|Figure 1: SME Outstanding Balance, December 2013
At least one fifth of Irish SMEs (small & medium
size firms) have direct exposure to property debt and
these firms are almost twice as likely to default compared with a similar firm
with no property debt according to
research [pdf] by Central Bank economists.
Loan-level data show that at least 10% of firms with bank debt have
exposure to property investment at the same bank, with this figure rising to 16% when including Buy-To-Let mortgages for a subset of the data.
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 43%, compared to 23% for those without property
Fergal McCann and Tara McIndoe-Calder say that
the performance of SME loans is of crucial importance from an economic recovery
perspective. As identified in the CSO's
Business in Ireland report for 2011, 69% of the 1.2m private sector employees in Ireland, or 828,000 people,
work in SMEs. Impairment rates of 25% suggest that there are a large
number of employees potentially at risk as these companies may need to cut
costs, downsize, or in some cases enter liquidation.
The economic letter says that property
borrowing is highest are the business and administrative services, hotels and
restaurants and the wholesale and retail sectors, where 30 to 40% of the
outstanding bank loans are linked to property.
SME owners with loans for the main family residence are less likely to
default compared with firms with no property debt.
SMES are defined as firms with less than 250 employees and whose turnover does not exceed €50m or whose annual balance
sheet does not exceed €43m.
The SME lending
volumes are dominated by the Real Estate sector,
which accounts for €29.8bn of the €67.6bn of total lending. The Financial Intermediation sector is
the second largest sector, with €11.6bn of credit
The economists remove the Real Estate and Financial Intermediation sectors, and plot the same
data for the remaining sectors, which they refer to
as comprising the "real economy."
These are firms whose primary business activity does not relate to property investment.
The economists say 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 also more likely to be involved in property borrowing, with
25% of firms employing more than 50 people having property exposure, as opposed
to 17% of micro firms defined as employing less than 10 people.