What do the latest losses reported by Lloyds Bank tell us about the Irish property market?

In Ireland  we never really saw the Lloyds brand but it did trade here under the Halifax and Bank of Scotland (Ireland) banners. Both financial institutions are closed here for new business but legacy loans are still being worked out. Lloyds itself is a major bank with a market capitalisation of €45bn with the British government owning 43%; it is certainly big enough to take a hit on its loans for Irish property and some people think that its provisions against losses are perhaps a more honest view of the prospects for the Irish economy compared with the domestic banks which are either nationalised or worth very little (IL&P is worth €40m, AIB €225m and Bank of Ireland €1.2bn). Yesterday Lloyds issued an Interim Management Statement in respect of the first quarter of 2011. In it, the bank announced a €1.144bn increase in its provisioning for losses on Irish loans. This entry examines the Lloyds Irish loan book and compares its provisioning with Irish banks.

Lloyds say in their interim management statement that their Irish loan book is GBP £27.6bn (€30bn) and that 60% of the portfolio (€18bn) is now impaired. The bank has a total provision against losses of €10.1bn (56% of the impaired portfolio or 33% of the total portfolio). Unfortunately, the Interim Management Statement doesn’t provide any further breakdown. This was the position in the Republicof Irelandat the end of 2010, from the Lloyds Annual Report. If gross loans remained static between Dec 2010 and March 2011 and the impairment % has risen to 56% and the provision has increased by €1.144bn that would indicate a provision being 32% of total loans and 58% of impaired loans.

The Royal Bank of Scotland (RBS) has this morning published its Q1, 2011 Interim Management Statement. RBS operates here under the Ulster Bank brand and like Lloyds’ operations in Ireland has suffered horribly from the aftermath of our financial crisis/burst property bubble. Ulster Bank expect impairments in Ireland to remain “elevated” for the next quarter before “gradually declining” in the second half of 2011. The report notes the “limited liquidity” available in the marketplace to support refinancing.

Although it’s a relatively minor detail, one of the most staggering pieces of information in the RBS report (PDF page 130) is that Ulster Bank advanced just 596 new mortgages in Q1, 2011 of which 85% were for Northern Ireland, indicating that less than 90 were provided across the 26 counties over three months in the Republic. Or to put it another way, the bank provides just over one mortgage per working day in the Republic! Here are the Ulster Bank loan details for March 2011 for the Island of Ireland (Ireland and Northern Ireland)

And what of our six State-guaranteed financial institutions? You can find all the latest financial reporting on the six covered institutions here. IL&P was not really exposed to commercial property lending. EBS is tiny and has not produced an annual report for 2010 yet. INBS is a bigger but also has not produced an annual report for 2010. Some assumptions are required to get their reporting to fit the above format but here’s what the latest reporting looks like:

In short Anglo’s provisions are at a higher level than those of Lloyds and substantially above those of RBS. However both AIB and Bank of Ireland are substantially below Lloyds and RBS. Bank of Ireland’s impairments and provisions look remarkably healthy. In terms of market reputation during the boom, was Bank of Ireland more prudent than Bank of Scotland (Ireland) and Ulster Bank? I don’t think there was much between them, which would suggest that Bank of Ireland in particular is vulnerable to future loan losses.

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Pick ‘n’ Mix – a marketing strategy for NAMA

Like Ireland, the UK suffered a collapse in commercial property values after the 2007 financial crisis and commercial property was down more than 40% from the peak (2007) when the trough was apparently reached in 2009. Since mid-2009 it has been a slow slog to recovery and prices are still 35% off peak values. These are averages of course across the UK – London has nearly recovered to peak levels, whereas Northern Irelandstill looks incredibly shaky. In Ireland we are off an average of 60% from peak levels so we have suffered more, that is certain, but we are in the same ballpark. And just like in Ireland, banks are dealing with impaired property loans and foreclosed assets. This week saw a novel development to try to deal with the overhang, and given the property company managing the project, we might see something similar inIreland.

Lloyds Bank has reportedly placed a mixed portfolio of property on the market in one lot. The portfolio, which comprises 38 properties, is being sold through Jones Lang LaSalle (JLL), NAMA’s Head of Portfolio Management, John Mulcahy’s former employer. The properties were owned by different borrowers and are geographically dispersed. The portfolio is said to generate an initial yield of 9% and has a price tag reported to be GBP 60m.

According to the JLL news release, “the Flagstaff portfolio comprises 38 assets totalling three quarters of a million sq ft with a guide price in excess of £60m reflecting a net initial yield of nine plus per cent.   Around half of the assets by income are located in the south of England, with the remainder located across the midlands, northeast, northwest andWales.  The portfolio boasts a strong line-up of tenants with a low vacancy rate of under four per cent. Three quarters of the portfolio is freehold with an overall weighted average unexpired lease term of over eight years.  Approximately twenty five per cent of the income from the portfolio is derived from the UK Government”

With such an overhang of distressed commercial property here, might this Pick ‘n’ Mix approach be a feature of our market in the not-too-distant future?

UPDATE: 8th July, 2011. Britain’s Property Week reports that Pears owned company Telereal Trillium has paid GBP 47m for the Flagstaff portfolio.

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The alternative to selling distressed property at auction : the receivership website

By most accounts, the Allsop/Space auction at the Shelbourne Hotel on 15th April, 2011 was a great success in that all but one of the 82 properties sold, there was great media and buyer interest and €15m of property sales was generated in one day in what is a very distressed market sitting in a troubled economy. The next Allsop-Space auction will be held on 7th July, 2011 with the catalogue available from 6th June, 2011 and will reportedly feature 200 lots going under the hammer, again at the Shelbourne Hotel .

But 80 properties or 200 properties is but a drop in the ocean of the overhang in Irish residential property at present. Whilst there may be 33,000 new properties in ghost estates, there are well over 100,000 properties which represent the excess of vacant property over long term averages. And as property loans are worked out and foreclosed, we will look back on the 80-property auction and wonder why there was so much fuss over such a small sale.

The Allsop/Space auction gave some sense of where the market is today and the conclusion seemed to be that prices were some 60-70% off peak – for the little it’s worth, my view of the auction was that prices were 55-60% off peak settled prices and 60-70% off peak asking prices. This week saw the deployment of an additional sales channel, which I don’t believe we have previously seen here: the receivership website.

Unapologetically aimed at communicating the message that prices have collapsed, the D4receivership.com website is aiming to sell 26 properties in the Gasworks complex in central Dublin. The complex was developed by Liam Carroll’s company, Fabrizia. Although Liam Carroll is a NAMA Top 10 developer, this sale has nothing to do with NAMA, Ulster bank which bankrolled the scheme is not participating in the NAMA project. Fabrizia became subject to a receivership in October 2009. Although the Gasworks complex includes the iconic Allianz building (aka “The Gasometer”, pictured here), it is understood that none of the properties for sale by the receiver are in this building. Overall there appears to be about €4m of property on offer. There is also the claim that finance can be arranged for buyers.

As a website dedicated to the sale of properties from one development, it is pretty-much low in frills but high in information value, with floor plans, photographs and prices. In the same way that Allsop/Space supported their auction with advertising in other channels, the dedicated D4receivership.com website is supported by advertising elsewhere too, for example on DAFT.ie and Myhome.ie.

As for the properties themselves, the mix of houses and apartments seem to be priced at €280-360 psf which, it is claimed, represents an average 65.5% discount to peak asking prices. Apartment management fees are €1-2k per year. Anecdotal reports suggest the complex is well-maintained. Sound-proofing and the lift system have been criticised. Yield-addicts suggest that in the current rental market, the gross yield is 6-8%, with better returns from the one-bed units.

Of course sales by private treaty will not produce the spectacle that was the Allsop/Space scouts taking bids from the overflow of punters on the pavement outside the Shelbourne Hotel three weeks ago, but media interest has been solid. Given the absence of a House Price Register, we may be kept in the dark about actual prices; there may well be bidding battles for properties but in the current market, the greater likelihood is that some of the properties will sell at a discount to the quoted prices. It is hoped that there will be an update on sales at the complex here next week.

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