Archive for April 5th, 2011

It’s now a month since the new government was formed on 9th March, 2011 and the apparent lack of urgency in delivering commitments was noted on here last week. Yes, it’s only 28 days but policies and legislation should have been in the making for months, if not years. This evening, the so-called Summer Legislative Programme was announced – the press release is here and the programme itself is here. From a brief review, there is much in the Programme for Government which doesn’t even get a look-in. In terms of areas of interest on here:

(1) It is noted that the Property Services (Regulation) Bill 2009 is before the Seanad. An amendment was made to this Bill just before the last government was dissolved, with the aim of introducing a House Price Database and a commercial rents register. Fine Gael had said that it would not bin this Bill and that it would be progressed; it seems as if FG is keeping to its commitment and a House Price Register could be a reality soon.

(2) There is no reference to legislation to enable downward reviews of Upward Only Rent Reviews (UORRs), the controversial proposal which the Minister for Justice Equality and Defence Alan Shatter last night said would be presented to the Dail before the summer recess or shortly thereafter and enacted before the end of the year. It is understood this proposal is presently with the Attorney General, Maire Whelan to examine its compatibility with the Constitution.

(3) There is no reference to the NAMA (Amendment) Bill which was published by the last government to enable the accelerated valuation and transfer of the €17bn of sub-€20bn land and development loan exposures at AIB and Bank of Ireland and associated loans (to be clear the land and development loans are estimated to total €12bn and the associated lending to total €5bn). The Department of Finance denied in strong terms today that these loans would move to NAMA which is consistent with the Programme for Government. Our creditor consortium presently in town might have some words on this abandonment of one of the terms of the bailout agreement. There is reference to a Freedom of Information (Amendment) Bill which might finally bring NAMA within the compass of this legislation though I doubt whether this legislation will give effect to the commitment to create a public register of non-performing loans.

(4) There is nothing on water or property taxes. We wouldn’t expect the introduction of these taxes until the December 2011 budget at the earliest.


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As we now have the usual quarterly troika of Irish residential property price surveys from DAFT.ie, Myhome.ie and Sherry FitzGerald, this entry is a roundup to see what the surveys are telling us.

(1) Prices dropped 3-4% in quarter one of 2011 and 13-15% in the last year. My personal opinion for the little it’s worth is that the decline would have been greater were it not for the reduction in stamp duty for non-first-time buyers which was effected at the start of December 2010 but I think  will have impacted prices particularly after the Christmas period. Stamp duty rates typically fell from 7% on the difference between the property value and €125,000,  to 1% of the property price – so for a €250,000 home the stamp duty is now €2,500 compared to €8,750. In a normal market where existing prices were in equilibrium this would have tended to push house prices up so that the total price remained the same. Note that first time buyers which comprise an estimated 45% of the mortgage market saw their stamp duty rate go from 0% to 1%. So that will have tended to depress house prices but because first time buyers would be expected to comprise far less than 45% of the total market (including cash transactions), I still think the stamp duty changes should have tended to increase prices and I think that 3-4% decline recorded is an aberration and would be higher in normal circumstances.

(2) Prices are 36-43% off peak according to Myhome/DAFT and 51-55% off peak according to Sherry FitzGerald.

(3) Although price drops aren’t accelerating they’re just about moderating but at 10%+ annual declines.

In terms of how the different sources compile their statistics this is what each has to say.

(1) DAFT.ie : Its index is based on properties advertised on Daft.ie for a given period. The regressions used are hedonic price regressions, accounting for all available and measurable attributes of properties and only coefficients with a very high degree of statistical significance (p < 0.001) are used. The average monthly sample size for sales during 2009 was over 10,000. Indices are based on standard methods, holding the mix of characteristics constant, with the  annual average of 2007 used as the base. A working paper on the methodologies employed in both rental and sales markets will be published on the Daft.ie website soon. Stock and flow statistics are calculated using consistent series for the period covered.

(2) Myhome.ie : Its index is based on actual asking prices of properties advertised on MyHome.ie with comparisons by quarter over the last six years. This represents the majority of properties for sale in Ireland from lead­ing estate agents nationwide.  The series in this report have been produced using a combination of statistical techniques. Our data is collected from quarterly snapshots of active, available properties on MyHome.ie. Our main National and Dublin indices have been constructed with a widely-used regression technique which adjusts for change in the mixture of properties for sale in each quarter. Since the supply of property in each quarter has a different combination of types, sizes and locations, the real trends in property prices are easily obscured. Our method is designed to reflect price change independent of this variation in mix.

(3) Sherry FitzGerald : Its index is based on the analysis of a basket of properties in its locations nationwide.  Commencing in 1996 in the Dublin market, it was extended nationwide in 1999. Each basket of properties was chosen based on a weighted profile of properties in each location.  The basket extends to over 1,500 properties, which are re-valued on a monthly basis for Dublin properties and a quarterly basis for nationwide properties with results produced quarterly. The basket is held constant and re-valued based on market evidence.  Sherry FitzGerald through its franchise network is represented in every major city, town and county in Ireland.

So two of the above are asking price indices and the Sherry FitzGerald is a valuation assessment index (akin to how SCS/IPD and JLL compile the commercial property indices as far as I can see)

Note Ireland has two actual sale price series, one from the Department of the Environment Housing and Local Government which is an atrociously crude average of mortgage transactions and is issued six months after the event; the other from Permanent TSB/ESRI is issued quarterly – next one due in the next fortnight for Q1, 2011 – and is an hedonic index but only based on PTSB mortgages and PTSB has less than 4% of the Irish new mortgage market. NAMA has recently said that prices were down an average of 50% from peak in November 2009, 16 months ago. There is no word on the immediate intentions of the new government on the House Price Database – the legislation is drafted in the Property Services (Regulation) Bill amendment and Fine Gael indicated it would pick this legislation up and progress it but there has not been any progress in the past three weeks.

In terms of outlook, who knows? These are the latest predictions/projects captured on here which I believe to be a comprehensive reflection of reported predictions and projections.

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Quarter Covering period to Delivered to DoF Published
1 31st March, 2010 30th June, 2010 13th July, 2010
2 30th June, 2010 30th Sept, 2010 2nd November, 2010
3 30th Sept, 2010 31st Dec, 2010 2nd March, 2011
4 31st Dec, 2010 31st March, 2011 Waiting ….

It will be a test of the incoming government’s commitment to transparency to see how long it takes Minister for Finance, Michael Noonan to release the NAMA report and accounts for Q4, 2010.These documents should have landed on his desk by last Thursday at the latest and they also incorporate NAMA’s first annual accounts, the significance of which is that we might get more accounting detail than contained in the quarterly accounts – of special interest will be a revaluation of NAMA’s loans and details of how NAMA has advanced working capital to developers. Minister Noonan’s role is not to make changes to NAMA’s accounts – after all NAMA is an agency independent of government, so we’re told. How long with Minister Noonan make us wait for the report and accounts? There will be tracking on here but meantime this entry examines areas of potential interest:

(1) The operating profit or loss for the year. NAMA should be showing an operating profit. Think about it – the agency is funded by bonds which simplistically cost it 1% in interest and it receives interest at 3%, or thereabouts, from developers. On €72bn of loans, that 2% margin should contribute a healthy operating profit. Aah, you might say but NAMA has huge overheads that will eat away any profits. That is true but what is not commonly understood is that NAMA was entitled to recharge the due diligence and valuation costs to the banks last year. And NAMA’s core costs were put at only €25m per annum. NAMA must pay other third parties, for example Capita which provides loan management services and its insolvency practitioners but I would still have expected NAMA to report an operating profit. On the other hand only 25%, or thereabouts, of loans are actually repaying interest.

(2) Loss on loan revaluations.  NAMA’s primary property market, Ireland has continued to tank since the NAMA Valuation Date of 30th November, 2009 so the €72bn of loans bought for €31bn should be worth substantially less than their purchase price – in fact the estimate on here is that €71bn of loans that were bought for €31bn will be worth only €25.2bn today; that’s because NAMA was paying a Long Term Economic Value premium of some 10% and also because NAMA’s property markets have dropped by an estimated blended average of 12%. It is true that 5% of the €31bn that NAMA paid for the loans is in contingent subordinated debt which won’t be honoured if NAMA makes a loss but that still means NAMA has lost about €4bn on these loans.

(3) Profits on sale of loans/assets. NAMA sold €2.7bn of loans/assets in 2010. In truth the sales were pretty much all made by the NAMA Participating Institutions (PIs – AIB, Anglo, Bank of Ireland, EBS and INBS). And when NAMA says “sale” these might have been borrowers repaying their loans or the banks selling the loans or foreclosing on the loans and selling the property. Very little, if any, of the €2.7bn was directly “sold” by NAMA. But because these loans at the PIs were NAMA-eligible and NAMA-bound, then NAMA should benefit. Of course other non-NAMA banks, Ulster Bank and National Irish Bank for examples, which were jointly funding projects will have received some of the proceeds but NAMA should have benefited. And you would expect NAMA to have made a nice tidy profit on these sales if NAMA is executing its asset management function properly because they should have been low-lying fruit, better quality assets where the borrower or project was financially sound.

(4) Derivatives and hedging profit or loss. It was remarkable how the Q3 accounts were dominated by reporting of derivatives and hedging. You might have thought that NAMA was an asset management company but these derivatives and hedges – simplistically insurance policies to guarantee exchange rates and interest rates – made up a large part of the reporting. In Q3, NAMA  reported a substantial loss on derivatives and foreign exchange losses of €27m. The NAMA chairman Frank Daly said some of these losses should reverse in Q4.

(5) Performing loans. Yes this is a component of operating profit above but deserves a separate heading. Performing loans are defined by NAMA as those operating in accordance with the loan agreement AND repaying interest (as opposed to those performing in accordance with their agreement and rolling up interest). Famously in the draft business plan put this key performance indicator at 40%, then went to 33% in April 2010 at the NAMA Oireachtas Committee hearing, then went to 25% in the June 2010 business plan before apparently increasing in the Q2, 2010 accounts to just below 30% before finally falling to some 25% in Q3.

(6) Working capital and other funding advanced to developers. Some €500m had been advanced as at the end of Q3, 2010. Will we get more information in the annual accounts to know where this money has gone?

(7) NAMA cash on hand. It seems that NAMA has now totally abandoned its short and medium term funding programmes which were to allow the agency access up to €5bn from the market to allow the agency invest in developments. In what seems to me like a monumental planning cock-up the agency has now seemingly decided that it can fund development through its operating income and repayment of loans. Why was this not considered by the expensive consultants advising NAMA in 2009? What happened to the fees paid by NAMA to

Banc of America Securities Limited, Barclays Bank PLC, Citibank International Plc, Credit Suisse Securities (Europe) Limited, Deutsche Bank AG, London Branch, Goldman Sachs International, ING Bank NV, The Royal Bank of Scotland plc and UBS Limited and The Bank of New York Mellon? All wasted? I expect NAMA will have €0.5-1bn cash on hand at the end of Q4, 2010. Remember though that this is a temporary cashflow aberration because NAMA will ultimately need redeem its own bonds and that will be NAMA’s moment of truth.

(8) Legal activities. Q4, 2010 was when NAMA went to court with Paddy McKillen. Paddy lost comprehensively at the High Court and then won a narrow victory at the Supreme Court. Legal fees on both sides may be in the millions of euro. Will NAMA disclose the cost of defending the action and now that the Supreme Court has partly upheld Paddy’s action, will NAMA be making provision for paying not only its own fees but Paddy’s. Elsewhere NAMA placed Bernard McNamara and others in receivership in the quarter but there is unlikely to be much detail disclosed on these actions. NAMA has only had one legal case where it initiated action and that was against Paddy Shovlin and the Fitzpatrick brothers.

(9) Salaries and bonuses. Generally grabs attention, particularly in Ireland. There are moves afoot to force all state agencies to disclose salaries and bonuses of staff and I understand we will start seeing more transparency in 2011. Will NAMA disclose salaries at the agency which are expected to average €200,000? What bonus did NAMA CEO Brendan McDonagh get for 2010 – he was reportedly entitled to a maximum of 60% of his €430,000 salary. Did NAMA chairman Frank Daly only get paid €170,000 – I say “only” because Frank has been a very prominent and well-informed voice of NAMA in the past year. Given that the mainstream media seems uninterested in the apparent 70% increase in director fees revealed in the Q3, 2010 accounts, perhaps this won’t be such an avidly awaited heading.

(10) Developer business plans. The absence of agreed business plans one year on from the transfer of the first tranche should be worrying. By “agreed business plan” I mean the three documents forming an agreement of the plan (a) Memorandum of Understanding (b) Heads of Terms and (c) Final agreement being signed by (a) NAMA (b) the developer and (c) potentially the developer’s wife. The first 30 developers absorbed by NAMA have average loan exposures of €900m so you can sympathise with the enormousness of the task facing NAMA. But NAMA is employing third party examiners of business plans and expensive consultants. So is the delay a result of reasonable difficulties being managed by NAMA or is there some dysfunction in the agency? Increasingly it is looking like the latter.

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