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Archive for July 26th, 2011

This afternoon, LaSalle Investment Management, part of the Jones Lang LaSalle group (NAMA’s Head of Portfolio Management, John Mulcahy’s former employer) has announced the purchase from NAMA of a shopping centre in Dumbarton in Scotland. The 120,000 sq ft Artizan shopping centre (pictured here) had been associated with Northern Ireland developer, Jermon Developments, though it is unclear at this stage if that company was involved in the sale. The price paid is confirmed by LaSalle to be GBP 4.85m (€5.5m). The shopping centre has substantial vacancy at present – said by LaSalle to be 33 % vacant by estimated rental value (“ERV”) and 54% vacant by net leasable area.

LaSalle report a Net Initial Yield of 13.6 per cent and a Triple Net Yield of 11.2 per cent. The price and yield might raise some eyebrows, though Scotland and Northern Irelandhave had a poor recovery from the collapse in UK commercial prices in 2007. Even today prices have only recovered across the UK to the extent of being 35% off peak values, and with regions like London and the South-East of England performing well, it is inevitable that some regions will still be in excess of 35% off peak.

Still, completed shopping centres in regional towns (21 kilometres fromGlasgow) for €43 per square foot. Might give some in Ireland  pause for thought.

UPDATE: 27th July, 2011. Irish media catches up with the deal today.  The Independent reports that the purchase is of a leasehold interest and is the seventh acquisition of a shopping centre by LaSalle in the UK “since 2009”.  The Irish Times reports that the centre had previously been purchased by Jermon in 2006 for GBP 17.8m.

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There are two indices in Ireland, both quarterly, which track changes to prices of commercial property. The smaller 32 property sample index is that produced by property services giant Jones Lang Lasalle (JLL) and involves JLL’s people examining a portfolio of property and revaluing prices and rents. The larger 287 property sample index is produced by the Society of Chartered Surveyors in Ireland (SCSI – the merged body created earlier this year from the Society of Chartered Surveyors and the Irish Auctioneers and Valuers Institute) together with global property information company Investment Property Databank (IPD) The JLL index tends to be published each quarter before the SCSI/JLL index and because NAMA’s Long Term Economic Value Regulations makes reference to both as reputable sources of information, the JLL index is used to calculate the NWL index and also the performance of Irish commercial property shown at the top of this page. Both indices display a remarkable historical correlation – indeed at the end of Q1, 2011 the JLL index indicated Irish property was 60.9% off peak whilst the SCSI/IPD index was ~62% off peak.

On 12th July 2011, JLL reported its index for Q2, 2011 which showed a shock 5.7% decline in Q2, 2011 – the largest quarterly decline since NAMA was created in December 2009. Today the SCSI/IPD index was published for Q2, 2011 and it continues to mirror the JLL index, showing prices were down 5.3% overall in Q2, 2011 compared with 5.7% reported by JLL. In terms of peak to present, JLL is now down 63% whilst SCSI/IPD is down 64%.

JLL issue a commentary with their quarterly report and two weeks ago, it strikingly pointed out that commercial property may suffer an additional 20-30% decline in commercial prices if the Government implements plans to abolish Upward Only Rent Review leases, which would mean all commercial leases would be able to seek market rents.

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“we’re basically waiting to see how beaten up people’s psyches get, and where they’re willing to sell assets” – Blackstone CEO and co-founder, Steve Schwarzman on European opportunities in December 2010

RTE News was not having a good day yesterday. The Papal Nuncio for Irelandwas recalled to Vatican City. “Recall” is a diplomatic term and means that the state of Vatican Cityhas written a letter – a so-called “letter of recall” – to the state ofIreland to inform it that theVatican City ambassador (or Papal Nuncio, being the special title for Vatican ambassadors) was being removed fromIreland. Letters of recall are written on one of two ground – protest or reassignment. There is no intimation in the case of Monsignor Giuseppe Leanza that he is being reassigned, and word fromVatican City is that it is unhappy with the Irish government’s reaction to the recently published Cloyne Report – the latest report to investigate the abuse of children by the Catholic church inIreland. Both the Taoiseach and Tanaiste have used unprecedented language to accuse the state ofVatican City of seeking to uphold its own primacy at the expense of covering up the abuse of children. And further, plans have been announced to strengthen child protection laws generally here inIreland, and indeed to intrude upon the seal of confession in pursuit of wrong-doing. RTE didn’t manage to get a copy of the “letter of recall” and the focus of its reporting was that the Papal Nuncio was merely back in Vatican City to help craft a response to the serious failings alleged against Vatican City in the Cloyne Report, whereas the actual central reason for the action was to deliver a protest to Ireland, by using a strong weapon in the arsenal of diplomacy (permanent withdrawal of the Papal Nuncio would be the next escalation, followed by closure of an embassy and sharing with another embassy, followed by breaking off all diplomatic relations). No real sense of any of this was given by RTE.

But it was in its reporting of the deal with Bank of Ireland that RTE really let the nation down yesterday. It is a complicated deal, it was only agreed yesterday morning, the parties to the deal are only now emerging, there is a lot going on with Bank of Ireland and Irish banks generally at present. So it is difficult to judge the merit of this deal. The Minister for Finance, Michael Noonan is upbeat about it calling it “truly another very positive development for the Irish economy”. Mind you, he’s been upbeat about other episodes recently that have later turned to dust. David Murphy, RTE’s Business Editor, mimicking the Minister’s language, reported that the deal was “positive for the taxpayer”. It wasn’t clear on what basis the deal is considered positive for the taxpayer – from this perspective it seems very difficult indeed to assess if the State has received value for money. This entry examines aspects of the deal.

It reduces future Government funding of Bank of Ireland
The March 2011 stress tests identified an additional recapitalisation need for Bank of Ireland of €5.2bn. Subsequently Bank of Ireland embarked on a programme to buy back subordinated bonds at a discount and to an extent that programme has been successful, (yesterday estimated as contributing €2.4bn to the recapitalisation) even if Bank of Ireland abandoned one specific buyback and apparently continues to face at least one legal challenge in another case. Yesterday’s announcement will reduce the recapitalisation demand on the State by €1.1bn meaning the State will now pony up €1.7bn rather than the €5.2bn identified in March. However here’s where the debate takes a new turn. Up to now, any investment by the Government has been regarded as an “investment” which we didn’t expect to ever see again, gone into a black hole and never coming back. And that is true of Anglo, INBS and largely true of EBS and Irish Life and Permanent and to a lesser extent at AIB. But Bank of Ireland is the healthiest of the Irish banks, and investment at this late stage may indeed be that – a proper investment with a prospect of both repayment AND a return. So in relation to Bank of Ireland alone really, reducing Government spend at this stage might not necessarily be the smartest financial move.

It involves external money
There is very little appetite out there to provide funding to Irish banks. Not only have deposits fled leaving the banks reliant on central bank funding to stay open, but more conventional market lending to Irish banks has to a large extent dried up.

It involves international money
With our debt rated as junk by Moody’s and unimpressive ratings from the other two main ratings agencies, with an IMF bailout, with debt:GDP projected to rise to 118% in 2013, with the second worst deficit in Europe, with an economy which is bouncing along the bottom with an anaemic outlook this year, though more positive in 2012, with unemployment of 14.2%, with a currency union which is inflexible to the specific needs of the Irish economy, with property markets on the floor and high levels of personal debt and negative equity; with all of that, it is positive that anyone outside the country looking at opportunities in different countries would seriously engage with us by providing cash.

There appears to be little oversight
As the Taoiseach reminded us last week, we live in a republican democracy where church cannon law does not have primacy over civil law. But another feature of a republican democracy is that important decisions are subjected to oversight by the people’s representatives. Here we have a sale of an asset controlled by the State worth, by reference to the deal announced yesterday, up to €1.1bn. That is a colossal transaction for this small country of ours. If we achieved 2% more we might have been able to save Roscommon A&E for a few years. Also Bank ofIrelandis to be one of the proposed two “pillar” banks. And as we know, banking is critical to this country so is the Dail happy with the buyers. Regulatory approval is one aspect of oversight, but in a democracy even regulatory approval is subordinate to the Dail. Will An Toaiseach recall the Dail to debate the deal, not just across party lines but also to invite comment from within the ruling parties. Does Peter Mathews think this is a good deal? And beyond our own shores, will there be oversight of the deal from our bailout partners at the IMF and EU/ECB? It would be comforting if there were.

External investment versus proceeding with State recapitalisation
A key question, to which an answer was not provided yesterday, was whether it was financially more profitable for the Government to invest all of the remaining capital requirement and wait for projected returns or accept external investment at this point. The absence of detail, the present value of Bank of Ireland and its projections, makes this a difficult question for an outsider to answer. But it is incumbent on the Government to demonstrate that the external investment at this juncture is a better option than an investment by the State.

Transparency
Remember the prospectuses for the sale of Eircom? And if this Government does ever address the McCarthy report on the sale of state assets, you can expect reams of similar public information for future sell-offs. At the very least, you can expect a sale akin to the sale of deposits at Anglo Irish Bank and Irish Nationwide Building Society in February 2011 where there would be a data room and competitive tendering. Where was the transparency in this deal, concluded in the wee hours of Monday morning? Were other bidders invited to bid? Was there a level playing pitch with access to information amongst potential bidders?

Best offer
One way to test a deal is to open it up to the market and seek bids and let the market find its level. We know from the recent application by Bank of Ireland subordinated bondholders in theUK’s High Court that other “international investors” had written to Bank of Ireland setting out terms for an offer for shares. So there is “international investor” interest out there.

Negotiators and advice
Yesterday’s press statement confirms that the negotiations on Ireland’s behalf were carried out by Ireland’s Department of Finance together with banking personnel seconded from the National Treasury Management Agency. Controversial investment bank Goldman Sachs was an external adviser to the Irish government. Goldman Sachs’ non-executive chairman is Irishman Peter Sutherland (with whom I see Minister Noonan spoke by phone on 24th March 2011 according to the recently released Minister for Finance diary and published by the ever helpful thestory.ie). Goldman Sachs is still trying to shrug off the blows to its reputation sustained during the 2008 financial crisis when the company was accused of selling a mortgage investment product that was apparently designed to fail and separately of helping the Greek government mask the true position of its finances through the lawful use of derivatives. It is generally true that the negotiators have not covered themselves in glory in the past – sales of Anglo/INBS deposits, banking guarantee, bailout deal, NAMA, managing subordinated bondholders 2008-2010, planning the drawdown of the bailout – but the NTMA has boosted its banking expertise and the Department of Finance is slowly addressing the skills issues identified in a number of reports (Nyberg, Wright) and it would be usual for an investment bank or similar to advise on such a potentially large deal.

Late last year, the CEO of US investment giant Blackstone, Steve Schwarzman delivered a speech in which he said “you want to wait until there’s really blood in the streets” before investing in distressed European markets. A concern must be that this investment has been rashly concluded under a cloak of secrecy without oversight in the Dail, by people on our side whose record has been patchy. Is it a good deal forIreland? Maybe but there doesn’t appear to be sufficient information to judge. But it is not at all clear how RTE can conclude that the deal is “positive for the taxpayer”.

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