A Government agency set up to boost lending to small house builders is now ploughing tens of millions of euro into developments being constructed for cuckoo funds.

The State’s Home Building Finance Ireland (HBFI) was formally launched in 2019 to provide loans to small building firms that lacked the equity to get loans from banks or other private sector lenders.

But since the Covid crisis, HBFI has earmarked €300m to large-scale developments that have been squeezed for funding, including funding large-scale apartment schemes targeted at the private rental sector (PRS) or cuckoo funds. 

According to a review of the agency for the Department of Finance published last night, builders and industry sources surveyed as part of the review said using the fund to back large-scale rental developments could make it harder for builders to get schemes aimed at ordinary buyers off the ground.

The review noted: “Some other respondents also raised concerns that available finance was being directed towards social housing and private rental sector developments, as it was perceived as less risky for funders at this time creating a more acute gap for build-for-sale projects.”

After switching tack last year, HBFI’s largest deals now include €74m to held fund the upmarket Green Acre Grange apartment scheme in south Dublin, which is being developed by Marlet. The 253-apartment scheme in Dundrum is primarily aimed at the private rented sector (PRS), meaning few of the homes will be available for ordinary buyers.

HBFI was launched with an initial loan fund of up to €730m – enough to provide funding to help with the construction of up to 7,500 homes over five years. It is funded by taxpayers via the Ireland Strategic Investment Fund.

Following the outbreak of the Covid pandemic, HBFI added a second pot, dubbed the Momentum Fund, to provide finance for larger prime residential projects that were experiencing difficulties in accessing finance.

According to minutes of a HBFI board meeting last year, chief executive Dara Deering warned that there could be “reputational risk” if it backed private rented scheme developments at the expense of the small builders it was set up to help.

“If HBFI does fund certain PRS schemes, it must ensure that it can continue to fund its core products so that funding continues to be available for all viable schemes,” she noted.

In the review published yesterday, HBFI said the fund is “not intended to compete with or replace” its original targeted market, but to “offer debt to lower-risk exposures for a temporary period addressing a need in the market”.

Funding of €300m has been made available to that fund “for a limited period”, noted the HBFI review. It did not say how long the fund will be available.

The Irish Independent reported last week that well-funded cuckoo funds are spending an average of €53m per week to buy up housing estates here, mostly in Dublin, but increasingly in the capital’s wider commuter belt.

In many cases, forward purchase agreements are being used to secure whole schemes off the plans.

The Irish Institutional Property (IIP) group, whose members include private equity groups and developers, has insisted that without its members’ investment in Ireland’s housing market, the objective of tackling the housing shortage could be set back by “decades”.