Archive for April, 2010

Today sees the publication of the first Permanent TSB/ESRI QUARTERLY house price index which replaces the old monthly index which was suspended following publication of the December 2009 index because of thin sales. The index published today tells us that the price of residential property has fallen by 4.8% since the end of December 2009 to the end of March 2010, ie an average monthly fall of 1.6%. The indication is that the pace of price falls is easing overall. The average price of a property nationwide is now €204,830. However prices in Dublin crashed 10.3% in the quarter which is worse than the 7.5% fall in Q4, 2009. The press release fromIrish Life and Permanent, Permanent TSB’s parent, is here.

The National House Price index stood at 91.0 at the end of March 2010. The last time it was at this level was in November, 2002  when it stood at 91.2. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec).

The Dublin House Price index stood at 83.0 at the end of March 2010. The last time it was at this level was in June, 2002 when it stood at 83.3. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec). The average price of a property in Dublin is now €250,872.

The Outside Dublin House Price index stood at 95.9 at the end of March 2010. The last time it was at this level was in March, 2003 when it stood at 96.3. The following shows the index since June 1999 at the end of each quarter (Mar, Jun, Sep, Dec). The average price of a property is now €183,309.

So the key questions : are prices still falling? We don’t exactly know because we only have a total movement for the three-month Quarter 1 and it’s not borken down by month so conceivably we could have had a 10% drop in Jan/Feb and a 5.2% recovery in March. However it is certainly the case that prices have, in overall terms,  fallen since December 2009. The fall in Q1, 2010 at 4.8% is less than the fall between Sep-Dec 2009 (quarter) of 8.5% – so in overall terms the pace of fall has moderated.

How far off the peak are we? The peak according to ESRI was in January/February 2007 when the index for both months stood at 139.5. Today’s figure of 91.0 for March 2010 indicates that prices have dropped by 34.8%.

How much further will prices drop? We’re at the bottom according to Brian Lenihan (again) on April 4th, 2010. If Mr Lenihan is not careful wags will rename the Government Buildings on Upper Merrion Street as “The Bottom” because he has now said on several occasions that this is where he’s at. Morgan Kelly indicated at the outset of the crash that prices may end up 80% off peak and as recently as November 2009 he was predicting further falls of 50%. David McWilliams thinks prices may have 45% to come off current prices before there is some sort of equilibrium between the sale and rental markets. Pundits at the start of 2010 thought prices would drop by a median of 9% in 2010 though that was generally packaged as a net of a fall during the first part of the year followed by a recovery during the latter part of the year. Morgan Kelly and David Macwilliams are arguably pessimists or realists depending on your viewpoint – apart from Mr Lenihan there have not been many loud cries supporting a rebound in prices to show  counterpoints. The ESRI indicate prices are 34.8% off peak – NAMAwinelake predicts a fall of 60%.

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, the fact that residential property has fallen by 8.3% from 30th November 2009 to 31st March 2010 would indicate a recovery of 20% is required so that NAMA can break even and of course that ignores any further falls after 31st March 2010.



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The Index has now been published – see main entry here.

Should be available later today if they are to keep to their commitment to produce in April the State’s only actual transaction price index. The monthly House Price Index was suspended following the publication of the December 2009 result (which saw a drop in residential prices of 3.6% in one month on thin sales). Comment and analysis including an exclusive downloadable spreadsheet will be available here. The link to the ESRI website House Price Index page is here.

Meanwhile one of the biggest auctions in recent times is taking place today in the Shelbourne on Stephen’s Green from 11am. 59 or so lots are up for grabs. The catalogue is here and the results will be here. (interesting that auction results don’t offend the Data Protection Act on disclosure of sales prices but other sales do!) Whilst there would normally be withdrawals of lots before such a large auction and some lots may not reach reserves and may be sold later and the word  “shilling” has a particular meaning in the context of  auctions, the results (although they should be treated with caution) should give some indication on prices. UPDATE: Preliminary results available at boards.ie indicate that there were 71 lots and only 6 were sold at an average discount of 7% on the AMVs, 26 were unsold where the average maximum bid/opening bid was 24% less than AMV, 25 attracted no bids/unsold, 14 were skipped/withdrawn – all in all, a washout.

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As we wait patiently for the ESRI/Permanent TSB to publish the new quarterly house price index (promised for April 2010), the tension mounts as we wait to see what has happened to actual sale prices since December 2009 when they dropped by 3.6% in one month alone which represented a 31.5% drop from peak values.

Recent reports on asking prices have indicated that prices are still dropping though at a more modest rate than previously. Certainly estate agents, CIF and others are talking about prices being 50% off the peak and indeed the ESRI might confirm that this is the case.

However there appears to be growing speculation that prices are about to take another tumble. Writing in today’s Irish Times, Jack Fagan cites property commentator Bill Nolan “The clear-out process is starting in earnest and the receivers and liquidators are getting fresh instructions daily – and you ain’t seen nothing yet.” He said that far from being an isolated incident, the recent fire sale of apartments in Mullingar indicates what receivers do.”

The Irish Independent carries an article today which suggests that activity is returning to manic levels as the receivers move in and as solvent developers lower prices to “realistic levels”. The article carries quite a few examples and features one where the asking price is now €125k compared with up to €300k three years ago.

And of course there’s NAMA who are apparently examining the first of the developer’s business plans right now and where there are indications that some property will be sold off sooner rather than later. The NAMA CEO told a recent Oireachtas Joint Committee on Finance and the Public Service that there had been many expressions of interest in putative NAMA assets. Although NAMA has not yet published its Code of Practices it is to be hoped that these first properties to be disposed of have adequate marketing exposure.

Whilst construction activity on new build homes continues at a modest rate, the immediate prospects for property prices don’t appear healthy. We should soon see the scale of emigration in 2009/2010 when the CSO publishes its annual population estimates. We have a large number of vacant properties for sale (estimates of between 35-350k). Calls for more wage reductions, rising inflation, interest rates, water and property taxes (or at least speculation about their introduction), at least €3bn to come out of the November 2010 budget would appear to tower over the good news from the increase in exports and the widespread predictions that the economy will return to growth at some point this year.

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Yesterday whilst presenting the annual report of the Office of the Information Commissioner, its head, Commissioner and Ombudsman, Emily O’Reilly articulated why she disagreed with the decision to exclude NAMA from the Freedom of Information legislation. She characterised bringing NAMA  within the remit of the FoI as a “no brainer” and spoke clearly about how NAMA might benefit from public trust and confidence whilst still being able to retain the confidentiality of commercial details of its operation.

Whilst researching a forthcoming blog entry comparing asset management companies and impaired asset schemes internationally, the experience of Securum (and its brother Retriva) in successfully bringing an end to the Swedish financial crisis in the early 1990s has been eye-opening.

In the early 1990s Sweden, Norway and Finland had a regional financial crisis which in Sweden’s case was caused by a property bubble and lack of regulation. Sweden sprang  into action and founded two companies, Securum and Retriva, to deal with banks’ toxic assets and to recapitalise the banks (the latter role makes the Swedish companies distinctly different to NAMA whose only remit is to acquire land and development loans and manage the loans and any consequential assets). In 5 years Securum, the main company, accomplished its remit and was closed. By 1997 €7bn-odd had been spent and about half had been received back  – by 2009 apparently the residual stock ownership of Securum would mean that it broke even. By all accounts Securum was a success.

In July 2009 one of the chief architects and operators of the Swedish rescue, Bo Lundgren, gave the Oireachtas Joint Committee for Finance and the Public Service the benefit of his experience. There are differences in scale, function and method of operation between Securum and NAMA. However this is what Mr Lundgren had to say about the transparency of Securum. (you can find the full transcript here).

“Transparency was vital. At least every six months I appeared before the parliament and had an open debate on what was happening in regard to bank support and so on. We tried to be very transparent in regard to what was happening.”

“On transparency, since we had this co-operation with the Social Democrats, we informed them, both unofficially and officially. At the beginning I spoke with a former Minister of Finance who was economic spokesman for the Social Democrats, and we were in agreement. We just made a deal. There were no written and formal agreements but when we did the first savings and loans a couple of days after I took office, for instance, we phoned each other and he stated that of course they had to help out with this one. I could go out in a press conference and state nobody has to be afraid of losing any money from what is happening in this bank. Then I had the Social Democrats and could say that as well, and that helped. [the reference to the Social Democrats is important – Sweden’s government built a consensus amongst all the main parties as to the strategy to rescue the financial sector – Ireland didn’t have that with the concept of NAMA and it remains to be seen how the implementation will be supported]

Later on, with the bank support authority, and even before that, I asked the former vice-prime minister, Odd Engström, to be the chairman of the bank support authority, and he was employed as a director general in the Ministry of Finance even before that. He became a good friend, not for political purposes, but did a hell of a good job. I am sorry about using the bad language. Therefore, that was formal in one way and informal in another. He had contacts with the leader of the Social Democratic Party at that time. It was unofficial and it was official as well. [In other words all parties were well briefed about what was going on]

Transparency, for me, also means other things. It means requiring that banks really display their problems. To my mind, at least, one of the causes of the long duration of the Japanese banking crisis — 15 years approximately, from 1990 to 2005 — was the lack of transparency. I was in Tokyo in 2002 and spoke about the Swedish handling of the banking crisis. I got the impression that the valuation of assets in banks was not really marked to market, to put it mildly. In a way it was more, well, as you choose. That made analysis of the Japanese banks’ situation go from being very disastrous to rather, if not good, not that bad. It was very difficult and nobody knew. One then had uncertainty which is what nobody likes in such times. Transparency, to me, is also marked to market, and has to be very strict anyway. I will come back to that later on.”

So in Sweden, they had by most accounts a successful resolution of their financial crisis, on a smaller scale than ours certainly, a crisis only affecting a small region which had its own currency, whose membership of the EU only came in 1995 so issues about state-aid and competition were limited. However they succeeded and brought the public and practically all political parties with them along the way and transparency was a key aspect of that.

With NAMA, we don’t have mark-to-market. We have Long Term Economic Value (LEV) which, it would be fair to say, has confused many economists and commentators in respect of the first tranche at least where the LEV of the property was estimated at €10.5bn and the consideration paid was €8.5bn. That the consideration paid is less than the LEV perhaps signals protection of the taxpayer but until the calculation is understood a suspicion will exist that the taxpayer is being exposed.

The absence of political consensus is to be regretted with respect to the concept. However with respect to implementation, it is to be hoped that all parties will try to ensure NAMA is a success. However NAMA is not off to a good start – the business plan is being cried out for and will not be published until June 2010, leaks from “sources” sow rumour and uncertainty about how NAMA is dealing with vast sums of money and whilst the reporting requirements as set out in the NAMA Act might be adequate when NAMA has been established and is operating on a normal basis, the lack of information now is frustrating and not conducive to the democratic processes in the State and although Brendan McDonagh has gotten off to a great start in a personal capacity, if revelations about the finances and method of operation are negative, the honeymoon period may come to an abrupt halt. Bringing NAMA within the remit of the Freedom of Information Act now would be a positive and confident step.

UPDATE: Alan Dukes, designate-chairman of Anglo is the latest to add his voice to calls for NAMA to be brought within the FoI remit, according to the Independent’s reporting from the Burren Law School. The National Union of Journalists make a strong appeal over the bank holiday weekend calling the exclusion “inexcusable”.

UPDATE: 11th May, 2010 – in the latest question in the Oireachtas on NAMA and FoI, Deputy Leo Varadker asked the Minister for Finance if he would amend the Freedom of Information Act to include NAMA and others and this is the answer he received “NAMA has a commercial mandate to obtain maximum value for the taxpayer and, to achieve this objective it is required to enter into complex commercial negotiations with financial institutions and developers, the nature of which requires in many instances a high degree of commercial confidentiality and therefore it is not appropriate to extend FOI to this body” – for the ll exchange click here.

UPDATE: 15th July, 2010. The Information Commissioner, Emily O’Reilly repeats her appeal for NAMA and other institutions to be brought within the application of the Freedom of Information Act. Saying that these institutions have nothing to fear from FoI which would respect commercial confidentiality, she suggested public trust would be boosted by the inclusion of NAMA within FoI.

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Without even having completed the first tranche (and remembering that there are valuation issues with 3 of the 4 financial institutions whose first loans have transferred and that the question of EU approval of the first tranche apparently remains), NAMA told the Independent yesterday that it has begun spending its development pot to provide funding to developers “if the projects make sense”. There had been suggestions from some quarters that NAMA would need wait until all the loans had transferred so that allocating the €5bn pot could be prioritised. It is not clear what projects have received what NAMA describes as “small amounts”.

The Independent goes on to say that some of the developer business plans in respect of the first 10 developers remain outstanding. Previous media reporting has suggested that some of the business plans that have been submitted have been returned because they are not judged realistic or they assume further interest roll-ups. Today’s Independent article implies that NAMA is considering allowing the roll-over of debts. The article also implies that NAMA still has the ability to obtain information from the Revenue, something which the EU Decision had apparently put paid to. Lastly the article states that developers will be forced “now” to sell underperforming or unprofitable assets – this is in concert with rumours that NAMA will dispose of assets as soon as May 2010.

Meanwhile no word on Anglo whose first tranche was estimated to be 63% (€10bn out of €16bn) of the total first tranche for all 5 institutions. Also NAMA have not apparently filled the vacancy for a third party provider of services to analyse the business plans.

I think the commencement of spending from the development pot is to be welcomed for sound projects. Although €5bn is a limited sum, I think NAMA will be able to attract significant additional finance from third party investors as NAMA acts as a matchmaker between distressed developers and investors. The construction and property sector is on its knees and as long as the spending is viable, it will safeguard and build wealth and employment.

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Working yourself out of a job

For the 75/80 employees of NAMA (20 so far recruited) together with the army of external service providers, a consideration must be entertained as to how the lifespan of NAMA will impact on their continuing financial health. After all, if NAMA can be stretched to last 20 years and not 7-10 as presently expected, then it would be a poor employee or consultant that wouldn’t consider the financial opportunities. So what is to stop NAMA becoming a self-perpetuating piggybank for a small number of employees and large number of external service providers? What astute person or service provider would work themselves out of a job? It is interesting that with other country’s asset management companies, there has been an emphasis on developing employees so that they will have access to better opportunities in the private sector as the asset management company is wound up, so if you’re a lending analyst at NAMA, attention is given to how the experience can be developed to elevate you to a fantastic and lucrative role in the private sector when NAMA is wound up. A motivational challenge for NAMA may be convincing its employees of these opportunities. Another tool is to ensure employee contracts align with the objectives of the owner (the government and citizenry) for example by aligning contracts timeframes with the envisaged timeframe of NAMA or by setting job objectives and bonuses in the context of NAMA’s objectives. Pay and bonuses are controversial areas but to ignore human nature, even for NAMA employees, might be a false economy. Third party suppliers of services need to be handled more ruthlessly and the emphasis must be on ensuring NAMA control the external service providers and frame any contracts to support and encourage the fulfilment of NAMA’s own objectives and timeframes.

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Where’s Anglo?

At the Oireachtas Joint Committee on Finance and the Public Service on Tuesday 13th April, 2010, the NAMA CEO indicated that Anglo’s first tranche of loans would be transferred to NAMA in the “next 10 days”. Other than an article in yesterday’s Sunday Tribune which suggests that the Anglo estimated payment for the first tranche may be €4.5bn, and not €5.0bn previously estimated by NAMA, there has been no news. Are there unexpected problems?

With respect to the first tranche, the Tribune article claims that only BoI’s first tranche is “without issues” and apparently there are disputes in respect of the three other institutions. It is unclear whether the EU have approved the first tranche valuations.

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New mystery on Baker Street?

Not at 221b, but at 2-14 where the building which is understood by Britain’s Telegraph to have been subject to a NAMA-bound loan was sold in April 2010 by the Northern Irish firm of McAleer and Rushe to property giant British Land for £29m (though it is unclear whether that figure includes any share of projected development profits which the Telegraph reports to be a term of the deal). The Telegraph says that the purchase of the property by McAleer and Rushe in 2005 for £57.2m was backed by a loan from Bank of Ireland which would have been bound for NAMA. Funnily enough it was British Land that sold the property in 2005, only to be buying it back now at what appears to be a substantial reduction – JP Morgan describe British Land as being “on the right side of the trade”!

The NAMA CEO recently told the Oireachtas Joint Committee on Finance and the Public Service that there would be a rigorous audit of NAMA financial institutions to ensure that what the NAMA Act terms as Eligible Assets have been correctly dealt with by the financial institutions. Whilst there is nothing whatsoever to suggest that the above transaction in any way affronts the intentions of the NAMA Act, it does illustrate again the fact that financial institutions have had a substantial window since NAMA was announced to examine their loan books and it is to be hoped that any audit by NAMA will ensure that Irish citizenry have not lost out in a way contrary to the intentions of the NAMA Act through disposals or redemptions of NAMA-bound loans.

A question posed on here recently was whether NAMA-bound loans were being disposed of at less than face value.

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One wonders whether forthcoming cases will create new precedents in Irish case law with regard to personal guarantees. Another case follows hot on the heels of the case involving Michael Daly in the High Court earlier this week where the judge, Mr Justice Peter Charleton ruled that Mr Daly who is being pursued by Anglo for €84.4m, had produced what the judge described as an “arguable defence” which was sufficient for Mr Daly to avoid a summary judgement and instead will now have a full hearing in May – the judge is reported to have stressed that his judgement was a reflection of the relatively low threshold required to avoid summary judgements and that his decision at this stage would not prejudice the outcome of the full hearing.

Yesterday, Mr Justice Peter Kelly was called on to decide in the case of the wife of a Kildare developer named Eugene O’Neill. Mr O’Neill is being pursued by Ulster Bank for in excess of €16m. The wife whose name is Deidre was defending a case in respect of personal guarantees apparently signed by her and is reported to have set out a defence which included her not understanding the significance of what she was signing and not receiving legal advice on the matter. The judge decided that Mrs O’Neill had put forward an “arguable defence” and consequently the case is now set for a full hearing. The judge also questioned why “anyone in their right mind” would sign personal guarantees for unlimited liabilities as apparently happened in the case of Mrs O’Neill. The case was reported by the Irish Independent.

As a separate matter NAMA has said that, in respect of the first tranche, it has paid the financial institutions nothing for personal guarantees, apparently much to the institutions’ ire. There is likely to be intense interest in the nature of personal guarantees in the coming months from a legal, financial and indeed social viewpoint.

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As reported by the Independent today, the chief executive of the NTMA, John Corrigan, yesterday told a Dail Joint Committee that NAMA would make enough money to cover its costs. Given what we know about the funding arrangements for NAMA and the likely interest rates charged to NAMA borrowers this should not come as any surprise at all. If NAMA is taking over €81bn of loans and the average rate charged on the loans is 6-month Euribor plus 2% (as stated by the NAMA CEO at the Finance and Public Service hearing last week) and if NAMA is paying 6-month Euribor on NAMA bonds (which make up 95% of the consideration for the loans) and 5.25%-5.75% on the subordinated debt (which makes up the remaining 5%) and assuming that the consideration that NAMA pays for the loans is €50bn (which is at the higher end of the estimates flying around – the NAMA CEO last week was talking about €43bn and the NTMA CEO yesterday was talking about €47-49bn) and if 6-month Euribor is 1% then

  1. NAMA will pay 1% of 95% of €50bn (€475m) plus an average of 5.5% of 5% of €50bn (€138m), or a total of €613m per annum in interest on its consideration.
  2. NAMA will receive an average of 3% on the performing part of the €81bn.
  3. If the performing part of the €81bn was 25%, ie €20.4bn then the interest receivable would be €613m.


So what the NTMA CEO was saying was that even if the performing loans are 25% of the portfolio then NAMA will receive as much interest as it pays out. The NAMA draft business plan assumed 40% of the loans would be performing. The NAMA CEO last week said that in relation to the first draft that 33% were performing. So it would appear, on the face of it, prudent to say that NAMA will receive more interest than it pays out.

 For full details of the terms of the securities (NAMA bonds and subordinated debt) being used by NAMA, click here.

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