Buried away on page 34 of the Four Year Plan (the so-called “National Recovery Plan”) published yesterday was a commitment which should freeze the hearts of those whose livelihoods depend on a recovery in the commercial property sector. As part of the government’s drive to return competitiveness to certain parts of the economy, it has identified rent costs in both the private and public sector as a drag on competitiveness and has developed some specific action points to address the perceived imbalances:
(1) The proposals of the Working Group on Transparency in Commercial Rent Reviews will be implemented.
(2) The Office of Public Works will lead a coordinated effort to reduce office rents by up to 15% and review the efficiency of property arrangements across the public sector.
Although we are some two months away from the publication of the Q4 commercial price indices for the State, it was striking that although both the SCS/IPD and JLL indices showed modest capital declines in Q3, 2010 (2.6% and 1.1%), both recorded nearly 5% quarterly declines in rents (that’s close to 20% annualized) in a country that before last March 2010 had rental agreements with upward-only rent reviews, whose terms continue in effect even though new leases won’t have them. These rental trends are also a cause for deep concern for any recovery in the commercial sector because those 7-9% advertised yields quickly become 4.2-5.4% yields after a couple of years of 20% rent declines even if capital prices remain constant.
Yesterday DTZ identified Ireland as yet again the outlier facing problems, with the publication of its periodical Debt Funding Gap report. It defines the debt funding gap as “the difference between the existing debt balance as it matures over time and the debt available to replace it.” In other words those investors who bought Irish commercial property with short term lending will face difficulty when they need roll over their loans. And as we saw in the recent Paddy McKillen case, it is not unusual for Irish investors to use short term funding as a key tool for managing the financing of their property assets.
And today, the Independent reports that the IMF is putting pressure on NAMA to start disposing of property. DTZ said yesterday that it expected NAMA to start “orderly disposals in 2011”. I’m not sure that those responsible for making disposal decisions have grasped the fact that we are slowly but surely losing decision-making discretion in this area, and despite the rational and meritorious decisions to a framework strategy which foresees different recovery in different markets and disposes of assets accordingly, it seems that pressure will be brought to dispose in a more generalized way. The IMF is now just repeating its advice in the last routine country mission in June 2010 but I think there will be far more urgency and precision in their entreaties today. Of course one of NAMA’s board members, Steven Seelig, is a former Mission Chief at the IMF and indeed had some previous IMF involvement with Ireland – he may become a key bridge between the needs of NAMA and the IMF now.
So the prospect of increased supply from NAMA, declining rents and the scarcity of funding all point towards a continuing decline in prices which are now some 60% off peak. Though quality buildings in prime locations may suffer less, the scale of the challenges facing the sector are such that no project is immune – there are rumours that the sale of the Liffey Valley Shopping Centre may have stalled. How many more transactions face being placed on ice until there is greater visibility on prices in the sector?
NAMA Wine Lake 
This instruction will be the “kiss of death” for any hope that NAMA will make a profit on its loans. The fact that Michael Somers is of the opinion that NAMA has overvalued these loans confirms that fear. There is no doubt that realistic sales levels and quick disposals will help rebase and revitalise the economy but there will be a trade-off in terms of NAMA losses.
On balance, IMO, the IMF are right.
P.S. If anyone thinks that a 9% or 10% return on commercial property investments based on historic rents are a bargain, when new current rents are at a 50% discount to 2006 levels – there’s this bridge in Brooklyn that I’d like to offer them.
For some light relief and deep insight:
check out this article on Irish Money
http://ceditora.com/en/irish-money/
I believe Dr Somers was criticising NAMA for overly aggresively valuing loans in an illiquid market which has no comparables, therefore firesale values were applied when a longer term value could be applied as to not put as much pressure on the banks capital base.
I do agree however that NAMA will be forced to sell by the IMF at anything close to transfer value (i.e. what NAMA paid for the loan) and this could mean whole loan books before any enforcement against developers happen.
I always believed that NAMA would kill whatever was left of the Irish Property market because who is going to compete against a government agency and most of the guys that would/could build or develop land will be tied up with NAMA for the next ten years.
The overseas stuff will be easier to sell and that should be coming to the market Q2 2011. Whether it does or not is another issue as NAMA itself does not seem capable of making any decision in a hurry…..
In Belfast downward pressure on rents is already being applied by government, which is frankly the only player that really matters in that market. Landlords are being offered the security of long leases in return for renegotiating rents downwards.
Also I’ve just been reading the latest accounts of PBN in which they are the first major nordie developer (other than McKillen/Drayne to talk openly about their relationship with Nama.
PBN has close connections to Anglo: One of the directors is Neil Adair who once ran the Anglo office in Belfast, another director is tax-exile Paddy Kearney who was one of the ‘Golden Circle.’
They look to be carrying about £200m of bank debt, the majority – if not all – owed to Nama PIs. They say they were told by phone call at the end of October that Nama had acquired their BoI loans but that at time-of-writing their loans with other PIs had not yet been transfered.
Reading between the lines they seem to be welcoming Nama as they say it’s been near impossible to have a sensible conversation with the banks, so chaotic have they become. They also like the sound of Nama’s 10yr lifespan and say they will be talking to Nama about refinancing and also ‘debt restructuring’ – which I take to be a euphemism for write offs.
PBN have plenty more to say about the banks. Firstly that they were forced to adopt a disastrous interest rate hedge just before the BoE started slashing rates in 2008 which cost them about £9m in 2009 alone.
Secondly that as a condition of continuing bank support they were told to get full PP for everything they could in order to increase the value of sites.
Thirdly they were told there would be no funding available to develop these sites if they did get them through planning. As a consequence they have mothballed all developments.
This focus on planning has not even been entirely successful as the Planning Appeals Commission recently rejected a 99 unit apartment development on a PBN site in Newtownabbey.
“another director is tax-exile Paddy Kearney who was one of the ‘Golden Circle.'”
As I understand it although Paddy has not denied being a member of the Golden Circle, he has also not admitted it either and the government has refused to identify the Golden Circle so the best you can say is that it is speculated that Paddy Kearney was one of the Golden Circle.
“PBN have plenty more to say about the banks. Firstly that they were forced to adopt a disastrous interest rate hedge just before the BoE started slashing rates in 2008 which cost them about £9m in 2009 alone.”
This is an interesting point. Most of the banks, but particularly Anglo insisted that their clients hedge their loans with 5 (mostly), 10 (a few) and even 20 year (exceptional) swaps. This has caused huge losses to developers.
I am aware of one situation where a developer was sold a €50 million 20 year swap at 4.9% plus margin even though the term of the loan was only 3 years. The loss on the swap is running at almost €2 million per annum and the loss if capitalised now is in the region of €20 million.
Funnily enough, none of these losses have been addressed yet – just “kicked down the road” and covered up.