Archive for July 8th, 2011

It’s not often that the outgoing ECB president, Jean-Claude Trichet gives one-to-one televised interviews, but on the occasion yesterday of the announcement of an increase of 0.25% to the ECB’s main interest rate, the 68-year old increasingly shook-looking Frenchman spoke with RTE’s Tony Connelly. Of course the ECB is sensitive to criticism from EuroZone countries still struggling with debt and economic recovery, and the fact that interest rate rises at this particular time are not helpful to the individual nation. Here’s the transcript with my highlighting of the subject of this entry, discussed below the transcript.

Tony Connelly: Mr Trichet, you have said that the interest rate policy is for the EuroZone as a whole. But do you understand the anguish amongst homeowners and mortgage payers in Ireland that after all the sacrifices and the austerity they have already suffered, that they will have even higher monthly payments?

Jean-Claude Trichet: If you were losing the control of inflation expectations because all market rates would increase if the anticipation is high inflation, all interest rates are increasing. So we are maintaining order, we are maintaining confidence. It benefits all, absolutely all citizens.

TC: Can I ask you if you were surprised by the Irish government’s decision to impose losses on senior unsecured bondholders at Anglo Irish bank and Irish Nationwide bank

JCT: We call for full respect of the plan as has been approved, all the plan, nothing but the plan including all what had been said at the time of the approval of the plan

TC: And the plan would I presume dictate that senior bondholders-

JCT: The plan, nothing but the plan, all what has been said at the time.

TC: The government has as you know been looking for a medium term facility to provide a more stable lending schedule for the Irish banks. Is this something that the EC [sic] is prepared to countenance?

JCT: We have ourselves said publicly what we would do, both I would say as regards the normal refinancing that we are proceeding for very, very important amounts. We also have the exceptional ELA which is delivered by bank, the national bank ofIreland[CBI]. And all this accompanied by remarkable efforts that are being made to restructure, to, I would say, deleverage in a very organised and impressive manner with progressively, help as I see it, the banking sector to go back to go back to, absolutely progressively of course with time a better position. It is clearly what is going on and it should go on.

TC: Just to be clear, is it a possibility that some kind of medium term facility-

JCT: No I don’t think it is a possibility.[resolutely] It is not.         

TC: Are you concerned about the level and the tone of the debate inIrelandbecause there has been a lot of criticism of European institutions, criticisms in particular the ECB. We have the leader of the Opposition today saying that the interest rate increased was foolish, that it could damage the euro itself. And that the ECB needed serious concern. Are you concerned at the level of debate that is underway inIreland?

JCT: We are helpingIrelandconsiderably. We are re-financing the Irish banks, both us and the national bank ofIreland[CBI] in euros for amounts that have absolutely no precedent, no precedent or equivalent inEuropeand no precedent in the world. So this is what we are doing. On the other hand I have to say that  I think that the Irish government, the Irish society and the Irish population is doing an [sic] incredible good work. I have a lot of testimony now thatIrelandwhich had lost a lot of competitiveness in the boom, which has been an [flourish of hands] extraordinary boom is now regaining its competitiveness. I see FDIs [foreign direct investments eg US multinational companies] that are coming back inIreland, becauseIrelandis back to competitiveness. So the adjustment which is of course a difficult one, which is a courageous one, is being processed in a very, very professional way

The first of the two subjects of interest is the burning of senior bondholders. And it is interesting that Jean-Claude refers to “the plan” and “all what has been said at the time”. The plan is presumably the Memorandum of Understanding, a document in the public domain. But it might also encompass the secret sideletter to the MoU, the contents of which have not been made public. But what does “all what has been said at the time” mean? Is this “the influence” darkly referred to by governor of the Central Bank of Ireland (CBI), Patrick Honohan. Or what Minister for Finance, Michael Noonan referred to as “a nod and a wink”? Was “all what has been said at the time” said in the language of extortion, that is, if you don’t repay senior bondholders, then the ECB will withdraw its funding of Irish banks, funding upon which Irish banks now depend as no-one else will lend to them? The pursuit on here of “all what has been said at the time” has been criticised for being useless – after all, what does it add to the story of the Irish bailout to know that there was an explicit threat, that won’t make the reality of the dependence of Irish banks on ECB funding disappear. That is true, it won’t change the financial reality. It might however change the political possibilities and the credibility of any discussion of alternative courses of action.

The second subject is the medium term funding facility. Irish banks today largely depend on what is termed “non-standard liquidity operations” whereby the ECB advances funding to Irish banks in return for collateral. The funding is understood to be provided at 1.5% which is a fraction of the funding costs in the open market, if indeed the open market would advance significant funding at all. In addition to this non-standard funding from the ECB (which totalled over €70bn to the 20-odd banks that service the domestic Irish economy) a further €54bn is provided by the CBI at a higher rate (understood to be about 3.5%). So without central bank support, both nationally and from the ECB, Irish banks would collapse. Plainly that is no way to run a banking system, and given the critical importance of banking to any modern economy, it’s no way to run an economy, or country or society. We don’t do military thinking inIreland, but if we did, we would deem this banking arrangement as a strategic threat to the country. So obviously we have been seeking a medium term facility which would mean the funding of Irish banks was not secured on week-to-week funding. The IMF supports this and the ECB had apparently touted such an arrangement in March 2011. But it is now not to be and the tone in which Jean-Claude said he didn’t think it is a possibility “it is not” is remarkable. The present funding arrangements are due to be withdrawn in October 2011, though they have been in place since 2008 and the chances are they will be extended but it still means Irish banks are heavily exposed to the whims of the ECB and also the freedom to manoeuvre in terms of burning bondholders is severely restricted. The scale of the funding is stratospheric, “no precedent in Europe or the world!” exclaimed Jean-Claude above. I wonder what options, our officials consider they have. Not many, I’ll wager.


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One of the odd features of the Irish property markets, particularly the residential market, is the lack of price discovery – that is, what a property actually sells for. We have asking prices aplenty, though we still get a smattering of “price on application” in advertising, but what we lack are settled prices. Due to repeated political failure by Labour, Fine Gael, the Greens and Fianna Fail we have not had the House Price Database (HPD) implemented. This, or something similar, was specifically called for in the Kenny Report in 1974 and although all political parties support the transparency, particularly when they are in Opposition, somehow the reform slips between the cracks as soon as politicians get into power. We have a greater chance of seeing a HPD in the next two years, but not because of any great domestic political epiphany; no we can thank the IMF for making sure that a “site valuation tax” made it into the Memorandum of Understanding against which the government must report progress quarterly. Such a tax will entail valuations and a consequence should be the creation of a public database of prices. Perhaps then we might have a better sense of the current property market, both mortgage and cash. Meantime, we have Allsop/Space auctions.

Of course we have other auction companies as well, but it is Allsop, the British auction giant with its local partner, the Dublinproperty company Space that is transforming auctioneering in Ireland. Three weeks ago, we had the washout of the GMAC auction in Cork where 65 properties with reserves near €10m were put under the hammer – in the event two sold for a total of €95,000. There was a Gunne auction last week with 12 lots but such is the abysmal local transparency, it was felt too messy a challenge to report those auction results on here. There will be a huge Savills auction in September 2011 in Dublin and I understand there will be a large Osborne King auction in Belfast in the same month. Car auction group Merlin is also poised to enter the property auction market, building on its credentials as a car receiver auctioneer.

But no-one does it quite like Allsop (at least not yet). And in the era of the Irish mega auction, potential competitors will have their work cut out to match up. Allsop is a class company for what it does, it fills venues after appropriate marketing, floods the market with information, catalogues, terms of sale. It professionally organises viewings. And on the day, its manpower is on the ground at its venues (normally upscale hotels), it deals effortlessly with proxy, phone and internet bids, no bid goes un-seen and the bidding public sees a transparent process at work. Away from the venue, the auction is broadcast over the internet with live bidding and results. Gary Murphy (pictured here in a more relaxed setting) has become the face of Allsop here inIreland; in theUK the company tends to rotate auctioneers. But I thinkGary has been warmed to, and Allsop seems keen to keep him to the fore; after all, the iconography pitfalls of a British auction giant selling what so far have largely been repossessed Irish properties, are obvious. So far though, the professionalism and transparency has been refreshing and welcomed. And of course Allsop is backed up locally by its Irish partner, estate agent and property services company, Space.

As regards the results of yesterday’s auction, there is an overview here. Unfortunately Space is suffering communication problems today with its email system being overloaded and no doubt the small estate agency is run off its feet with tying up the inevitable loose ends in the aftermath of any auction. So there is no comment from Space yet, but elsewhere it is reported that domestic buyers outnumbered foreigners and the betting would be that cash purchasers outnumbered mortgage/credit buyers.

A feature of yesterday’s auction, not mentioned elsewhere, which might be concerning to buyers was incidences where auction particulars were changed from those in the catalogue, specifically where freehold became very long leasehold eg lot 54 Villiers Street in Rathgar which became a 500-year lease on the day. Now you might snort at suggesting there’s any real difference between a freehold and a 500-year lease but remember leases may have all sorts of conditions eg modification. That might be something to watch out for at future auctions.

And what do the results of yesterday’s auction tell us about property inIrelandat present?

(1) There is funding for property at the right price. In April, Allsop generated over €14m and yesterday nearly €16m. In April, only one property remained unsold a couple of days after the auction. I would expect the same result this time as most of the five unsold properties had bids within 5% of their maximum reserve and in one unsold case, the site in Ennis with a reserve of €500k, the final bid was €495k. Remember there’s still nearly €90bn on deposit in Irish banks and who knows how much is squirreled away elsewhere. Recent Census 2011 figures would indicate population growth continues, so there is also likely to be pent-up demand. All of which might be positive for the prospects of the property market though price discovery, confidence and lack of credit clearly remain issues.

(2) To date properties sold by Allsop/Space have appeared to be largely Bank of Scotland (Ireland) repossessions. But remember that Certus, the newly-formed company which is working out BoS(I) loans has some €30bn of loans to work out. IF these loans were all property AND they were all granted at the peak AND had now fallen 80% THEN those loans would be worth some €6bn today. Considering the first two Allsop auctions generated just over €30m, that means that 99.5% of the property may still come on the market. That can’t be emphasised enough – the amount of property overhang in Irelandis staggering with 33,000 complete or near-complete properties on ghost estates, and another 60,000-plus of what is described as an overhang of vacant properties (total vacant properties including holiday homes were recently quantified by Census 2011 at 294,000). So bottom line is that is A LOT of property still to come to market.

(3) As for the all-important question, what did yesterday’s results mean for the present level of property prices? That’s a difficult question as the properties were (deliberately) spread around the country and also spread across different property types. As regards the star of the show the semi-detached 35 Ailesbury Road which fetched €2.325m, next door, the terraced 33 Ailesbury was reported to have fetched €7.75m in November 2007, just after the cusp of the peak.The property sold yesterday was said to be in need of renovation. All told, the estimation on here was that the sale indicated a 70% price drop from peak. But that was the star of the show and was no doubt a deliberate attempt by BoS(I) to discover prices in the primest of locations, even if the subject property was in need of renovation. My view is that yesterday’s auction on average placed settled prices 60% down from peak, about the same as April. The 3-bed flat at 470 Castleforbes sold for €262,500 down 40% from the apparent asking prices in 2005, two years before the peak and arguably 60% down from peak. The Mill House in Schull which sold for €560,000 (compared with its max reserve of €270,000) was considered to be about one half of its peak valuation. A property onIona Road in Glasnevin fetched €710,000 at a time when apparently similar properties on the same road are for sale at over €100,000 less. A property onHaddington Road in Ballsbridge fetched €635,000. A similarly sized property on the same road in first rate condition was offered at €1,450,000 and is apparently now sale agreed but the price is not known. There is some evidence of sellers adjusting their asking prices, having reflected upon what the first Allsop/Space auction indicated for the market.

Taking a further step back from the first two Allsop/Space auctions, it seems clear that BoS(I) is deliberately taking the lead in price discovery so that buyers and sellers at least can see what certain properties clear at. Auctions are quite expensive businesses and BoS(I) or rather Certus, might be hoping that once there is a certain degree of transparency then properties might be disposed of through traditional private treaty sales. And remember behind BoS(I), Ulster Bank is also nursing a similar-sized loan exposure inIreland. And behind both is NAMA which is still to bring large volumes of property to market. The second Allsop/Space auction yesterday wasn’t the end of mega Irish auctions and to misquote Churchill again, not even the beginning of the end and indeed, such is the extent of the overhang of property, probably not even the end of the beginning.

The next Allsop/Space auction is on 23rd September 2011. The results of yesterday’s auction are here together with a flash analysis and the results of the first auction in April 2011 are here.

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