Commercial property crash remains contained, Central Bank finds

Commercial property values as a whole are down 27pc since Covid, but falls in the office and retail sectors are bigger and may continue, Central Bank researchers said in a special report published alongside the first regular Central Bank Financial Stability Review of the year.

The scale of the hit to the office market was already flagged in the Central Bank’s own accounts last month when it wrote down the value of its new office in Dublin’s North Docklands by €157m – barely a year after moving into the building which had cost around €230m to buy and fit out.

The Central Bank undertook an in-depth assessment this year focussed on the domestic financial stability implications of what’s described as “the ongoing adjustment in the commercial real estate (CRE) market”.

It found the sector facing a series of “fundamental shocks” including higher interest rates and structural changes such as the shifts to remote working and digital commerce.

Even so, the overall findings represent relatively good news compared with the last big property crash.

This time around the relatively light exposure of domestic banks is a significant difference – around 10pc of bank lending is now exposed to CRE compared with a third during the last property crash. The overall strength of the wider economy, which in many cases is unaffected by the property slow down, is another positive versus 2008.

In addition, international investors and lenders are now worse placed to be hit with losses on Irish CRE than domestic investors. An analysis of the biggest property investment deals of 2022 and 2023 by the Central Bank found investors from the US, Canada and continental Europe were more active than Irish investors.

The growth of non-bank lenders, many specialised in relatively niche parts of the property market, also means the impact of losses is more contained.

“The Central Bank’s judgement is that the domestic banking system is sufficiently resilient to absorb – rather than amplify – this CRE downturn. Non-bank sources of financing in the CRE market, such as Irish property funds and local non-bank lenders, have not exhibited signs of amplifying the shock to date,” the report said.

The report says domestic non-bank lenders’ share of all real estate business is estimated at around €6.5bn compared with around €12bn for domestic banks. Given the role of international funds, the total size of non-bank loan financing is likely to be higher again

For now at least, this more diverse funding mix is supporting domestic financial stability, with limited losses falling on any one sector and no evidence of spillover from lenders to the non-property sectors.