New research from the Central Bank has found that small businesses that borrowed money for property investment are almost twice as likely to default as similar firms without property loans.

In an economic letter published this morning, Central Bank economists say that at least a fifth of Irish SMEs have exposure to property.

The property borrowings of these firms account for one third of the outstanding bank borrowings of the SME sector, which suggests that larger borrowers are more likely to have property related borrowings. 

This echoes with earlier research which suggested that extremely high levels of indebtedness is concentrated in an estimated 10-20% of Irish SMEs.

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 40% 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. 

Indeed 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 16% of firms have property borrowings that account for 41% 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 €50m or whose annual balance sheet does not exceed €43m. 

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 €26 billion of outstanding loans to the SME sector.

Total SME borrowing is €67.6 billion, of which real estate firms account for €29.8 billion, while financial intermediation firms owe €11.6 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 25% of firms employing more than 50 people having property exposure, as opposed to 17% of micro firms - those employing fewer than ten people.