Property debt hits relatively few SMEs

Property-related debt among SMEs is concentrated among a relatively small number of firms, which have much higher default rates than the industry average, according to the Central Bank.

The issue of SME debt has generated considerable media coverage since UCD economics lecturer Morgan Kelly said last March there was a huge quantum of property losses sitting on the balance sheets of the banking system that would topple the economy.

He argued there was €56bn of SME debt and roughly half of this related to speculative property loans. Moreover, following the ECB stress tests later this year, the banks would be forced the turn the screw on SMEs with high debt levels, which would trigger a wave of business failures and result in spiralling unemployment.

The Central Bank, in a research paper written by Fergal McCann and Tara McIndoe-Calder, underlined the importance of the SME sector to the economy. Of 1.2m private sector workers, 69% are employed by SMEs.

However, it found that outstanding loans to the SME sector stood at €67.6bn. But €29.8bn of this relates to the real estate sector and a further €11.6bn is accounted for by financial intermediation firms. Consequently, there is €26.2bn of SME debt owed by firms in the “real economy,” says the Central Bank.

Overall, the Central Bank economists found that cases of extremely high indebtedness were concentrated among 10%-20% of the SME population. Moreover, non-core property related debt tends to be held by bigger SMEs. Roughly 20% of SMEs have exposure to property debt and 23.6% of SME loans are linked to property exposure, although this increases to 43.2% when weighted by value.

Firms with high levels of property debt have loan default rates running at 43%, which is almost twice the rate for firms without property debt, which is 23%. The sectors with the highest default rates are in construction and the hotels and & restaurant sectors.

The director of the Small Firms Association, Patricia Callan, said: “The evidence shows the need for the Government to introduce innovative measures to enable the separation of the core business debt from property-related debt to ensure that viable trading small businesses are able to access the necessary finances to continue to grow and develop.

“The primary principle should be that where the business is a viable trading entity, it should be protected, and the jobs saved. Measures such as the separation and parking of the property debt; conversion of bank debt to refundable preference shares; other equity injections through enhancing the EIIS, etc. should all be examined to enable the continued financing of the viable business,” Ms Callan said.