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Archive for June 25th, 2011

The NAMA chairman, Frank Daly was the guest on the Marian Finucane show on RTE Radio this morning – the podcast will be here later today and the interview with Frank lasts more than 50 minutes during the first hour. For the non-Irish audience, the Marian Finucane Saturday radio show has the third highest ratings in the country with typically 380,000 listeners, and deals with events of the day, mostly flim-flam. Marian presents the show on Saturday and Sunday only (Sunday’s show has the fourth highest ratings) and she herself is a veteran of Irish broadcasting; her style might be described as light and neighbourly. The interview this morning lasted 50 minutes and would seem to indicate NAMA is trying to raise its profile and dispel some of the mystery about its operations.

Here are the highlights

(1) Fourteen months after taking over the first tranche of loans, NAMA has not yet agreed one business plan. By agreement I mean having a signed Memorandum of Understanding, Heads of Terms and Final Agreement. The NAMA chairman said that one business plan was “close to finality”. NAMA has “signed off” on 33 business plans and the business plans are being delivered, just there is no formal agreement by both parties to the plan. Now these business plans are complex (see below) but failure to get agreement on one business plan after more than a year should worry those whose responsibility it is to oversee NAMA. There would appear to be planning, resourcing, operational or management failure, or perhaps all four.

(2) Without identifying the developer, Frank provided an example of one business plan to evidence how complex they can be. One developer has 300 loans on 600 properties and the ownership structures are complicated with some loans owned individually, jointly with others, by companies, Special Purpose Vehicles (companies also, whose sole purpose is to manage one asset) and some companies are overseas-registered including Delaware and Luxembourg (I wonder when they’ll get to the British Virgin Islands and Panama, then there’ll be some real fun!). There is cross-collateralisation which means that one property might be used as security for a number of loans. Developers have loans with NAMA banks and with non-NAMA banks. And some developers have loans that run into the billions with NAMA alone. Frank didn’t mention personal guarantees, quality of loan documentation and security, spousal issues, trusts etc. Frank said that he thought he had seen complex structures during his tenure of the Revenue Commissioners (Irish tax authority), but that was as nothing compared to the complexity of some structures used by developers.

(3) Frank gave an account of how he was offered the job of chairman of NAMA. He received a telephone call from Brian Lenihan offering him the role, and giving him a few hours only to consider. On the light side, Frank claimed the only good thing about becoming chairman of NAMA was that he was able to abandon his role on the board of Anglo (to which he had been appointed in December 2008 when the full mess there was becoming apparent).

(4) With respect to developers Frank said that NAMA received the most positive commentary in the media when it foreclosed on a developer but that pulling the plug was not something NAMA wanted to do. That said, Frank conceded that “excessive and ostentatious lifestyles of developers” were “offensive” to him. There was no word whatsoever on David Daly, or any other outstanding legal case (NAMA was issued with proceedings by Carl Dillon in the High Court last week, but NAMA has not replied to a request for comment – not clear which Carl Dillon that is, but there is A Carl Dillon that was appointed liquidator at the Whelan Group)

(5) When asked about commercial experience amongst NAMA’s 140 employees (set to increase to 200 shortly), Frank said that there were very experienced property and lending people working for NAMA – three of the most senior had 100 years property and lending experience between them, he claimed. Frank wasn’t challenged on how 200 staff could POSSIBLY effectively manage €73bn of loans.

(6) On the question of the huge costs being incurred by NAMA in engaging outside consultants and companies, Frank claimed that all engagements were subject to tendering. Which we know is not true – take a look at the Comptroller and Auditor General’s report into NAMA’s first months of operation and there are several secondment-type of engagements costing millions; where was the tendering for these? In general though, it would probably be fair to say the majority of engagements are subject to open tendering.

(7) A number of people had contacted Marian Finucane to claim that they had agreements to buy NAMA property, presumably residential property and yet NAMA was delaying the sale. Frank asked that these people would write to him personally as he was unaware of the issue and claimed NAMA was generally responding well to requests.

(8) NAMA still expects to make a profit over its 7-10 year life, though Frank sidestepped the question of whether NAMA had made a loss to date (which it has in the €1bn range according to NAMA and the near-€3bn range according to estimates here)

(9) With respect to the vexed question of Upward Only Rent Review (UORR) leases, Frank said that last year NAMA had written to the Minister for Finance to outline the effect any change would have; there’s no suggestion of lobbying which might put NAMA in hot water. Frank said that NAMA meets with some 50 investors every week – Wow! – and that a common concern was the uncertainty surrounding UORRs.

(10) NAMA’s mortgage product will be introduced “by the end of the year” and Frank provided a worked example of a property that NAMA might sell for €200k, with the buyer putting up €20k, the bank €140k and NAMA would assume responsibility for the rest and if the property fell in value subsequently NAMA would write off the loss.

(11) Frank said that NAMA had indeed crystallized losses in the banks, but he made the point that this was not NAMA’s fault – the losses were already there and it was the banks that had incurred them. NAMA has apparently been praised by ratings agencies for providing clarity to the level of losses in banks and has contributed to us finally having a handle on the costs of the financial crisis in our banks. Frank makes a good point – does anyone think that Spanish banks with €450bn of development loans and €45bn of loan provisions are being anything other than delusional?

And lastly Frank (aged 66) said that he didn’t expect to be chairman of NAMA when it is eventually wound up in 7-10 years. If it has been a sharper presenter than Marian, Frank might have been asked if he expected to be chairman in 7-10 weeks.

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(1) Why are construction costs in the Republic of Ireland twice those in Northern Ireland?

(2) Why are prime rents in Belfast one half of those in prime Dublin?

(3) Why has residential property dropped by more from peak values in Northern Ireland than in the Republic?

If Irelandis serious about regaining its competitive edge, perhaps one of the first steps needed is to make the National Competitiveness Council (NCC) more competitive. On Thursday (June 23rd, 2011), it produced its annual “Cost of Doing Business in Ireland” 2011 competitiveness survey using figures, mostly from….. 2009. So if you want to read an historical text, you might get some satisfaction from the NCC’s annual report. If you want to know about what has been generally happening in the past 18 months, look elsewhere. This entry examines what the report had to say about property.

But first, turning to the three questions at the opening. The Society of Chartered Surveyors in Ireland annually publishes rebuilding costs in the Republic, their latest survey is analysed here. In Northern Ireland the Association of British Insurers (ABI) /RICS Building Cost Information Service has a calculator (free registration required) which calculates rebuilding costs. In the Republic rebuilding costs this year vary between €119-169 psf; in Northern Ireland, as of this morning the standard cost of rebuilding a 1,000 sq ft 3-bed semi-detached house is GBP 69,000, that is GBP 69 psf or at current exchange rates of GBP 1 = €1.1252, €77.64 psf. So why does construction cost one price in Dundalk in the Republic, yet in Newry, 23kms away it costs 50% less? Wages, and in particular the wages set out in the Registered Employment Agreements (REAs) might be partly to blame but if you’re a building company in the Republic you pay 12.5% corporation tax and 26% in the North, so should high wages and low corporation tax not cancel each other?

Secondly, according to its most recent annual outlook, property powerhouse CB Richard Ellis reports that prime office space rents for €15 psf inBelfast and €30 psf inDublin. Okay Belfast is still by some standards a regional backwater without the financial services or technology hubs that exist in Dublin, scenes of savagery in the Short Strand this week will not help the city’s image and the corporate tax rate in the UK is still 26% and the betting on here is that Northern Ireland will find it difficult to financially justify lowering that rate on a regional basis because of the accompanying cut in Westminster funding that under the EU Azores principle must accompany the setting of regional differential tax rates. Northern Ireland is also in the sterling area and international companies prefer the stability (!, yes even after this week’s events in Greece) and lower currency risks of being in the bigger currency. But still, that our costs are twice those of Belfast?

As regards the third point we have really beaten ourselves up in the Republic over the collapse in the property market. We lost the run of ourselves, we had easy money stuffed down our throats to buy houses, planning authorities were greedy and incompetent, the financial regulatory system let us down, government was venal and hubristic, the media changed perceptions with the  sexy portrayal of property, prices spiraled out of control ending up costing more than eight times the average wage, we were building half the number of houses each year of the UK which has 15 times the population, ghost estates in the middle of no-where, the ECB taking its eye off the ball….. Right, so why is it that property prices in Northern Ireland are down 44% from peak whilst in the Republic they’re down by just 40.8%?

In truth the report by the NCC does tangentially address some of the above issues, but what it fails to do is to explicitly expose the extent of the anti-competitive practices in the Republic. It does refer, softly, to the following:

(1) The creation of residential and commercial property registers to foster price discovery which may lead to a better functioning marketplace

(2) The abolition of upward only rent review clauses which mean that for some commercial tenants in Ireland, they are paying rents appropriate to the boom.

(3) The examination of Joint Labour Committee agreements (JLCs) and REAs to foster a better functioning labour market

(4) Reform of personal bankruptcy arrangements

Property costs are dealt with from page 42 of the NCC’s report. It might be of interest that there is a suggestion that the normal vacancy rate in Dublin is now 15%, up from 7% previously and that there is an imminent shortage of large-scale prime property.

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