Paddy Burke (Fine Gael)
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I welcome the Minister for Finance, Deputy Noonan.

Marc MacSharry (Fianna Fail)
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I thank the Minister for taking the time to deal with this motion. I did not believe that it would be him who would be present.

This motion is in connection with the Ireland Strategic Investment Fund, ISIF. As the Minister undoubtedly knows, part of the Government's two-pronged approach in the budget to the housing crisis was NAMA's programme to build a certain number of houses between now and 2020. Being from outside Dublin, I am concerned that some 90% of those houses will be in Dublin. It is not that Dublin does not need housing. However, more houses are needed across the country as well. We have heard this on the news constantly in recent weeks.

The second part of the approach is the ISIF offering loans to encourage investment through the private sector with a view to starting residential building throughout the country. Under the management of the National Treasury Management Agency, NTMA, the ISIF has joined together with KKR to establish Activate Capital, which allegedly will focus exclusively on lending to the Irish residential sector.My concern about this is that the interest rate to be charged is as high as 14%. While that is consistent with what some of the commercial high street banks are seeking, and they are only prepared to lend up to 60% or maybe in some instances 70%, Activate Capital may consider lending up to 90%. That loan-to-value ratio would certainly be positive, but a rate of 14% is prohibitive in a market where we are not getting enough product out. I never thought I would say this, but we probably do not have enough active developers out there at the moment. Some fellows are caught up with NAMA or bankruptcy, while others are finished because their credit ratings are down and so on. That aside, however, even to encourage or breed new developers at 14%, it is not at a rate or terms that are now necessary to kick-start the market.

Can the Minister clarify whether, in fact, the rate is as high as 14%? If so, can it be revisited through the National Treasury Management Agency and its work with KKR? While we certainly want a return for the taxpayer in terms of the €500 million to be invested here, we also want to be strategic about it and ensure that we get the desired output. We do not just want to make profits for the NTMA or KKR, the private sector aspect to the fund; we also want to see housing built and developments throughout the country, whether in Limerick, Sligo or with additional resources in Dublin where we know they are much needed. It will be done at rates that take a margin for the State but also make it sufficiently attractive to breed new development and new developers to get much needed housing throughout the country.

Michael Noonan (Limerick City, Fine Gael)
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I thank Senator MacSharry for raising this important issue. Senators will be aware that Activate Capital, known as Activate, is a new and innovative non-bank financing platform that has been established by the Ireland Strategic Investment Fund, ISIF, and the global investment group KKR. Activate Capital will invest on a commercial basis in residential development projects in Ireland, which will help to address the current supply shortages in the main urban centres. Activate is focused exclusively on lending to Irish residential projects and will target, in particular, new residential development in the greater Dublin area, Cork, Limerick and Galway, all of which have been identified as the areas of greatest demand. However, outstanding activity is not confined to those locations.

Activate is a €500 million fund, which is financed through a €325 million loan note provided from ISIF and a €175 million loan note provided from KKR. The ISIF's investment is fully consistent with its mandate to invest on a commercial basis to support economic activity and employment in Ireland.

The €500 million represents the peak funding outlay at any one time, but as borrowings are repaid this will create additional lending capacity over and above the original €500 million. It is estimated that Activate will, in this way, be capable of financing the construction of over 11,000 new homes in Ireland.

This is clearly a very important initiative given that new housing output continues to fall short of demand. It should be noted that, in addition to its direct impact, Activate is also introducing competition to the market for development financing and should, in this way, result in more competitive and attractive terms for borrowers across all lenders in the real estate sector.

House building of the scale envisaged under the Activate initiative is expected to support approximately 1,900 direct and indirect jobs in the house building sector, which will further underpin measures that have been introduced to return construction output and employment in Ireland to more sustainable levels so that it is capable of meeting the growth needs of the Irish economy.

Activate uniquely will provide up to 90% of project funding and will provide funding for both the acquisition of land and to bring projects through the planning process. Irish banks will currently not lend for site acquisition or to fund project design and planning processes.

It is useful for Senators to note that Activate also offers the advantages of both deliverability and speed of execution. The Activate model is capable of substantially quicker credit turnaround times than average timeframes currently in the market place given the requirement, typically, for project promoters to deal with more than one lender and sometimes multiple lenders.

On the issue of lending rates, the ISIF informs me that the Activate base lending rate is in the order of 10% approximately. As would be expected for projects of this nature, there is participation in equity upside if projects are successful so that the fund, and by extension taxpayers, share in any gains alongside the project promoter.

The pricing for Activate facilities reflects the provision of up to 90% of overall development costs compared to typically up to 60% provided by the traditional bank capital, and the fact that it is, in effect, taking a combination of debt and equity risk. The alternative for project promoters currently is to seek debt and equity funding, if available, from a number of different lenders.

Marc MacSharry (Fianna Fail)
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I thank the Minister for that clarification. The base rate and actual rate are two different things. Sometimes the old bankers are very good at telling us the APR and so on. I ask the Minister to query it with his officials because I do have concerns that it is higher than 10%. Second, where possible, we should encourage more imagination in terms of taking equity in projects and maybe letting finance out there a little bit cheaper. It will be better for the State as well. It is not to make profit for developers but ultimately to get activity in the market so that we get what we want, namely, housing for people.

Michael Noonan (Limerick City, Fine Gael)
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The strategic investment fund is obliged by law to lend commercially and get a commercial return on its lending. The base rate is 10% but in individual projects the rate would be higher than that. In addition, if one has a successful project and allows for the fact that there is participation in profitability because they are providing equity, it grosses out at around the figure the Senator mentioned. However, we will keep it under review. The decision will be for the fund itself and for the NTMA ultimately, but they know the situation and they are not in the business of trying to make enormous profits. They simply want to lend commercially to provide the kind of credit facilities that are necessary and we now have.