What if funds default?

WhiteWalls

Saw the above point being made earlier on here and think it deserves a thread.

I think the vast majority of people find the housing situation so worrying at the moment as it seems in simplistic terms that there doesn't seem to be any sign of prices dropping. This is while there is such little supply and people are wealthier since covid.

The last boom was caused by credit handed out too easily but there aren't really any obvious warning signs this time around. Yes people are spending big money but it's not being borrowed from the bank, its gifts from family members ang people having huge deposits from a year of increased saving.

Is it an exaggeration to say that the market is being fuelled by funds and what would be the chances and result of them defaulting?

Geuze

Default on what?

Debt?

Many of these funds are pension funds, they don't have debts.



REITs may borrow, yes.

https://www.rte.ie/news/business/2021/0521/1222986-hibernia-reit-funding/

Anyone buying is well protected now, central bank rules constrain how much they can borrow, usually, very good deposits could be a gift but also very good saving.

I know a couple who purchased a new 3-bed A-rated house in Dublin at the end of 2020 just under 400k, their mortgage payment is less than 1000k a month, they would be fine even if only one was in employment.

WhiteWalls

I suppose I'm not particularly up to date with the specifics of funds etc but when I read about the potential of funds taking a slump, it did get me thinking.

Would we need a world recession for arguments sake if funds were to sell up?!

Smee_Again

The funds are essentially cash buyers, there’s nothing to default on.

Ace2007

WhiteWalls wrote: »

I suppose I'm not particularly up to date with the specifics of funds etc but when I read about the potential of funds taking a slump, it did get me thinking.

Would we need a world recession for arguments sake if funds were to sell up?!

When people think of investment fund they seem to just think apartments and houses, but in reality there is so so much more - from distribution channels, to shopping centers, to medical facilities etc, to big infrastructure projects. Investment Funds basically provide the capital for the majority of the world.

Even just looking at Irish domiciled funds - we are talking trillions of euros

Amadan Dubh

WhiteWalls wrote: »

Saw the above point being made earlier on here and think it deserves a thread.

I think the vast majority of people find the housing situation so worrying at the moment as it seems in simplistic terms that there doesn't seem to be any sign of prices dropping. This is while there is such little supply and people are wealthier since covid.

The last boom was caused by credit handed out too easily but there aren't really any obvious warning signs this time around. Yes people are spending big money but it's not being borrowed from the bank, its gifts from family members ang people having huge deposits from a year of increased saving.

Is it an exaggeration to say that the market is being fuelled by funds and what would be the chances and result of them defaulting?

It would not be an exaggeration to say that the funds or institutional investors which have piled into the Irish property market could pose a significant risk to the whole market should they move out. The regulator in Ireland has subjected property funds to closer scrutiny, particularly due to covid but also due to the pre-covid suspensions of redemption by property funds.

https://www.irishtimes.com/business/commercial-property/central-bank-warns-of-covid-19-risks-to-property-market-1.4280680?mode=amp

Foreign real estate and private equity firms, mainly from the US, have been behind 60 per cent of commercial property bought in Ireland since 2014, according to the bank, marking a significant shift in a market that had been dominated by domestic investors during the Celtic Tiger years.

About a third of professionally-managed commercial property is housed in so-called Irish Real Estate Funds (Irefs), which are predominantly linked to overseas firms, the Central Bank said in its latest biannual Financial Stability Review, published on Tuesday.

A previous Central Bank report put the total level of assets in Irefs at almost €18 billion at the end of 2018.

“The investment behaviour of such entities will always be affected by market uncertainty,” the new Central Bank report said.

A sudden stop or reversal in foreign investor appetite for CRE (commercial real estate) would have “adverse consequences” on property prices, the banking system, which has €2.4 billion of loans out against such property, and the wider economy.”

In addition, Irish property funds have higher levels of debt than 90 per cent of similar European funds, according to the Central Bank.

Benedict8

Smee_Again wrote: »

The funds are essentially cash buyers, there’s nothing to default on.

That’s only the case for REITs, that tend to have very low debt levels. Many of the PRS schemes around Dublin are financed through bank loans, often at relatively high levels of leverage. Without debt, the investment would not make sense.

Therefore, a default is possible, but would probably only occur in extreme circumstances, such as a sudden shock to demand for rental properties or an unexpected and substantial increase in interest rates.

In such a scenario, the lenders would probably enforce the mortgage they hold on the property (tenants would not be affected) and sell the property on, when they deem it appropriate.

Unfortunately, it is unlikely that these PRS schemes will ever been broken up and sold to individual buyers, because institutional investors typically pay a substantial premium. They essentially discount the rental income they think they can achieve at the rate of return they are targeting, eg. if they are targeting a 4% return, they would be prepared to pay €750k for a unit with a rent of €2500 pm. Realistically, in these schemes, that would be the rent on a one-bed apartment, which may have a surface of 50 sq m. The price per square metre would be €15k, which is almost double the market rate in Dublin city centre, which is probably no more than €8k per square metre. Even if you assume that individual buyers would not be affected by changes in a reduction in rents and/or an increase in interest rates, the shock would need to be very large in order to push €15k below €8k.

Of course, the example above is a simplification and in reality there are costs and void assumptions etc, and so you may not get quite to the €15k to start with, maybe in the low teens, but the logic is similar.

athlone573

Sorry what is a PRS scheme, do they publish reports like the REITS do?

Benedict8

athlone573 wrote: »

Sorry what is a PRS scheme, do they publish reports like the REITS do?

PRS stands for private rented sector - it mostly refers to large developments purchased by funds in their entirety to be rented out.

Whether they publish accounts or not depends on the structure they use, if it’s a limited company you should be able to find them on the CRO if you know what to look for, but they can be quite brief and uninformative at times.

REITs are public companies, so they publish much more comprehensive information.