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Archive for January 20th, 2011

Following the announcement at lunchtime today by An Taoiseach, Brian Cowen, that the eagerly anticipated general election will be held on Friday 11th, March 2011, attention will inevitably turn to the composition of the new government and a particular interest on here is the identity of the new Minister for Finance and the new administration’s attitude towards NAMA.

The new Minister of Finance will operate the powerful (some would say draconian) provisions of the Credit Institutions (Stabilisation) Act (“the Act”) and remember four banks face challenging capital raising targets in the next six weeks. In particular the new MfF might be at the centre of determining Bank of Ireland’s future – that bank has now less than 40 days to raise €1.5bn and seems to have been flouncing around in recent days unsuccessfully trying to secure an extension to the 28th February deadline for bringing its Core Tier 1 capital up to 12% and now apparently trying to devise some scheme to allow State injections which wouldn’t result in State control.

The Act was passed just before Christmas having unusually prompted the President to convene a Council of State to consider the provisions of the Act in the context of the Constitution. The Act had a very public demonstration at the AIB court hearing which was ironically held in private, protesting journalists and interested parties having been kicked out of the court room by a judge who claimed she was following the new provisions of the Act. The new MfF will indeed wield great power for the restructuring of the banking sector in 2011 and 2012.

Below is a table showing the present composition of the Dail and recent opinion polls (and the results of the Donegal South West bye-election).

(click to enlarge)

At this point the betting would be that the new administration will be FG/Labour with Enda Kenny as Taoiseach and Labour contributing a MfF which would naturally be Joan Burton.  The odds given by Paddy Power for the next administration are as follows:
FG/Lab                            1/20
FG Minority Government    12/1
FG Majority Government    16/1
FG/FF                             16/1
FF/FG/Lab                        16/1
FF/Lab                             18/1
Lab/SF/Green                   28/1
Technocratic Government 33/1
Lab/SF                             33/1
FG/Lab/Green                   33/1
FG/Lab/SF                        50/1
Labour Minority                 50/1
FF/Green/SF                    66/1
FG/Green                         66/1
FF/SF                             66/1
FF Minority Government    100/1

You would have to say that next MfF is likely to be either Michael Noonan or Joan Burton though Pearse Doherty, Brian Lenihan or a Green politician are theoretical possibilities.

This blog is impartial for the time being on this election campaign. Plainly serious mistakes have been made by the incumbents but it is the privilege of Opposition to avoid detailed policy statements during the term of the government of the day. However in the run-up to the election these alternative policies should be teased out and tested. Expect comment and criticism of proposals on here regardless of their source.

With respect to NAMA, neither FG nor Labour has signalled radical changes at the agency. Perhaps we will get better transparency but at this stage I would not expect any major change in direction, but that might change – I note banker Peter Mathews is contesting a seat for FG and he is on record as calling for the reversal and effective abolition of NAMA. Labour has indicated that there would be a tougher line on spousal transfers and developer salaries. Labour has also been delving into conflicts of interest.

Sinn Fein has said that it would scrap NAMA. The Greens and Fianna Fail’s position seems established and would continue with the status quo.

And regardless of the composition of the new administration, the officials at the Department of Finance won’t change and I note that the NAMA Report and Accounts for Q3, 2010 which were delivered by NAMA to the Department of Finance on 31st December, 2010 still have not been published. Plus ca change!

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It’s still January so perhaps we’re still in time for some more New Year predictions. There was a detailed entry on here a fortnight ago on residential property predictions for 2011 and indeed the summary prediction on here for Irish commercial property was that capital values would decline by a further 10% in 2011 bringing the cumulative fall from peak in 2007 to 64%. This entry examines the prospects for commercial property in some more detail by reference to property powerhouse and NAMA valuation panel member, CB Richard Ellis, who has this week produced its annual property outlook report.. Its outlook report for 2011 paints a mildly optimistic picture though it is far from Pollyanna-ish. The report covers Ireland, both North and the Republic and in lesser detail there is an outlook for the UK.The highlights:

(a) The distinction in performance between prime and non-prime locations/assets and Dublin/provincial locations will become more marked.
(b) Rents are predicted to fall in all sectors, the indication is that there will be modest capital increases for prime markets
(c) There will be more transactions as NAMA, banks, receivers and liquidators bring product to market amidst a stabilisation in returns
(d) Whilst credit will still be constrained, there is funding available for certain projects though foreign capital will feature prominently
(e) Whilst there is little new commercial space coming available, restructuring, retrenchment and business failure will mean the overall stock is unlikely to reduce to any significant degree

Omitted from the report is the potential for increased competition from the North which has dramatically lower property costs (CBRE quote prime office rents in the North at GBP 135 psm or €15 psf compared with ~€30 psf in Dublin) though there are signs of severe rent adjustment on this side of the border. The Irish Times yesterday reports on a significant new rental on Temple Bar’s Fleet Street in central Dublin. The 11,000 sq ft store, which will trade as a Tesco Express, is paying a reported €200,000 a year in rent, equivalent to €18 psf – this rent level represent the future in my opinion.

In February 2011 the UK will begin in earnest its attempt to lower the corporation tax rate for Northern Ireland. I would have said that the UK wouldn’t surmount the so-called Azores principle whereby the EU would block regional tax variations unless the region was fiscally balanced. Which Northern Ireland isn’t. But this doesn’t seem to be stopping Chancellor George Osborne and of course he will find willing supporters in the North and we may find fewer supporters in Europe. CBRE prominently cite the importance of the State’s 12.5% as a contributing factor in bolstering demand for commercial property.

Personally I think we may have another economic convulsion or two before we get out of the woods (deposit flight, another European crisis, further bank loan or derivative losses – take your pick). The hit-or-miss ESRI has this morning lowered its prediction/projection for GDP growth in 2011 to 1.5% (less than the Government’s 1.75%). Like the property market, the Irish economy currently has its own prime/non-prime sectors and whilst the export market is expected to thrive, domestic demand is expected to contract or at most, modestly grow.

We don’t get precise predictions from CBRE but the prediction here is that commercial property capital values in the State will drop 10% by reference to the JLL index (which is down some 60% already from peak). There may well be sectoral variances though I think that even prime property in Dublin will come down. Rents have been dropping by some 20%+ annualised during all of last year and I expect further drops in 2011 of 15-20%, again by reference to JLL’s series. Investment property transaction volumes and values will be up on the 29 worth €241m in 2010 – I wouldn’t be surprised by a doubling-plus in volumes and values.

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