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Archive for July, 2010

The wide-ranging quarterly Central Bank report and forecast published yesterday contains some interesting nuggets on NAMA and Irish property in general. On NAMA, it publishes information on the first tranche which hasn’t been publicly seen before, namely a split of the first tranche loans between resident and non-resident borrowers and also gives the provision the banks held for the loans transferred. The information is on page 39 of the report and is summarised here.

Of note is that the writedown by NAMA on the loans (49.6% in total) comprises a writedown by the banks themselves (23.7%) and NAMA’s additional write-down (26.0% – rounded) – given that Anglo’s accounts were published on 31st March, 2010 and INBS’s accounts were published on 9th April, 2010 and they each contained the government’s recapitalisations announced on 30th March, 2010, it is indeed amazing that they were showing their provisions at such a low level – was it a case that the accounts were produced many months earlier and only amended for the government’s injections of capital – wasn’t there any attempt to show the imminent NAMA haircuts? As to the split between resident and non-resident, I’m not sure how much can be deduced. For information the following were reported by the media (not confirmed by NAMA and indeed Paddy McKillen’s spokeswoman has denied that Paddy was in tranche 1) as being the Top 10 developers in the first tranche – spot the non-residents!

Liam Carroll

Bernard McNamara

Sean Mulryan

Derek Quinlan

Paddy McKillen

Treasury Holdings

Michael O’Flynn

Joe O’Reilly

Gerry Gannon

Gerry Barrett

As to what the Central Bank say in their report on page 39 about the write-downs with respect to residents and non-residents they are talking rubbish – the figures show that the resident loans had greater write-downs at both the banks and at NAMA.

Elsewhere in the report the Bank predict new house registrations will be 12,000 in 2010 (at most) and 10,000 in 2011. Construction in the commercial sector is also seen as declining this year and next. On the economy the Central Bank are predicting an 0.8% rise in GDP in 2010 (GNP minus 1% in 2010) and a 2.8% rise in 2011 – for 2010 GDP this is considerably up on the recent ESRI scenarios which projected a -0.4% fall in 2010 (0% change in GNP). For GDP it is also up on the recent EU stress test which projected between -1.4% and -2.1%  for changes to GDP in 2010. The striking change to the GDP forecast for this year does will not it seem translate into a reduction in unemployment which is seen as averaging 13.5% this year and 13.3% next year. Wage costs are forecast to fall by this year by 2.7% before rising next year by 1.1%. Inflation is likely to fall by 1%-odd this year and rise by that amount next year.ECB rates may creep up marginally.

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The National Institute for Regional and Spatial Analysis (NIRSA), a university institute at the National University of Ireland at Maynooth set up in 2001 “to undertake fundamental, applied and comparative research on spatial processes and their effects on social and economic development in Ireland”, has produced a working paper which draws together much work undertaken by NIRSA on Irish ghost estates, overproduction of housing, planning and the Irish response to the banking and property crisis.

The working paper has received widespread media coverage, in particular its call for a specific inquiry into the property bubble and related planning issues. The paper examines the property bubble in particular from 2000 onwards, planning, overproduction, the property boom and bust. NIRSA received much coverage at the start of 2010 when its work on vacant residential property and ghost estates was published. It is noteworthy that NIRSA have revisited their estimates of vacant property and are now estimating just over 200,000 properties vacant (defined as base vacancy plus overhang), which places NIRSA somewhat below other studies such as UCD’s and DKM’s. Apparently the DoEHLG is in the process of counting vacant property and I would not be surprised if the results show that there is much less property that could potentially be made available for sale than the recent studies would imply – – according to research by Federcasa (the Italian Housing Association – used as a source in the recent UCD vacant homes study) in 2005/6, Ireland has had a vacancy rate of 10.2%  even back in 1991 (the source is credited to “National Statistical Institutes, Ireland and the DoEHLG”), it may turn out to be the case that the potential supply of vacant property that can be made available for sale might be in the area of 100,000 units – hopefully the DoEHLG will provide comprehensive statistics later in the year.

Of particular interest here is NIRSA’s consideration of NAMA, and NIRSA is cautious about NAMA’s operation and prospects. Although the report doesn’t introduce new data in relation to the operation of NAMA, it does draw together a number of concerns about how NAMA is operating:

Lack of transparency – this is a subject touched on by many previously including the Ombudsman and Information Commissioner, Emily O’Reilly – all calling for NAMA to be included within the Freedom of Information. The thrust of the NIRSA call for transparency however originates from a different angle and NIRSA want NAMA to share information on their assets to assist in the orderly planning of housing and infrastructure. This call echoes recent calls from local politicians and county managers for example in Cork and Westmeath. NIRSA also raise concerns over the way in which NAMA is valuing loan assets, stating “It is also not clear as to how valuations are being made and whether they take into account existing levels of oversupply and evidence-informed, long-term projections of an area’s demography and labour market.”

Risk of losing money – NIRSA highlight the fact that NAMA is controversially paying in excess of what property is worth today (more accurately what it was worth in November 2009) by paying the Long Term Economic Value. NIRSA point out “Land in areas of high surplus housing and/or over-zoning is likely to fall greatly in value and to stay that way for quite some time, limiting the ability of NAMA to realize any profit, especially if it is acquired for too high a value”. It is of course to be hoped that NAMA have conservatively valued property. NIRSA’s own study on vacant property in the State however was published after 10th January, 2010 and according to the NAMA LEV Regulation, any analysis produced after this date cannot be used in valuing the LEV. NAMA may be able to use a DKM study from September 2009 but that study did not indicate the location of oversupply. NIRSA also express a concern that NAMA may pay for property subject to zoning which may then be de-zoned.

The negative impact upon the existing residents of ghost estates by NAMA’s decisions regarding empty or partly built houses – firesales (might worsen negative equity), leasing for social housing (might concentrate social difficulties – “creating new Ballymuns” as one commentator remarked), hoarding (will mean that existing residents continue to live without neighbours). There is an appeal for NAMA to meet the civilized expectations of people trapped in ghost estates.

There is also an examination of the context which gave rise to NAMA and whether it is an “illogical logical” construct and NIRSA question whether in principle an operation like NAMA, which may seek to re-inflate the property bubble and protect what many would call elites, is really what Ireland should be doing at this juncture.

The main part of the paper however doesn’t deal with NAMA, it examines the context for our property crash and does so with clarity with rich supporting statistics. A worthwhile document that deserves widespread media exposure.

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Today sees the publication of the second Permanent TSB/ESRI QUARTERLY House Price Index. The index for Quarter Two (Q2) of 2010 tells us that the price of residential property has fallen nationally by 1.7% during the quarter. An average property now costs €201,364 nationally compared with €204,830 at the end of March 2010.

In % terms the indication is that the pace of price falls is decreasing overall as the drop in Q1 was 4.8%. However prices in Dublin are falling at a higher-than-national rate of 3.5% in the quarter though that is less than the 10.3% fall in Q1, 2010.

The National House Price index stood at 89.5 at the end of June 2010 with the average cost of a home being €201,364 (compared with €204,830 at the end of Q1). The last time it was at this level was in September, 2002. The following shows the national average house price since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

The Dublin House Price index stood at 80.1 at the end of June 2010 with the average cost of a home in the capital being €242,000 (compared with €250,872 at the end of Q1). The last time it was at this level was in April, 2002. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

The Outside Dublin House Price index stood at 94.8 at the end of June 2010 with the average cost of a home being €181,200 (compared with €183,309 at the end of Q1). The last time it was at this level was in January, 2003. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

So the key questions : are prices still falling? We don’t know the breakdown of the quarterly fall by month but it is certainly the case that prices have continued to fall on a quarterly basis since March 2010 and the rate of fall between Jan-Mar 2010 (quarter) was 4.8% compared with a fall between Apr-June 2010 (quarter) of 1.7%, so the pace of falls is decreasing.

How far off the peak are we? The national peak according to ESRI was in January/February 2007 when the index for both months stood at 139.5. Today’s figure of 89.5 for June 2010 indicates that prices have dropped by 35.8% from the peak. In Dublin, prices are 43.8% off the peak while Outside Dublin prices are 32.4% off the peak.

How much further will prices drop? Who knows, but here are the latest predictions and projections for residential property in the State – the spreadsheet with the sources for the data is here.

What does the index mean for NAMA? NAMA has chosen a valuation date of 30th November 2009 to value the Current Market Value of property. The NAMA Long-term Economic Value Regulations state that evidence produced after 10th January 2010 by the ESRI is not to be considered when evaluating future conditions in which the long term value of the property will be calculated. So on the face of it, given the fact that residential property has fallen by 9.8% from 30th November 2009 to 30th June 2010 and assuming NAMA pays 11% over the Current Market Value for the Long Term Economic Value of the loans  then this would indicate a recovery of 23% is required so that NAMA can break even and of course that ignores any further falls after 30th June 2010.

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The first entry on this blog in January 2010 dealt with a projection of the State’s population. This was partly to work out the need for housing and place that need in the context of the then-recent revelations about the 300,000 vacant houses. And since that first entry, the subject has been revisited on several occasions eg here and here. This week Eurostat released its population estimates for all EU states and shows that Ireland had a net population increase of 6,000 in 2009.

Here is the history of our population from 1987 to the present, sourced from the CSO.

The CSO analyses change by reference to April each year. The Eurostat figures are by reference to the calendar year end 31st December. The Eurostat figures show the population increase in Ireland in calendar year 2010 to be 6,000. That is the smallest 12-month increase in population since 1990 when the population actually fell by 3,700. From the point of view of housing demand, and given that we have roughly 2.75 people per home in the State, the figures indicate that 2,180 additional homes will be needed. With estimates of vacant housing in the 35-350,000 range and with 6-15,000 new homes being built in the State, the projection of house prices, by reference to supply and demand, is that should the 2009 population characteristics continue, then prices will need come down substantially.

Another theme referred to frequently here is the fact that from the point of view of NAMA,  the Long Term Economic Value (LEV) Regulation forbids NAMA from using any analysis produced after10th January, 2010 when assessing LEV. Up to 10th January, 2010, the CSO were happily projecting on two migration scenarios – one that there would be nil net migration (net migration = immigration minus emigration) or that there would be highly positive net migration over the period to 2026. The CSO didn’t bother to even consider negative net migration. Of course the CSO produced their projections in 2008 before the full scale of the banking crisis became clear. However the DoEHLG adopted the projections and these projections have become the basis for the State’s Regional Planning Guidelines. They also determine future demand for housing and therefore are significant in determining the LEV of property. Which means that we risk overpaying for NAMA loans and NAMA making a loss.

Of course the Eurostat figures are for 2009. Might net migration reverse? Not according to the ESRI who (very late in the day) are forecasting large scale negative net migration upto 2015. My own view has been that the strong positive net migration between 1994 – 2008 (450,000) could reverse, particularly for EU-Accession States. For the next 10 years in Europe, will Ireland overperform or underperform the average with consequent impact on migration? Difficult to say, small open English-speaking economy with low corporate taxation and decent workforce versus the hungry central Europeans making up ground for 40 years of communism? Who knows, but the fact that the CSO didn’t even consider negative net migration was in my view reprehensible and may have the consequence of NAMA substantially overpaying for residential assets in the State.

And lastly why might the CSO figures show a population fall? The CSO population estimate for April 2009 was 4,459,300 and the Eurostat estimate is that the population at December 2009 was 4,456,000. What happened between January and April 2010? Difficult to say but anecdotal evidence would suggest emigration has continued at a high level – will natural growth between Jan-April 2010 less net migration be over 3,000? I would say the betting is against that.

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Unlike our own Permanent TSB/ESRI which takes a full 30 days after the period end to issue its (quarterly) House Price Index, the UK seems to have better data collection and analysis systems for reporting on house prices. The Nationwide Building Society has today published its July report. That Nationwide Building Society report is one of the referenced sources of information set out in the NAMA Long Term Economic Value Regulation and is a source for the key market data information shown at the top of this page.

The latest report from the Nationwide shows that prices in the UK fell by 0.5% in the month of July, the first decline in prices in since December 2009. The Nationwide attributes the fall to an increase in supply (the abolition of HIPs in June – the UK’s rough equivalent of the BER and sellers being tempted back into the market by a strong recovery in prices which has been evident since the start of 2009) and a decrease in demand (tight credit conditions and swingeing cuts to the public service and uncertainty about the economic future). The average price of a property in the UK today is GBP 169,347 (EUR 203,165 at GBP 1 = EUR 1.1997).

As for NAMA and its Valuation Date of 30th November, 2009 today’s report means that UK residential prices are up 4.04% since last November. The Minister for Finance has recently said that one third of NAMA’s assets are in the UK, though the Minister didn’t provide a split between residential and commercial.

What are the prospects for the future of UK residential? The recent EU bank stress test benchmark scenario has residential increasing by 2% for the full year 2010 which would indicate a 3-4% fall from prices today. Some commentators point to some future buoyancy in the market, particularly the London market, as a result of the Olympics. Others have forecast falls of 20% from current levels. Last week the UK’s GDP growth for the second quarter was reported to be 1.1%  which was seen as very positive. Although there are no suggestions of UK interest rate rises from the present 0.5% Bank of England rate, inflation is running at 3% which is above the BoE target. Interest rate rises might dent prices.

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It seems like an eternity ago when Luca Ascoli at Eurostat wrote to our very own Bill Keating at the CSO to provide the “preliminary” view of the treatment of NAMA bonds in relation to our national debt. And of course the decision was that NAMA bonds would not be added to government debt. It was only October 2009 when Eurostat wrote their letter but it might be worth revisiting the basis on which the judgement was made, and to examine what changes have taken place to Eurostat’s assumptions. In overall terms Eurostat saw the potential for losses at NAMA as low and gave the following in support of its conclusion:

1. “The presence of market investors is reassuring (those providing 51% of the equity of the SPV)” To what extent can the SPV investors be classed as “market investors”. Remember that all we know is that each of the following three groups has invested €17m into the NAMA SPV – an overall total of €51m which gives them 51% of the NAMA SPV equity. However we do not know what the anti-money laundering folk would call the “Ultimate Beneficial Owners” of the investments. Also although the final terms of the investment have not been published, they were previously reported have offered poor returns with risk.

(a) Irish Life Investment Managers “the asset management arm of Irish Life & Permanent plc. ILIM manages money on behalf of a wide range of clients from large multinational corporations, charities and domestic companies. Currently managing assets of in excess of €30bn”

(b) New Ireland Assurance “As part of the Bank of Ireland Group, New Ireland is backed by the Group’s resources and expertise. New Ireland is one of the leading life assurance companies in Ireland, providing for the future of hundreds of thousands of customers with easy to understand life assurance, pension, savings and investment products.”

(c) “group of clients” of Allied Irish Banks Investment Managers “is an autonomous, independently managed investment manager.  We specialise in the provision of discretionary investment management on behalf of a diverse client base.  AIBIM has been managing investment portfolios in Ireland, the U.S., Europe and Asia since 1966.”

2. “The price paid for the loans of banks are calculated from the value of assets already written down by the banks and then a 30% haircut is then applied on these book values. This so-called “LTEV – long term economic value”is paid for the assets which is assessed individually by the experts. The current market value is 15% lower than the LTEV but Irish authorities believe that under the current conditions the market values for properties are artificially low”. I wonder if this is an echo of the record-yield-levels-indicating-the-market-has-bottomed-out nonsense that Brian Lenihan was ill-advisedly spewing out last September 2009. Both commercial and residential prices have continued to tank in the State and even though there has been a modest recovery in the UK where supposedly one third of NAMA assets are located, it in no way offsets the disaster-zone that is Irish residential and commercial property today. Indeed the EU’s own benchmark (ie central or base) scenario used in its recent stress test of the banks was that there would be a decline in 2010 of 14% and 13% respectively in commercial and residential in the State and further declines in 2011. Eurostat must now know that NAMA has chosen a Valuation Date of 30th November, 2009 by reference to which NAMA is valuing assets. Eurostat must also be aware of the recent NAMA Business Plan and the fact that the plan is now to make a €1bn NPV profit, compared with €4.8bn last October 2009 when the letter was written.

3. “An important additional element – which Eurostat understands will shortly be introduced into the legislation – is a levy to be imposed on participating banks if the SPV were to have losses at the end of the operating period. The Irish authorities confirmed that under the new proposal, the participating banks have to pay a tax surcharge on their operating profits until the loss on the SPV is recouped.”  This important new element was given effect in the NAMA Act under section 225. However in practice given that Anglo, INBS and EBS make up the majority of the loans being transferred to NAMA and any SPV loss will be applied proportionately to the banks and given that Anglo, INBS and EBS will only survive with State-aid then in practical terms any loss the SPV makes will not be recoverable. So what do Eurostat make of this “important additional element” now?

It may be academic of course given our coaches and four drive through our budget deficit to GDP and debt to GDP requirements under the Stability and Growth Pact but in the interests of transparency should Eurostat not revisit its decision?

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The report and accounts for 2009 are published today in two parts – part 1 and part 2. In brief the DDDA turns in a loss of €23m for the year on top of a loss of €226m for 2008. The Irish Glass Bottle site bought for €412m by the Becbay consortium in which the DDDA has a 26% share was worth a total of €50m at the end of 2009 according to Lisney valuers, a valuation that has not changed at all since the end of 2008 – see page 20 PDF of part 2. This must be one of the very few Irish development sites not to lose value in the 12 months to the end of 2009! Lisneys are on NAMA’s valuation panel. Even though the valuation of the IGB site has remained constant, the DDDA has revalued other property downwards by €9m (from €43m to €33m approx). And that €50m valuation on the IGB site is subject to a few assumptions that might be far from being certainties. This is what the note to the financial statements says (page 43 PDF from part 2).

“The key assumptions used in the valuation as at 31 December 2009 were:

(a)The Draft Poolbeg Planning Scheme will be approved by the Minister for the Environment, Heritage & Local Government without undue delay and there will be no significant alterations in the adopted plan.

(b)The proposed scheme of development will comply with the density and use guidelines, as set down in the Draft Poolbeg Planning Scheme.

(c) no onerous soil contamination issues exist on the site.

(d) The standard inputs used in preparing the residual development appraisal, such as, inter alia, construction costs, rents, yields and estimated sales prices, are as at the valuation date, 31 December 2009.

The independent professional valuation report concluded that the market value of the Irish Glass Bottle development site as at 31 December 2009 was €50 million (2008: €50 million). The Authority has recognised its relevant share of the gross assets and gross liabilities of Becbay Limited as at 31 December 2009, resulting in a share of net liabilities of €75.1 million (2008: €74.7 million)

being reflected in the consolidated balance sheet.”

Loans associated with the IGB site continue to drain €4.4m interest from the DDDA each year. Furthermore Becbay still has ongoing operating costs of which the DDDA’s share is €0.4m per year so in total the IGB site continues to suck just under €5m from the State each year. Some other nuggets of misery from the report

1. The former chief executive, Paul Maloney, was paid €121,000 for 7 months work in 2009 and then a further €128,000 as payment in lieu of notice bring his remuneration to a total of €249,000 for the year.

2. The DDDA acknowledges legal issues facing it but “believe that these will be successfully defended and will not result in material liabilities for the Authority” – I wonder what Bernard McNamara would make of that.

3. The DDDA made an operating loss on continuing activity of €7m for the year.

4. Legal fees of €1.143m were incurred during the year on top of the €5.648m incurred last year. Marketing fees were €0.6m this year compared with €3m last year.

For a more detailed analysis of Becbay including the latest accounts, see here. For a detailed history of the Irish Glass Bottle site, see here

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