Archive for April 29th, 2010

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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