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Bank Of Ireland Director Says Resi And Retail Are Its Focus For New Lending

Bank of Ireland trimmed its exposure to the property and construction sector by €1B last year, as Dublin felt the chill winds of higher interest rates and lower leasing levels blow through the market.

But as one of the bank's most senior commercial lending directors explained, while the bank is cautious, it still has appetite for the sector — just not in exactly the same areas as before. 

“Real estate and real estate lending is a cyclical asset class, and as one of the two incumbent lending bodies, we have always continued to invest through the cycle,” Bank of Ireland Corporate Banking Senior Director Nicholas Lyons said in an interview. “This time round, there is generally less leverage, and that should mean a more resilient Dublin market overall. While we are likely to see a muted first half to the year, I think we might see more of an upturn in the second half, barring another major event.”

With the bank pledging to ramp up residential lending and retail still in its sights, inevitably it is office real estate where there is the greatest concern, as Bisnow spoke to Lyons about how he sees the year ahead.

Lyons, a panellist at Bisnow’s Dublin Property Pulse: State of the Market event on 19 March, said that despite the challenges facing the global real estate market, the situation is “far from all doom and gloom.”

Dublin's real estate debt market is contained despite creeping stress.

Bisnow spoke to Lyons in the week when one of Ireland's two main property  lenders, alongside Allied Irish Banks, revealed results that showed pretax profits up 92% to €1.9B, a rise from just over €1B in 2022, as net interest income jumped 48% on an annual basis to €3.7B in 2023.

As part of that, Bank of Ireland said it had reduced its property and construction loan book by 12% to €7.2B, of which €6.7B is investment lending and €500M is development lending.

Its coverage ratio of property loans on which it might face losses rose from 2.4% to 3.4%, but the bank's management said it was being proactive in analysing loans that might go bad. 

While Bank of Ireland and Allied Irish Banks have largely insisted on well-capitalised, fully leased schemes before it will lend, which has opened up the market to more alternative lenders, it announced earlier this month that it will increase available funding for housing development to €2.5B by 2026. Within this, funding for social and affordable housing will increase to €1B, the bank said in the announcement.

That represents a 40% increase in funding available for homebuilding, up from its commitment of €1.75B, which the bank said had “the ambition to support the construction of 25,000 units of all types including houses and large and smaller scale apartment developments.”

Funding for social and affordable housing will more than double from €400M to €1B, and Bank of Ireland is funding the development of circa 21,000 residential units across around 170 sites, including circa 3,200 units for social housing. 

“We are already the biggest lender into the housebuilding sector, and we’ve made a substantial commitment with the announcement,” Lyons said. “It’s a high-demand market, and as a lender of our scale, there is also a social purpose to that lending to help with Ireland’s housing shortage.

“On top of that, housing shortages are often cited as a deterrent to foreign direct investment, and so there is a knock-on impact of helping boost housing supply to encourage business investment.”

Investing In Local Housebuilders

Lyons said the bank is looking to invest not just with the major national housebuilders but also in smaller, local housing companies, and that has required a fresh and more granular approach.

“What we have done over the past couple of years is get on the ground to find the housebuilders looking to put up homes in the 10-15 units type of level,” he said. “It’s not just about funding the major housebuilders. It’s about trying to lend to the smaller end as well.”

However, the contraction in commercial real estate is a cause for concern for all lenders, and Dublin has been hit hard both by global factors and especially the headcount reductions among a number of the major U.S. digital and tech industry occupiers.

Speaking on the radio to RTÉ Morning Ireland, Bank of Ireland CEO Myles O'Grady said the higher loan impairment provision for 2023 was designed to “capture known and future risk, particularly in the commercial real estate sector.”

“We have a €7.2B commercial real estate book. That's about 9% of total loans, and by design, that was reduced by about 12% in the year, so we've taken a very cautious approach to commercial real estate,” he said. “Part of that [impairment charge] is capturing the potential risk into the future. There is a risk here that possibly commercial real estate prices could fall by 10%.”

Lyons said he is sanguine and that although the office sector is going through a difficult time and is an area “where we may see some stress creep into the market,” he feels that so far the impact on commercial real estate has been relatively contained.

“Although we’re being cautious, we have lent through the cycle before, and we haven’t stopped,” he said. “We have seen a couple of buildings go into administration, including The Beckett building and the North Docks 1 and North Docks 2 offices. And I think we will see more.

“The sense is that the situation is still to play out. Clearly, there is lower demand post-Covid and with hybrid work and work-from-home. While overall office vacancy rates are around 17% in Dublin, actually, if you take out [the better-performing] prime offices, then it’s more like 25% for offices in a secondary location and of secondary quality.”

Retail has remained robust after values and rents were repriced, Bank of Ireland's Nicholas Lyons said.

Several property companies have opted to use alternative debt providers, which have traditionally had a comparatively small slice of the Irish commercial real estate lending pie. While Lyons said there is “undoubtedly a role for a wide range of investors,” he cautioned that as they typically incur more expensive debt, that could leave some property owners more exposed. 

“At the moment, that’s relatively contained, and we’re unlikely to see much distress until the second half of this year, at which point interest rates will hopefully be cooling, although that might not happen until Q3,” he said. “That lower interest rate and calmer inflation environment could encourage more investors to buy back in if they can achieve good value in a more stable and predictable situation.”

Retail Remains Robust

Bank of Ireland will also continue to lend to retail, Lyons said, describing the beleaguered sector as more robust than many may have expected. While for major destinations such as Blanchardstown Centre a substantial discount has been necessary to attract buyers, Lyons said activity in smaller lot sizes has been encouraging.

“With no new supply entering the market, many retail parks and malls are achieving very high occupancy and retail collections, while the rents and values have stabilised,” he said. “Right now, where we see value is in the up to €30M asset size, and a number of assets at that scale have been changing hands.

“We are especially interested in retail parks, smaller centres that are not fashion-led and local convenience retail, again that is not fashion-led. We’re also seeing some strength returning to the high street, especially the prime Dublin retail areas.”

Lyons will be a panellist at Bisnow’s Dublin Property Pulse: State of the Market, which takes place at the Radisson Blu Royal Hotel in Dublin on 19 March.