The banking sector has called for a targeted Credit Guarantee scheme for SME builders and developers in order to unlock critical private finance which will be required to meet expected higher housing targets. The report, which was commissioned by Banking & Payments Federation Ireland (BPFI), examines how the lending capacity of the banking sector can be fully leveraged to meet the significant funding challenge now faced by the State in delivering increased housing output.
Outlining the key findings within the report, Brian Hayes, Chief Executive, BPFI said: “With housing targets likely to be revised upward to 50,000 units per annum in the coming months, the State is facing a significant funding challenge in terms of how this can be delivered. The current level of State investment in housing is currently at historically high levels, but this is not sustainable into the future. It is well recognised that as much as 80% of the total finance needed to meet future housing requirements will need to come from private capital sources. The banks are already providing significant finance to the housing market however, as highlighted by our report today, we believe there are ways in which the lending capacity of the banking sector can be more fully utilised, while also enabling it to act as a promoter and conduit of international capital into the housing market.”
Mr Hayes added: “One of the greatest challenges in meeting increased housing targets will be the capacity of the building sector to scale up construction. With a highly concentrated developer/contractor market in Ireland it is of major concern that outside of this top tier of developers, there is a large cohort of capable SME developers, with viable projects, who struggle to secure bank funding due to a lack of equity. While banks can provide up to 65% on a loan-to-cost basis, the developer needs to bridge the gap with their own funds or more expensive ‘mezzanine’ finance. This lack of equity stops many developers from acquiring more than one site at a time, limiting their ability to scale their business. Additionally, the housing market’s dependence on a small number of large developers is not only acting as a significant barrier to achieving sustained levels of housing output but is also impacting on the banks’ ability to lend, as well as the attractiveness of the residential market to international capital.”
“If a higher level of housing output is to be realised, it is critical that smaller developers can deliver more units each year than they are currently able to do. BPFI is therefore calling for a development of a credit guarantee scheme for SME builders to further advance finance to developers with viable projects but insufficient equity. This would enable the banks to provide finance to additional clients and developments without compromising credit underwriting standards.”
Mr Hayes concluded: “By actively engaging with international investors and offering them access to the domestic real estate market through their banking services, banks can effectively attract international capital and contribute to the growth and development of the real estate sector. With the requirement for additional sources of development finance, this role for banks as a conduit for international capital, will be particularly important in the future.”
