Archive for July 14th, 2010

IPD has just published its monthly UK Commercial Property index which indicates that capital values increased by 0.5% in the month of June 2010, bringing to 8.84% the cumulative compound improvement in UK commercial property since 30th November, 2009 (NAMA’s Valuation Date).  The IPD monthly UK Commercial Property index is the only commercial index for the UK specified for use in the NAMA LEV Regulations.

The IPD index is the source for tracking the UK Commercial Market – one of NAMA’s key markets, and its performance since 30th November, 2009 is shown in the header at the top of this page.

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The ESRI this morning published its Quarterly Economic Commentary for Summer 2010 – the summary and press release are available here. Whilst for many the headline of the day will be that Ireland’s budget deficit % in 2010 will be the largest in the developed world as a result of the bank bail-outs, a less prominent forecast may emerge to become the most important aspect of the report in coming days. The ESRI forecast that “expected migratory outflows” will be “70,000 in the year ending April 2010 and 50,000 in the year ending April 2011”. It has been stated that “migratory outflows” are the net difference between emigration and immigration and that in both years the migration is forecast to be 10,000 per year meaning that emigration is forecast to be 80,000 in 2010 and 60,000 in 2011. Remembering that our birth rate (which is one of the highest in the developed world at 17/1000) means we will have  75,000 new souls in the State and our death rate (which is one of the lowest in the developed world at 6/1000) means that 25,000 will shuffle off this mortal coil, our population would naturally grow by 50,000. If there are 70,000 net outward migrants then our population will fall by 20,000. The last time we had a drop in population was 1990 when the population fell 4,000 from the year before.

Whilst the migration forecasts by the ESRI are depressing, the forecast marks a reversal in previous population estimates and this has a direct effect on NAMA’s valuation of Long Term Economic Value (LEV) of assets underpinning the loans being transferred. NAMA, to recap, has set 30th November 2009 as the date by reference to which it is valuing the property assets underpinning the NAMA loans. NAMA is of course paying the LEV for the property assets (less some discounts), a controversial aspect of NAMA and which has attracted accusations that NAMA is overpaying for loans. The LEV Regulations state that NAMA must

“(2) In determining the correlation for the purposes of paragraph (1)(b),

NAMA shall have regard to such of the data and analyses as it considers appropriate

and which were available to NAMA on or after 21 December 2009 but

not later than 10 January 2010, and as are prepared by any or all of the following:

(a) Central Statistics Office;

(b) Economic and Social Research Institute; and

(c) Central Bank and Financial Services Authority of Ireland.”

Paragraph 1(b) states

“(b) the correlation, in the relevant period, as determined by NAMA in

accordance with paragraph (2)—

(i) between land prices and demographic variables relating to the


(ii) between land prices and interest rates in the State, and

(iii) between land prices and the State’s gross domestic product;”

In a nutshell NAMA is directed to rely on analyses produced before 10th January 2010. The principal analysis as regards  population produced before that date were the CSO Population Projections in December 2008 which were subsequently adopted by the Department of the Environment Heritage and Local Government is assessing Regional Planning Guidelines.Unfortunately these projections only foresee neutral (ie nil) migration or substantial net inward migration. What the ESRI forecast this morning signifies is that there will be substantial outward migration in 2010 and 2011. It should be noted that net inward migration in the period 1994 – 2008 was 450,000 so one could argue that net outward migration in the recession and the forthcoming decade of pain resulting from the bank bail-outs might be on a similar scale. So the immediate fear is that NAMA are calculating LEVs by reference to population projections which are unrealistic and which may result in NAMA factoring in a higher demand for housing than may be the case, and consequently might estimate LEV at too high a level.

So that’s the ESRI report which is gives rise to the risk that NAMA will over-pay for the loans it is acquiring. The reason that today is one of the worst days for NAMA is that two property indices have been published that show that NAMA’s key property markets continue to decline in value by reference to NAMA’s valuation date – 30th November, 2009. The Jones Lang Lasalle index was examined on here this morning and it shows that the rate of decline in commercial capital values is accelerating and that we are 8%-odd off values at the end of November 2009. The IPD UK Commercial Index was published this afternoon and it shows that prices have increased by 8.84% since the end of November 2009 but the June 2010 monthly increase was just 0.5% which continues a muted upward trend in UK commercial property.

So NAMA is at severe risk of overpaying for LEVs while the Current Market Values (CMVs) are rapidly declining. This double whammy exposes NAMA to significant loss. NAMA can change its Valuation Date – the Minister for Finance suggests EU approval would be needed but surely such a reasonable change would be fast-tracked. By not changing the valuation date NAMA is overpaying the CMVs by over €1bn.

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The Irish Examiner’s Niamh Hennessey today reports that property prices are predicted to fall a further 16%, following a statement from Goodbody Stockbrokers that prices will fall by 50% from peak before they reach The Bottom. Niamh figures that because the latest Permanent TSB/ESRI House Price Index has fallen 34% from peak, that must mean that prices have a “further 16%” to fall.

Well Niamh, if the price at the peak was €100k and prices are now at €66k (ie 34% off) then they have another €16k to fall to get to €50k (50% of the peak). And 16/66=24%, not 16%. It also would have made a better headline with 24%.

With a couple of recent predictions for the property market, here’s an overview of recent scrying through the tea leaves.

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Jones Lang Lasalle (JLL), John Mulcahy’s old company today publishes its index for Irish commercial property for Q2, 2010 and it continues to show declines. The Report should be available from JLL later (free registration required). Jack Fagan at the Irish Times reports that the overall capital index has fallen by 4.7% in Q2, 2010 bringing the cumulative fall since the start of the year to 6.7%. The index is published on a quarterly basis only but if it is assumed that the Q4, 2009 index fell at an even rate then this would mean that the overall commercial capital index has fallen by 8% since 30th November, 2009 – the date chosen by NAMA to be the Valuation Date pursuant to section 73 of the NAMA Act for the assessment of Current Market Values of property backing NAMA loans. Here is the index

Q3, 2009               682

Nov 30 2009          664 (655+(682-655 )/3)

Q4, 2009               655

Q1, 2010               641

Q2, 2010               611 (calculated Q1, 2010 less 4.7%)

Because JLL publish their quarterly index before SCS/IPD and because, like SCS/IPD, the JLL index is one of the sources on which NAMA can rely according to the LEV regulations, I am today changing the basis of the Ireland Commercial NAMA property performance shown in the header above from SCS/IPD to JLL.

There is an important consequence to the information published by JLL today – based on the latest performance of the indices covering Ireland and UK (commercial and residential) and on the basis of NAMA having 1/3rd of its assets in the UK, this means that the value of the NAMA portfolio can’t possibly be “broadly neutral” as claimed by the Minister for Finance two weeks ago. If you take NAMA’s assets to be €40.5bn and assume 1/3 (€13.5bn) are in the UK and the rest are in Ireland (about 7% were expected to be in the Rest of World so this is an approximation). The UK Commercial sector is outperforming residential so assume (in the best case for NAMA) that 100% of the NAMA assets in the UK are commercial. The Irish Commercial sector at -8% since last November 2009 has outperformed the latest available Permanent TSB/ESRI index so let’s assume 100% of Irish assets are commercial also. At the *very best* for NAMA, the assets backing the loans have fallen by €1bn from €40.5bn to €39.5bn by reference to a 30th November, 2009 Valuation Date. If the assets were 100% residential then the fall is €1.6bn (and remember that relies on the Permanent TSB/ESRI index which is three months out of date and is likely to have shown further falls in Q2 if the DAFT.ie report published yesterday is a good guide).

Now is the time for NAMA to change the Valuation Date from November 30th, 2009 to today. For the sake of the additional work on valuations at this stage and for obtaining what is likely to be fast-tracked EU approval to the change of date (if such approval is indeed needed), NAMA would be saving the taxpayer a substantial sum and reducing the risk of NAMA making a loss. The time to make this change is today – not when the tranches have been transferred.

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