details the institutional ownership of CRE. Reifs and real estate investment trusts. Most have finance through equity or loans and half of the of the financing comes from foreign investors. The report also found that Reifs, a foreign investor possesses commercial property worth €18 billion. This number staggers the commercial property of insurance companies of €4 billion. Even Irish banks has less commercial property loans totaling to €12 billion, most is non-performing.

Emerging big institutional investment funds in the Irish housing market is a relatively new and controversial concept. Ultimately, the key to achieving affordability is bringing down high land prices is by diversifying types of investments. The site tax should be heightened in some areas while in others it could be lessened .

 

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