Michael Quealy, Head of Portfolio & Credit at Novellus, a leading alternative finance provider, shares what trends he is seeing in the Irish real estate financing market:
Over the past few years, the Irish market has become accustomed to financing solutions provided by specialist lenders, outside of the mainstream market.
The reduction of offerings from the pillar banks since Ulster’s departure in 2023 coupled with the constraints on what those remaining pillars are willing to underwrite, has resulted in the alternative finance sector becoming more relevant and competitive.
With the significant supply deficit in residential space associated with the on-going housing crisis, the market seems unable to react quickly enough to build to satisfy demand.
Particularly around Dublin and Galway, value appears to be driven by the expectation that sites previously zoned for commercial or industrial use are to be repurposed in an attempt to meet the demand for residential development.
Security of income from potential contracts with housing bodies appears to be further boosting prospective investor confidence.
Demand for properties suitable for IPAS and other emergency accommodation purposes has been strong, as investors look to cash-in on the disproportionate yields such assets offer.
The planning exemption applicable to certain of these projects has furthered the appeal to prospective investors. This has helped drive demand for refurbishment or CAPEX finance, as promoters work to meet the requirements to secure these lucrative government contracts.
Bridging finance has facilitated investors in moving quickly to seize these, and other, value-add opportunities. However, there now appears to be a governmental shift in policy towards volume accommodation providers and this is inevitably causing smaller providers to re-think their strategies.
Whilst some trading sectors have struggled (restaurants, for example), Revenue’s decision to restructure Covid-related tax liabilities over terms of up to 10 years should assist somewhat with liquidity.
Notwithstanding, overhead inflation and margin pressures continue to present a significant hurdle to many operators, with the result that certain sectors now seem ripe for consolidation – larger players can ‘stem the tide’ through centralised back-office functions and shared services arrangements.
With the requirement for liquidity, investors and business owners are seeking a range of alternative financing options, be it through private funders, non-pillar lenders, or Private Equity funds offering debt-equity solutions and deals centred around convertibles or warrants.
In spite of recent interest rate reductions, the apparent reticence of pillar lenders to increase their exposure to certain asset classes in recent years has left increased scope for alternative sources of finance to provide senior term debt.
I believe there is still plenty of value achievable in the market, but (as always) the ability to procure it hinges around the availability of capital.
The flexibility of Novellus’ capital stack and the speed at which we can transact allows us to support projects that other finance providers cannot. Consequently, we have seen a material uptick in enquiries within recent months and have been able to offer the types of alternative solutions that the market is clearly demanding.
