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Archive for April, 2011

Figures released by the Central Bank of Ireland (CBI) this morning for the month of March 2011 show that the flight of deposits from Irish banks shows no sign of slowing down. From an Irish perspective, possibly the most significant figure to watch is the total of private sector deposits in the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS). The total which represents businesses and households fell to €106.3bn in March 2011 from €108.6bn in February 2011 and is now down €23bn from a year ago, €11bn since the IMF/EU bailout in November 2010 and €2.3bn down over the course of just one month. The CBI and ECB continue to provide substitute funding for Irish banks which replaces this flight of deposits and Irish banks continue to provide extensive State-backed guarantees on deposits. It remains to be seen if the pace of decline in deposits slowed after the bank restructuring announcements made after close of business on 31st March, 2011 – Minister Noonan indicated the early signs were encouraging but since then our sovereign bond yields have sky-rocketed again.

So, looking at the deposit figures produced by the CBI. First up is the consolidated picture for all banks operating in Ireland including those based in the IFSC which do not service the domestic economy.

Next up are the 20 banks which do service the domestic economy and include local subsidiaries of foreign banks like Danske, KBC and Rabobank. There is a list of all banks operating in Ireland here together with a note of the 20 that service the domestic economy.

And lastly the six State-guaranteed financial institutions (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS)

(1) Monetary Financial Institutions (MFIs) refers to credit institutions, as defined in Community Law, money market funds, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. Since January 2009, credit institutions include Credit Unions as regulated by the Registrar of Credit Unions. Under ESA 95, the Eurosystem (including the Central Bank ofIreland) and other non-euro area national central banks are included in the MFI institutional sector. In the tables presented here, however, central banks are not included in the loans and deposits series with respect to MFI counterparties.

(2) NR Euro are Non-Resident European depositors

(3) NR Row are Non-Resident Rest of World depositors (ie outsideEurope)

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Take a look at the recent history of the financial performance of the Discretionary Fund in our National Pension Reserve Fund (NPRF), taken from the 2009 Annual Report

The Discretionary Fund is to be distinguished from Directed Investments which are investments the NPRF is directed to make by the Minister for Finance and have particularly applied to recent investments in the banks.

Add in the 11.1% return in 2010 on the Discretionary Fund and we have a simple total return of 45.9% over 10 years or a simple average of 4.59%. Hardly spectacular but we are assured by the NPRF that it has outperformed the average of private Irish pension funds during that period.

So a simple average return of 4.59% per annum. Yet this morning, the return on our 3-year sovereign bond is 12.4%. Sovereign bonds are one means by whichIreland borrows money so that it can fund the annual budget deficit (the difference between what the government takes in tax less what it spends, mostly on the public sector and social security). There has never been a suggestion, not even by Sinn Fein who possibly take the most contrarian view on bonds, that we should default in any way on our sovereign debt. That being the case, you might have thought that whatever funds we have left in the NPRF might be more productively used in buying our 3-year bonds (I have chosen three years because it is medium term debt – longer and shorter term funding is generally yielding returns in the same ballpark). After all, we would see a guaranteed return which was some 200% more than the simple average return achieved by the NPRF in the past 10 years.

The Irish Independent today reports thatGreece has been doing exactly as suggested above – buying back its own bonds, to the tune of €2.3bn since the start of this year. The Independent goes on to report “last night, National Treasury Management Agency sources said thatIreland had not made any such purchases this year.” It is unclear, to an extent, how much cash the National Treasury Management Agency (NTMA, responsible for managingIreland’s debt and associated functions, including the oversight of the NPRF) has to play with at present. Our Minister for Finance, Michael Noonan seems to be performing the dance of the seven veils with recapitalizing the banks, which our stress tests last month showed would require €24bn. Possibly the Minister sees delaying the injection of the €24bn as one of the few remaining aces in Ireland’s hand as the country seeks to renegotiate the interest rate and terms of the bailout funding. However it would seem that we have a few billion euros available, at the very least.

So at the current rates, should the NTMA be buying Irish bonds? If not, at what rate does the purchase of Irish bonds become irresistible? 15%? 20%?

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The rationale for the decision by NAMA to appoint accountancy firm Grant Thornton as receivers to companies controlled by NAMA Top 20 developers, Ray and Danny Grehan, is slowly becoming apparent. Yesterday the Irish Independent claimed that NAMA had tried to install a non-executive chairman to Glenkerrin as a condition for the continued co-operation from the agency. And today the Irish Times reveals the identity of NAMA’s man – Harry Slowey (pictured here). The reporting suggests the Grehans were not happy with the appointment though it seems the matter did not get as far as to be discussed by the Glenkerrin board, Glenkerrin being the flagship company owned by the twoGalway developers.

Harry is a fellow of the Instituteof Chartered Accountants in Ireland. He is currently the chairman of Barnados charity in Ireland. He was a director of Bank of  Scotland (Ireland) for 13 years until he stepped down in 2006. He has held “senior positions” in the Guinness Peat group and KPMG. He is currently a director of Dublin-based financial services company, FinanceOne. He is a non-executive director of the Thornsett Group, the Irish owned property development group, which in 2006 had schemes in development valued at €400m inIreland, theUK and Belgium.

The NAMA tactic of forcing developers to employ a NAMA-selected individual slipped below the radar on here. In January 2011, the Irish Times reported that NAMA might seek a role in approving the appointment of staff at developers’ companies, but that seems to be weaker than its present position of apparently forcing the appointment of a specific individual.

Presumably at the root of the NAMA tactic is the desire to ensure that NAMA’s financial interests are protected. In the Grehan case, it seems that in addition to the reported €650m currently owing by the brothers, there was a request for additional funding by the Grehans from NAMA to complete an extension to the Crowne Plaza Hotel in Shoreditch in east London. So NAMA has a very clear interest in ensuring the Grehans delivered on whatever plan was agreed.

NAMA’s reported choice of the role of “non-executive chairman” for their appointment seems puzzling as chairmen are typically removed from all but the most significant decisions of the company. Why didn’t NAMA seek appointment to the Finance Department or an executive directorship? Also puzzling is how NAMA justifies the appointment of any individual unless there has been some competition for the role.  And as there was no advertisement for the role on the NAMA website, how can NAMA ensure it has secured the best person for the role?

UPDATE: 29th April, 2011. A NAMA spokesperson has stated that the appointment of Harry Slowey as chairman was in fact agreed by the Glenkerrin group, which is at odds with the reporting in this morning’s Irish Times. It is also worth pointing out that FinanceOne where Harry is presently a director has an existing relationship with NAMA. According to NAMA’s tenders, the agency appointed Finance One (sic) Limited to provide services in connection with the review of developers’ business plans. This is confirmed on the FinanceOne website which says “FinanceOne Ltd has been appointed to a panel for the provision of Advisory Services in connection with the review and evaluation of Borrowers’ Business Plans to the National Asset Management Agency (NAMA).”

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The Jones Lang LaSalle (JLL) report published yesterday showed that both capital values and rents were still declining in Ireland, though based on the experience of one quarter, the declines were moderating. There is a competing commercial property series for Ireland produced by Investment Property Databank (IPD) and the Society of Chartered Surveyors in Ireland (SCSI, the newly merged unit which brought together the old Society of Chartered Surveyors and the Irish Auctioneers and Valuers Institute) and it has been published this afternoon and is available here. This blog uses the JLL reporting to produce the NWL Index at the top of this page because it is usually published before the SCSI/IPD’s. Both series are referred to in NAMA’s Long Term Economic Value Regulations (Schedule 2).

The SCSI/IPD index confirms prices are still dropping, at 2.3% overall for the quarter which ended on 31st March, 2011. This compares with JLL’s own reporting yesterday which suggested prices were down 1.5% in the quarter. I haven’t tracked the SCSI/IPD index historically but I believe it would show we are now down by ~62% from peak, compared with 61% with JLL’s index. So over time, both indices show a strong correlation with each other.

The SCSI last week published its Quarterly Commercial Property Review which reflected the views of its members on aspects of the commercial property market. The Review is a private publication for SCSI members and has been monitoring the market for the past five quarters. It showed that overall transactions volumes are dropping, as are enquiries. Vacancy levels continue to rise. Lease lengths are falling which might be considered good news for commercial tenants but inducements are also coming down. Of the three basic commercial segments (office, retail and industrial) it is the office segment which looks the most positive in the sense of transaction volumes increasing. Overall it paints a sector still facing challenges. And with an anaemic economic environment and uncertainty over Upward Only Rent Review legislation, it seems that the sector will remain challenging for the next quarter or two at least.

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Although the advertisement is not currently showing on the NAMA website under its recruitment section, the Irish Independent today reports that NAMA is, in fact, recruiting an unspecified number of “forensic managers and analysts” whose role will be to “verify and substantiate the credit standing of NAMA debtors”. The role will also involve liaising with unspecified third parties.

The roles will be based in Dublin and the principal duties are understood to include undertaking and overseeing “forensic and investigative searches to verify debtor credit positions”. The person specification for the role says that candidates are “likely to have a minimum of 3-4 years’ investigative/forensic experience”. Any prospective candidate must comply with section 42 of the NAMA Act which says:

“(2) Before employing or otherwise engaging a person to be assigned to NAMA under subsection (1), the NTMA shall ascertain to its satisfaction that the person—
(a) is of good character and has not been convicted of any offence likely to render him or her unfit or unsuitable to perform the duties that the person is required to undertake or is likely to be required to undertake,
(b) has not been disqualified or restricted from acting as a director under the Companies Acts, and (c) has no material conflict of interest, whether actual or potential

(3) Before the NTMA assigns a member of its staff to NAMA under subsection (1), the NTMA shall ensure that he or she provides a statement of his or her interests, assets and liabilities to the Chief Executive Officer of NAMA and the Chief Executive of the NTMA in a form that the NTMA specifies”

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News today that the Central Statistics Office (CSO) in Ireland is to start producing a new monthly house price series, will be welcome in a country where there is a dearth of real information on actual sales prices. The new series will be unveiled on 13th May, 2011 and will reportedly reveal data stretching as far back as 2005.

Details of the new house price series

(1) It will use data on mortgage draw-downs reported by eight financial lenders under Section 13 of the Housing (Miscellaneous Provisions) Act of 2002

(2) It will exclude cash transactions, though the CSO plans to include in the monthly release detail on the overall size of the residential property market based on Stamp Duty data supplied by the Revenue Commissioners

(3) The index will be hedonic, that is, it will take account of changes in price on a like-for-like property basis. The opposite of hedonic in an Irish house price series is the information published by the Department of Environment Heritage and Local Government which simply takes the sales prices of all property sold and divides that by the number of transactions to give you an average house price!

(4) There will be a monthly national index as well as three sub-indices (a) Dublin Houses (b) Dublin Apartments and (c) Rest ofIrelandHouses and Apartments

There is indeed a dearth of price information in Irelandwhich is preventing price discovery in what has been the collapse of an almighty residential property bubble. It is encouraging that NAMA is calling for the rapid implementation of a house price register , the legislation for which is wending its way through the Oireachtas at present but at a very slow pace.

The following are the current sources of house price information in Ireland at present

(1) Permanent TSB/ESRI quarterly mortgage-derived average prices. It’s hedonic, produced within a month of the quarter end but only applies to less than 4% of the mortgage market and excludes cash transactions.

(2) Department of Environment Heritage and Local Government series which is produced six months after the period end, isn’t hedonic but is apparently based on all mortgage transactions.

(3) DAFT.ie and Myhome.ie produce quarterly series based on asking prices from their property marketing websites.

(4) Sherry FitzGerald produces a quarterly series based on its valuation of a portfolio of properties.

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Britain’s Property Week today reports that NAMA has appointed property receivers to a major property in London’s Leicester Square. The property is the present site of the Odeon cinema and the adjoining Leicester Square Theatre which occupies a substantial part of the south western corner of Leicester Square. The site is owned by Steamboat Developments Limited, the Irish company to which NAMA appointed Kieran Wallace of KPMG as receiver on 25th March, 2011. Steamboat is most associated with rugby legend, Pat Whelan, his business partner Pat Chesser and solicitor Paul Hanby.

The site was assembled at a reported cost of GBP £58m and Property Week estimates that it might be worth GBP 200m (€225m) in its developed state. According to Property Week the site has planning permission for the development of a 245-bedroom hotel, 33 flats, four restaurants and a two-screen cinema. The planning application does not appear to be available online from Westminster City Council but an application in respect of an Environment Impact Study is available here.

The property receivers appointed are our new friends, Allsop, who ran a spectacularly successful auction inDublin’s Shelbourne Hotel two weeks ago. In the British context, Allsop are termed fixed-charge property receivers and the two gentlemen at Allsop handling the property are Jon Gershinson and Simon Davidson.

There is a little sting in the tail of this story. Property Week say that another company called Real Estate Resolutions bought part of the site in November 2010 and that the redevelopment cannot take place without the input of that company. Curiously Real Estate Resolutions which was founded by former Ballymore planning director, Tim Farrow, does not list the Leicester Square site as one of its developments on its website. Ballymore is Sean Mulryan’s company and the last I heard of Tim Farrow in connection with Ballymore was that he was suing the company for €4.5m after his dismissal.

UPDATE: 30th January, 2012. The property in Leicester Square has reportedly been sold to the Edwardian hotel group, no price has yet been disclosed. There is a press release by the NAMA receiver, Allsop, here. The Financial Times is reporting the site sold for “what is thought to be close to £100m”, which if confirmed,  would be considerably more than the GBP 58m thought to have been the cost of Steamboat assembling the site. The site is presently undeveloped and it has been estimated it might be worth GBP 200m in its developed state.

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