Wednesday, August 20 11:20:41
Those small and medium sized businesses that borrowed to buy property during the boom are nearly twice as likely to default as similar firms without property loans.
That's according to new research from the Central Bank this morning that also shows that at least a fifth of Irish SMEs have direct exposure to property debt.
Loan-level data show that at least 10pc of firms with bank debt have exposure to property investment at the same bank, with this figure rising to 16pc when including Buy-To-Let mortgages for a subset of the data, the study shows.
Data on loan default suggests that property-related borrowing has had a detrimental impact on firms: SMEs with property-related borrowings have a loan default rate of 43pc, compared to 23pc for those without property exposure.
The sectors where property borrowing is highest are the business and administrative services, hotels and restaurants and the wholesale and retail sectors, where 30 to 40pc of the outstanding bank loans are linked to property.
Analysing data on different types of mortgage borrowing, the authors conclude that it is large SME borrowers who have predominantly borrowed for buy-to-let investments.
Default rates for firms whose owners have buy-to-let loans are significantly higher than for firms with no property exposure, or where the property borrowing is for the owners' own home.
The research shows that default rates for firms with borrowings for the primary dwelling house of the owner are less likely to default than firms with no property exposure.
On this basis, they exclude borrowing connected with the business owners' personal home from the numbers. This suggests that 16pc of firms have property borrowings that account for 41pc of the outstanding loans to the SME sector.
The authors define the SME sector as firms with fewer than 250 employees and whose turnover does not exceed E50m or whose annual balance sheet does not exceed E43m.
From this group they exclude firms in the real estate and financial intermediation sectors - which are both heavily indebted - to arrive at what they call the "real economy" SME firms, which form the focus of the study.
This group account for E26 billion of outstanding loans to the SME sector.
Total SME borrowing is E67.6 billion, of which real estate firms account for E29.8 billion, while financial intermediation firms owe E11.6 billion.
The research finds that firms in the manufacturing and services sectors were least likely to invest in property, while firms involved in agriculture or construction were the most likely to take on property borrowings.
Larger firms were more likely to be involved in property borrowing, with 25pc of firms employing more than 50 people having property exposure, as opposed to 17pc of micro firms - those employing fewer than ten people.
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