If the banks don’t have the capability or the appetite to finance enough houses, what other options are out there?
Insurance broker JLT has been lobbying the Central Bank for some time for the introduction of a mortgage indemnity scheme, which would see insurance companies like JLT take on a portion of the risk on all Irish mortgages.
Hypothetically, if a borrower provides a 10pc deposit, JLT would insure 20pc of the mortgage. That would mean that a bank would only stand to lose money if property prices fell below 70pc of the mortgage. The scheme would have a cost, which banks would likely pass on to consumers, but Pat Howett of JLT believes the scheme would reduce risk for banks and free them up to release more capital for lending.
The Central Bank hasn’t bitten on the proposal as of yet. Another option might be to approach a mezzanine lender like the WLR Cardinal Mezzanine Fund. The fund, backed by US Commerce Secretary Wilbur Ross, pictured, is willing to provide construction funding alongside banks on selected projects.
A typical mezzanine transaction sees the non-bank lender charge a higher interest rate than the bank for their portion of the funding, but they are secondary to the bank when it comes to having security on the project. It’s not for the faint-hearted.
Paul Corry, who runs the fund, said it is happy to consider projects but added: “We’d be very selective as to the calibre and track record of developers. It’s guys who have delivered in the past and have extensive experience, and those who can conclude a project successfully.”
A third alternative option is a property-focused “minibond”. Accountant Declan de Lacy is one of the directors of Foxglove Finance, which last year raised €1.6m of one-year money from investors, promising at a 10pc interest rate.
The idea was to use the money to purchase, complete and sell an unfinished ghost estate – taking the bank out of the equation entirely. With much commentary about the recent low-yield environment, the bond was an attractive investment for some.
“There are a lot of people with pension funds or other surplus cash looking for a yield, and if you can find a good project with good security behind it, a good developer, then it seems to make sense for everybody,” de Lacy said.
“It’s not suitable for somebody who has a relatively small pot to put everything into. It’s the sort of thing you might 10pc-20pc of your investable assets into. The risk is higher than the risk associated with putting your money in the bank. There is always a risk of something going wrong,” he said, adding that the company insists on the developer taking a reasonable slice of the equity, meaning they take the first hit if something goes wrong. The bondholders are the only secured lenders on the project.
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