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Archive for February, 2010

So says Patrick Honohan, governor  of the Central Bank of Ireland this morning in Cavan. Indeed there are very qualified people in NAMA and NAMA will be advised by the top players in the property industry. How though can you have “fair and honest valuations” when the markets have largely seized up and where there appear to this author to be significant signs that prices are being propped up consistent with market manipulation –

unspecified overhang of unsold residential property (300,000 – NIRSA, >300,000 – UCD). The NIRSA study leaves open the possibility that vacant homes are being hoarded or withheld from the market until prices improve. The UCD study may shed more light on the subject of hoarding

deferral of recovery actions on residential property (>30,o00 mortgages restructured). Yes banks are bring socially altruistic and of course what is the point of putting repossessed distressed assets on the market now when the last available statistic is that prices dropped 3.6% in December 2009.

mortgages being denied below certain levels to deter purchases of cheaper housing. I do not have accurate statistics on trends or position but it is fair to say that there are a substantial number of properties at the €100,000 asking level or thereabouts on DAFT which would not qualify for mortgages from many banks because they are too cheap.

deferral of large scale commercial recovery actions which might lead to distressed property appearing on the market

In addition,

deferral of implementation of Register of actual land and property transaction prices which might obviate estate-agent puffery – this was recommended by the Kenny Report in 1973 and has been promised for some time. 36 years later we’re still waiting.

It will be post-April 2010 when the population figures are released for 2009/10 and of particular concern is migration which turned negative last year for the first time in 15 years and has anecdotally accelerated since then. I’m betting on a population reduction, the first since 1990.

I would again call on FG to lobby to have the first tranche of loans pared back and a quick review of the valuation methodology and modus operandum of NAMA to ensure value for money for taxpayers.

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Ever been to a Milano restaurant? I have and think they’re a pretty good quality and reasonably priced restaurant group with very good service. However I was more used to going to Pizza Express restaurants  (as the Milano brand is known in the UK). Same food, exact same food, same good quality but the prices are apparent 20-50% lower than in Ireland. Here, compare the two menus and see for yourselves (I used an exchange rate of GBP 1 = EUR 1.15).

Milano

http://www.milano.ie/our-food/mains.aspx

Pizza Express

http://www.pizzaexpress.com/our-food/mains.aspx

Why the difference? Here's what the National Consumer Agency had to say

"A number of factors can affect the total price that a consumer is asked to pay for products
or services in different markets, for example, VAT and the costs of doing business in
different markets.

Where there appears to be an unacceptably large difference between the sterling
and euro price of a product, if the option is available consumers should choose to
buy elsewhere, having informed the retailer that the difference in price is unacceptable
to them.

There is no price control in Ireland, apart from certain limited areas such as utilities
and postage. Government policy in relation to prices is one of encouraging
competition, price transparency and the promotion of greater price awareness among
consumers."

I am reminded of our rents today as we learn that 80% of the 2500 licensed restaurants
operating in the country are operating at a loss and the owners are blaming 

1. Rent
2. Wages
3. Local authority charges including waste

How much longer than these 2000 restaruarnts continue to trade at a loss
and how soon will their vacated premises be offered up to the market?

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Well new private sector housing completions in developments fell of the cliff to 149 in the entire month of January, comparing with say 8000 during the boom,is there a concern that we’re not building enough homes for our population and that prices should maybe start increasing??? Homebond which shares it address with the Construction Industry Federation only registers private sector housing. It only registers multiple housing completions – not one offs.

The government estimated about 10,000 housing completions in 2010 and we are still some way off seeing whether that figure will be reached – by the way we don’t know the number of public sector and one-off houses completed in January so we may well be on track. Getting hard information in the State untainted by someone’s vested interest is a challenge.

I also look forward, perhaps this week, to the publication by UCD of its report into vacant property in the State where we are likely to learn there are well in excess of 300,000 vacant properties.

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We know that Enda Kenny, the man who revitalised FG after the disastrous 2002 general election, is a fan of the Mayo Gaelic Football team. Using a football analogy therefore, why is the entire FG party on the 65 metre line staring at Senator Eugene Regan (FG’s Agricultural specialist) making all the running up to the far goal with his two EU submissions?  Okay, the submissions are likely to be rejected but should he not get a little more support,though if by chance the submissions are upheld (even in part) you won’t be able to hear yourselves think with the deafening thunder of the FG party running up the field to partake in the glory.

Maeve Dineen in today’s Irish Independent attempts to go back to basics and ask about NAMA’s function and how abysmally it is thus far delivering. She claims to describe the purpose of NAMA as “to quickly save the banking system in a fair and transparent manner so that the banks could begin lending once again”. Well, if we had a functioning Opposition they would have demanded detail from the government, metrics, SMART (ER) objectives and the Opposition would now be testing Government policy against reality and perhaps getting kudos for it.

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Take a look at what rent allowance you can receive from the Irish State – a single person can get €94 per week or €407 per month (4.33 weeks in an average month) for the counties Longford, Westmeath, Laois and Offaly for example. And if you were to look at DAFT right now for Offaly and 1-bedroom apartments you would see 8 results which range in price from €350 to €560 per month – €500 would appear to get you a well furnished and decorated apartment. These are asking prices on DAFT and even in the present market where some Dublin City Centre apartments are showing signs of rent rises, discounts of 8% are well-achievable.

So take 8% off a €500 rent and you have €460 per month versus a rent allowance of €407. To this author it is very difficult not to conclude that rental prices are being propped up by government.

UPDATE: March 16th, 2010. Labour TD Joan Bruton tabled a question in the Dail asking about the government’s plans for the  level of rental supplement. Her question (search for 5546/10) from 3rd February, 2010 can be seen here and in brief the response from Deputy Hanafin was that the allowance was the subject of a report in March 2010 and that the use of the allowance to distort the marketplace would not be permitted with an implication that the present level of rent supplment may be at risk.

UPDATE: 5th September, 2010. The Sunday Tribune reports that Friends First economist and FG councillor Kieran Dennison claim that the €500m being spenteach year is in fact propping up and distorting the rental market.

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Let me quote you a paragraph from Fintan O’Toole’s excellent book “Ship of Fools”

The main reason for this [the runaway property inflation between 1994 and 2007] was the price of building land, which in turn was heavily influenced by what the Oireachtas All-Party Committee on the Constitution referred to as the fact that ” certain landowners had accumulated large landbanks at the outskirts of urban areas which they then released in dribs and drabs in order to manipulate the market and artificially to maintain high land prices”. Essentially a small number of very wealthy land speculators was able to shape the market in such a way as to ensure that the cost of buying the land it stood on made up a larger and larger proportion of the cost of a house”

If the Oireachtas Committee is correct (seems like a good enough judge of fact to me), then might such market manipulation be possible, nay probable, again? Could the social altruism of banks restructuring mortgages on 30,000 properties, the overhang of 300,000 vacant properties, the unsustainable lending margins of Irish banks (now at about 1% compared to 3.5% a few years ago), the lack of recovery actions by the banks on big developers (there have been some but compared to the size of the loans, it’s but a drop in the ocean) – with all of this could we be seeing a manipulation of the market ahead of NAMA’s point of no return?

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Yesterday came the absolutely horrifying news that “DEVELOPMENT LANDS in Athlone, Co Westmeath, valued in 2006 at €31 million have a current value of €600,000, Bank of Ireland told the Commercial Court yesterday in a dispute with a developer over unpaid loans.”, a 98% fall in value and if banks had advanced the average NAMA-estimated LTV of 77% then the bank would have lent €24m and even with a 15% “long term economic value” built in the haircut would be

current value  €600k

LTEV 15%        €90k

Consideration to be paid to the bank   €690k

Gross value of bank loand (assuming no rolled up interest)  €24m

Haircut €23.310m or 97%

It is likely that there is rolled up interest so the haircut is likely to be more than 97% in this case! I’m sure the banks are praying this is an isolated case and not generally applicable to NAMA loans!

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Yes many years ago when I was a child and was dragged into “Bruiser” Smith barbers, you would choose the severity of haircut. These days the “haircut” has entered the Irish economics lexicon as the discount to be applied to bank loans (including rolled up interest)  and the result is the consideration to be paid to the banks for their loan – to illustrate by reference to the overall figures last September 2009.

Original Asset Values underpinning loans   €88bn

Original loans advanced (at 77% LTV)          €68bn

Rolled up interest on the €68bn loans           €9bn

Loans plus rolled up interest                             €77bn

Haircut at 30%                                                         €23bn

Consideration being paid by NAMA              €54bn

(Comprising current asset values                  €47bn plus

Long term economic value)                            €7bn

Last night in London, Enda Kenny TD and leader FG and many say Taoiseach-in-waiting said that anything short of a 40% haircut would be “outright theft”. So with a 40% discount, NAMA would be paying €46bn and if you were to take away 15% for “long term economic value” then the asset values would be €39bn.

On the other hand we learned in the media yesterday (where else, the Opposition don’t have the information) that a discount of 50% may be applied to Anglo loans which if repllicated across the other banks would mean NAMA paid out €39bn and the asset values were €33bn.

Indeed Senator Regan has called for deadbank and performing loans to be excluded which would reduce the original €54bn to €25bn.

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Last night at at the BT Centre, St Pauls, London at the inaugural London Irish Business Society presentation which dealt with NAMA, Enda Kenny gave a 45-minute speech on NAMA and said that the first loans would be transferred “in the next couple of months”. Today the Irish Times said the EU were expected to give approval “within weeks”. All that lies between approval and rejection it would appear is Sr Eugene Regan’s submissions. Also of interest last night are FG’s five proposals surrounding NAMA.

1. Hold a full Inquiry into the collapse of Irish banks.

2. Never allow this crisi to re-occur

3. Play hardball with the banks – no more investment (recapitalisation) until bondholders accept losses.

4. Minimise tax-payer exposure to NAMA – quote ” any discount of less than 40% will be outright theft”

5. Create a National Recovery Bank (cf France) to support lending conditions in the State.

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NAMA has become a valuation altering “event” which must keep NAMA valuers awake at night. Today, top 10 developer Bernand McNamara says that the “unknown impact” of NAMA makes it impossible to establish what property assets are currently worth in the Irish market.

Add to that, general worldwide economic uncertainty and the lack of transactions have made it “impossible to establish any meaningful or appropriate valuations for property-related assets” according to Mr McNamara’s companies.  And given the prominence of Mr McNamara’s loans in the first tranche of loans being transferred to NAMA this must be causing not inconsiderable stress at NAMA.

Speaking as a former valuer, I would be delighted to see the methodology used in the first tranche of loans. In fact I would like to see the first tranche of loans reduced to under €1bn and then see the process openly reviewed to ensure oversight and best practice in what is rapidly becoming a very secretive organisation.

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