Archive for May 19th, 2011

Apparently we are, according to NAMA who said in speeches today “there is tentative evidence to suggest that we may now be close to the bottom of the cycle” And the evidence? Step forward the Central Bank of Ireland (CBI) and its stress test macroeconomic scenarios that were published in March 2011. To remind ourselves, there were two scenarios published by the CBI, the baseline and the adverse. In terms of commercial property prices, the baseline projection was for a 2.5% decline in 2011 followed by 1.5% increases in each of 2012 and 2013. The adverse scenario was for a 22% decline in 2011 followed by 1.5% increases in each of 2012 and 2013. Whilst the CBI declined to provide any explanation for the sources of their projections, the view on here was that the difference between the baseline and the adverse was the proposed abolition of Upward Only Rent Review (UORR) leases which the property industry has claimed will lead to an average 20-30% decline in Irish commercial property prices. But as to the derivation of the baseline, who knows? But it seems tenuous at best to suggest the unexplained CBI baseline scenario is solid proof that we are at the bottom.

But there was more; the NAMA speeches also said “taking account of the long-term relationship between commercial property prices and economic growth, we know that, for much of the past decade, prices had accelerated well ahead of GDP growth and that they have now corrected to levels where we would have expected them to be had the price bubble not taken place.” Hmmm, what does this mean exactly? The most likely interpretation, I would suggest, is that capital prices increased more than the increases in GDP during much of the last decade. So if you were to take a property worth €10m in 2000, and cumulative real GDP growth from 2000-2010 was 40%, then if capital prices were to mirror GDP growth, that would mean the property would be worth €14m in 2010 in real terms (“real” in this sense means excluding inflation). Of course what happened was that commercial property increased by well in excess of GDP during the early/mid 2000s but following a 60% collapse from peak values, we are now back to pre-2000 levels. So were pre-2000 levels a good indicator of the long-term value of commercial property? NAMA certainly seems to think so, but why? Again, there is little in the way of evidence. It is still curious that prime property inDublinis almost twice as expensive as primeBelfastproperty.

And lastly NAMA said “there are a number of other indicators which suggest a stabilisation of prices, including the reversion of office and retail yields back to pre-bubble levels” I must say that this hints of the ignorance of former Minister, Brian Lenihan’s statement in September 2009 that “the fall in property values has pushed up property yields. Yields are now above their long-term average, and this suggests that values are bottoming out” Now we know that Minister Lenihan was talking nonsense in 2009 because commercial property dropped more than 15% since that date. Does NAMA have more cause for optimism in 2011? Probably, because the economy is stabilizing to an extent. However, with a general overhang of vacant property, anaemic economic growth in prospect, difficulties in accessing credit and the great bugbear, the abolition of UORR leases, it may still be the case that rents continue to decline, which may bring capital values down with them.

There was some optimism with the two Google transactions on Barrow Streetin quarter one of 2011. But the outlook is challenging and Paddy Power’s recently agreed rent, understood to be close to a net €10 psf for third generation offices in Clonskeagh, will certainly tend to bring downward pressure on prices.

We should remember that it is in NAMA’s interest that we are close to the bottom of the cycle. Otherwise who will buy the property securing its loans? I am still scratching my head at NAMA chairman, Frank Daly’s claim that residential property was down by an average of 50% from peak values in November 2009 when the recent CSO index indicated we were only down by 28% at that date, and although the CSO only analysed mortgage transactions, it also said that mortgage transactions accounted for 94% of the total residential market in 2009. So NAMA’s claims at this stage should probably be treated with caution.


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This morning, the Financial Regulator Matthew Elderfield released the mortgage arrears data for quarter one of 2011 together with enhanced information on restructured mortgages. The headline is that mortgage arrears are still rising and the pace is increasing slightly. Here’s the data together with as much historical data as is available:

(Click to enlarge)

In short arrears are up more than 10% relative to the previous quarter and up 55% compared with quarter one of 2010. Some 6.34% of all mortgages are over 90 days in arrears and the pace of increase is increasing slightly (the total in arrears increased by 0.68% in Q1, 2011, 0.53% in Q4,2010, 0.513% in Q3,2010). Repossessions in the quarter were at their highest level since these current records began but at 140 are still minute compared to other jurisdictions eg US and UK – forbearance measures by banks and our lack of a modern bankruptcy mechanism might the reasons for this low statistic. The restructured mortgage data is new and I extract here the table from the report published today:

Of interest is that not one mortgage that has been restructured, has been a tracker where the borrower has been forced to take a standard or other mortgage product as a condition of a restructuring agreement. Or if that isn’t the case, the Financial Regulator hasn’t deemed it noteworthy to include such a heading. The under-reported scandal of banks being able to strong-arm vulnerable mortgage holders into surrendering valuable tracker mortgages for standard variable mortgages as a condition of agreement to any restructure has long been a bug-bear on here.

Also it is not quite clear how many restructured mortgages are included in the arrears figures. The report indicates that there are presently 62,936 restructured mortgages and of these 36,662 are not in arrears indicating that 26,274 are in arrears, though some of these may be less than 90 days in arrears.

So if you were to ask the question “how many mortgages are in some difficulty today?”, you’d have to add the arrears of 90 days+ (49,609) to some restructured mortgages (at least 36,662) to give you at least 86,271 or 11% of the total mortgage book. There are reportedly some 16,000 mortgages in receipt of some form of State mortgage assistance, some of these may be included in the arrears/restructurings but some may not.

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“Our aim would be to unveil a product with the two banks in the early autumn which meets a number of key criteria: one which generates sales of property controlled either by NAMA debtors or by receivers yet provides an incentive to purchasers to invest at current prices in the knowledge that there will be a mechanism in place which will offer them protection against the risk of negative equity in the event that prices should continue to fall.” NAMA 19th May 2011

The NAMA CEO and chairman delivered the same speech to two separate audiences this morning. Frank Daly was speaking in Corkto the Cork Chamber of Commerce. Brendan McDonagh was speaking in Dublinto the ACCA (certified accountants). The speeches were the same and are available here. There is also a press release, which is only marginally shorter than the speech, here.

The speeches are described by NAMA as “keynote” and certainly contain some new thinking on reviving both the residential and commercial property markets here. It seems that the kite that NAMA launched into flight two months ago whereby the agency proposed financing purchases of its property, that kite hasn’t been shot down and NAMA is now developing with AIB and BoI a product which will both fund the purchase of a residential property and provide some sort of insurance against future negative equity. There wasn’t any further detail forthcoming but I understand the product that NAMA has in mind to be akin to a normal mortgage and an insurance product of the kind Ulster Bank was considering last year. NAMA is also progressing its staple financing initiative for selling better quality commercial property to “pension funds, insurance companies, private equity firms and sovereign wealth funds” (in other words bottom-feeding vulture funds can get lost!)

Elsewhere we got an update on NAMA’s numbers:

(1) The agency has acquired €72.3bn of loans for a consideration of €30.5bn and that there is a potential €3.4bn of Paddy McKillen/objector loans to acquire

(2) NAMA has approved the sale of €3.3bn of assets (loans and property) with “the majority” disposed of in theUK

(3) NAMA has €1.2bn in cash on hand, and that’s after redeeming €250m of NAMA bonds. That €250m redemption is new and curious as to why NAMA is using its cash now to redeem its bonds.

(4) NAMA has approved €800m in development funding, though presumably only a fraction of this has in fact been advanced

With respect to the developers or “debtors”

(1) The first 30 developers represent €27bn of lending at nominal value and NAMA is “at an advanced stage” with them

(2) The next 150 developers represent €25bn of lending at nominal value and NAMA is engaging with them to have appropriate strategies in place by the end of 2011

(3) Taking the top 180 developers together, NAMA has approved business plans or commenced enforcement in 33 cases

(4) With respect to the small fry, the 670 debtors representing €12bn of lending at nominal value, some 200 of these will have been “determined” by August 2011

(4) In “57 cases to date” NAMA has been left with no choice but to enforce against debtors. It is not clear if these are individual companies or separate debtors. NAMA itself has taken action against some 71 separate limited companies so presumably NAMA is talking about debtors. The 57 cases includes enforcement action by NAMA banks against debtors.

NAMA also spoke about issues with transparency and asserted that the NAMA Act and the original loan agreements guaranteed confidentiality for borrowers. It looks like Minister Noonan might have been pressing for this register of impaired loans as promised in the Programme for Government but it seems new legislation will be needed to deliver on that promise. Whilst taking pains to explain that it was not encouraging lobbying, NAMA announced a liaison mechanism with the accountancy body umbrella group, the Consultative Committee of Accounting Bodies in Ireland (CCABI).

NAMA continues to use any opportunity at all to bang the shield at developers and I leave you with this gem from this morning’s speech about what NAMA claim is the attitude of some developers to NAMA’s overtures “It is akin to falling overboard and then complaining to your rescuer about the colour of the lifebuoy that he is about to throw in your direction”

UPDATE: 19th May 2011  Ulster Bank appears to have withdrawn its Secure Step mortgage product for specific property. But this is the blurb that was available from that bank.

UPDATE: 25th May, 2011.  Although NAMA has not formally provided any further details of its negative equity mortgage product, its spokesman seems to provide snippets to selected media outlets.  The Irish Independent today reports that NAMA’s loan fund will amount to some €1bn and that NAMA may allow non-NAMA banks to participate in the scheme. It is unclear if these statements relate to residential sales only or to both residential and commercial, the latter being offered alongside staple financing. The Independent states that NAMA has “indicated” that it “may” sell properties below their November 2009 valuations. Remember NAMA paid an average of a 10% long term economic value premium and both residential and commercial has dropped 10-20% in Ireland since November 2009 so NAMA may well end up selling below its acquisition price if it wants to dispose now or in the short term. We get this strange wording from the NAMA spokesman again on the subject of sales prices “NAMA has been clear that market prices are dictated by what people are willing to pay not what sellers are hoping to get.” So lets say we have two buyers in the market looking for a house, Buyer A and Buyer B. Buyer A has some cash put away and his credit union will lend him three times his deposit there. So Buyer A can afford to pay €100k for a house. Buyer B has far less cash and his bank is not so keen on lending him money. But NAMA says it will advance him a €108k mortgage as long as Buyer B puts in €12k cash and also NAMA will postpone the imposition of an additional €30k loan for five years contingent on the market not falling further. So in this case what are “buyers willing to pay”? €100k or €150k? Plainly NAMA’s provision of the mortgage product will distort the market but is that 50% distortion acceptable for a short period of time? It might be, but I can foresee competition and other problems for NAMA. In another article in today’s Independent, there is apparent clarification from the NAMA spokesman that the schemes will only be available for Irish properties (that’s presumably Republic of Ireland) and not for “overseas” properties.

UPDATE: 27th July, 2011. NAMA has provided more information and illustration on how its proposed mortgage product will operate when it is introduced in October, 2011 on a limited trial basis through AIB, Bank of Ireland and Irish Life and Permanent. The full graphic is here. The modified version consists of a disclaimer

How the product will work at the time of the property purchase and following 5 years.

And what happens when theer is an independent valuation at the end of the 5 year period.

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