CP145: Leverage Limits and Minimum Liquidity Timeframes

The Central Bank of Ireland published its framework for ‘Macroprudential Measures for the Property Fund Sector’ on 24 November 2022. This followed their initial consultation paper (CP145) that was issued in November 2021. The policy framework focuses on introducing two key measures - leverage limits and minimum liquidity timeframes. Kevin Meighan analyses these two key measures and possible next steps.

The Central Bank of Ireland (CBI) published its framework for ‘Macroprudential Measures for the Property Fund Sector’ (the Policy Framework) on 24 November 2022. This followed their initial consultation paper (CP145) that was issued in November 2021.

The policy framework aims to increase the resilience of the property fund sector by reducing the potential for leverage to amplify a shock in the commercial real estate market. The framework outlines the belief that a more resilient property fund sector will protect the real economy and better equip the sector to continue to serve as a sustainable source of funding for economic activity.

The Policy Framework focuses on introducing two key measures - leverage limits and minimum liquidity timeframes. These measures are summarised below:

Leverage Limits

• A Leverage Limit of 60% (the Leverage Limit) (calculated as total debt to total assets) of each Fund which invests greater than 50% of its assets directly or indirectly in Irish property assets. The total debt figure used in the calculation will include debt from any source including banks, alternative lenders, and shareholders

• There will be a 5-year implementation period running from 24 November 2022 to 24 November 2027. Funds currently above the Leverage Limit are not expected to increase the quantum of their debt post-24 November 2022

• The CBI expects that existing property funds will make gradual and steady progress towards compliance with the Leverage Limit over the implementation period

• Funds undertaking development activity are permitted to apply a margin of an additional 20% on a loan-to-cost basis (LTC) when calculating their leverage limits

• Funds which invest at least 80% of their assets in social housing are not subject to the Leverage Limit once the below criteria are met:

- The Social Housing assets are held on long-term leases to a local authority for a fixed period

- The income received by the fund is guaranteed by the local authority for the period of the lease

- The debt utilised by the fund has no Loan-to-Value covenants or repayment-on-demand features associated with it

Liquidity Timeframes

Liquidity has become a strong area of focus of the CBI in recent years. A 12-month minimum liquidity timeframe has been incorporated into the Policy Framework to guard against any potential liquidity mismatches which may arise when an illiquid property fund is faced with significant redemption requests. The Policy Framework also articulates the CBI’s position that all property funds should be either closed-ended or open-ended with limited liquidity.

The Policy Framework states that any Property Fund offering greater liquidity to potential investors will not be authorised.

Next Steps

AIFMs should analyse the guidance and conduct an impact analysis of the Policy Framework on the existing property funds which they manage. AIFMs are expected to test the leverage limit on at least an annual basis.

Any funds which are breaching the Policy Framework’s LTV limits should devise a plan which should gradually and steadily reduce the Funds LTV within the five-year implementation period. The guidance states clearly that the CBI expects that deleveraging should have progressed significantly by the third anniversary of the publication of the Policy Framework.

AIFMs should also review the liquidity provisions contained in the documentation of the property funds which they manage. Appropriate action should be taken by the AIFM to align the liquidity timeframes of their property funds within the 18-month implementation period set out in the Policy Framework.