(Bloomberg) -- The large share of Irish commercial real estate held by property funds could amplify market stress if those funds are forced to sell assets during a downturn, the country’s central bank has warned.

“Irish property funds with high leverage or significant liquidity mismatch can amplify market stress,” the bank’s Financial Stability Review 2024 cautioned. “In some cases, Irish property funds borrow from domestic banks, creating an interconnection between segments of the domestic financial system.”

The Central bank estimates that the value of commercial properties connected to entities under its regulation and supervision comprise between €55 billion and €60 billion, of which €29 billion is held by Irish property funds.

Irish commercial real estate prices sharply fell in the aftermath of the pandemic when working from home increased, meaning the need for office space dropped. That has had an acute impact on Ireland, a small open economy that hosts an outsized number of multinationals.

Valuations in commercial real estate are down an estimated 27% since late 2019, the report said. The Dublin office market has seen one of the largest increases in vacancy rates in Europe, said the review.

The impact of the downturn on the financial system has been “contained to date,” Central Bank Governor Gabriel Makhlouf said on Tuesday, pointing to resilience in the domestic banking sector and diversification of non-bank financing sources.

Domestic banks now have a more diversified loan book making up a smaller share of their total balance sheet, a deliberate post-2008 move. Much of the financing this time around has been provided by private credit firms.

“Looking ahead,” the report said, “there remains significant uncertainty over the market outlook, stemming particularly from structural developments in the office sector and the risk that financial conditions could remain tighter for longer than currently expected.”

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