Archive for July, 2011

In addition to the 2010 Annual Report, NAMA has also published this morning the report and accounts for the first quarter of 2011. The report is here and the accounts are here.

Comment and analysis here later.

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has just been published and is available from NAMA here. (the report itself is here and the version as Gaeilge is here, the press release is here and the  launch presentation is here )

There was a preview of the report on here two weeks ago.

There will be comment and analysis here later.

The NAMA chairman, Frank Daly has given an interview to the Irish Independent today in which he talks about NAMA’s plans, including the plan to introduce a negative equity mortgage product in association with Bank of Ireland, AIB and Irish Life and Permanent and perhaps others in October 2011 which will initially be offered on “a few hundred” properties in Dublin. It will be withdrawn if unsuccessful. Frank says “it behoves everyone to be as creative as possible” referring to the challenges facing the agency with an absence of credit for potential buyers and concerns over future negative equity – who wants to buy a property today for €200,000 when next month, it may be worth €195,000.

Knowing our obsession with property, I hope NAMA has increased the bandwidth on its website which will, from later today, show details of NAMA repossessed and foreclosed property. With nearly 100 foreclosure actions to date (those initiated by NAMA and confirmed in Iris Oifigiuil listed here – there will be other actions initiated by NAMA banks on loans prior to transfer to NAMA), there is likely to be a fair smattering of property available.

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Willie Penrose, the Minister of State, Department of Environment, Community & Local Government with responsibility for Housing & Planning, has told 98FM radio in Dublin that Cluid Housing Association has bought 58 apartments in the Beacon South Quarter in Sandyford (see map above) from NAMA. The Department is involved with the transaction on account of its control over the financing of the deal (see below)

Of the 58 apartments, 34 will be rented to people on the local authority list with reduced rents. The remaining 24 apartments will be privately rented. The purchase price has not yet been announced but queries have been submitted to the various parties to the transaction, and this post may be updated later.

The Beacon South Quarter was developed by NAMA Top 20 developers, Paddy Shovlin and the Fitzpatrick brothers, Patrick and Tony. The website of the shopping centre which is part of the development describes Beacon South Quarter as having been “developed by Landmark Developments as a new high end retail, residential, office and hotel quarter for South Dublin. With over 25,000 square metres of upmarket retail outlets, 1,100 luxurious apartments and a vibrant cultural centre” Last October 2010, having absorbed the loans secured by the Beacon South development, NAMA obtained an order against the developers in Dublin’s High Court (there was no judgment, NAMA merely secured an order) and a receiver was appointed by NAMA to the properties. It is understood that the sale announced today was concluded on behalf of NAMA by the receiver, Simon Coyle of Mazars (pictured here).

According to the housing association, and in respect of the funding of the purchase “a loan of approximately 75 per cent of the purchase price has been approved in principle by the Housing Finance Agency (HFA), the first such transaction by the HFA. The remaining 25 per cent is being funded from Clúid resources and the Capital Advance Leasing Facility (CALF), a new facility that has been created to support the acquisition or development of new homes using funding from financial institutions.” CALF is indeed a new facility and seems only to have been announced by the Department of Environment, Community and Local Government on 11th July, 2011 – the facility which combines State support and finance from “financial institutions”. Queries have been submitted to the Department for further information on the facility, and this entry may be updated with any response.

So the key question, how much were the properties sold for and how will the NAMA sale price compare with existing prices? As regards existing prices, there is no information on settled prices publicly available; and just to confirm, there were no sales of Beacon South property in the two recent Allsop/Space auctions. So we are left with asking prices, and a quick browse through DAFT.ie returns seven properties in the Beacon South Quarter and the results indicate reasonably high spec apartments for sale with asking prices of about €250-300 per square foot. If average apartment sizes are 800 sq feet, the NAMA transaction might be expected to be worth €14m. NAMA has recently been indicating prices achieved on individual sales (eg Montevetro and the Jack Yeats painting) – so hopefully we will soon get the sales price information for this transaction. It should after all indicate NAMA’s view of the market.

UPDATE (1): 27th July, 2011. There is a press statement from Minister Penrose (pictured here apparently handing over car keys to the Cluid housing association). There is no additional commercial information available in the release which focusses on the social benefit of the transaction. It seems that there won’t be further information forthcoming from either NAMA or the receivers either, though efforts to reveal the purchase price will continue.

UPDATE (2): 27th July, 2011. There appears to be an enlarged press release from the Cluid Housing Association in which there is some financial information. The total purchase price is €10.3m, or an average of €177,500 per apartment (elsewhere it is confirmed there are a mix of one- and two-bedroom flats). The flats presently for sale in the Beacon South Quarter on DAFT.ie are 2-4 bedroom, with minium 800 sq ft. There is no one-bedroom flat for sale. So, it’s difficult to say how the purchase price announced today compares with existing asking prices.

UPDATE: 29th July, 2011. The Cluid Housing Association has confirmed that the apartments purchased from NAMA comprised  12 x 1 bed units, 44 x 2 bed units and 2 x 3-bed units.

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This morning has seen the publication of the fourth CSO residential property price indices forIreland. The inaugural series was published by the CSO on 13th May 2011 and covered the period from January 2005 to March 2011. This morning’s release covers the month of June 2011. Here’s the summary showing the index at its peak, November 2009 (the NAMA valuation date), June 2010 (12 months ago), December 2010 (end of year, start of this year) and June 2011.

Now that the Permanent TSB/ESRI has abandoned its quarterly house price index, the CSO isIreland’s premier index for mortgage-based transactions. Mortgage transactions at eight financial institutions are analysed : Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank ofIrelandgroup), the Educational Building Society, Permanent TSB, Belgian-owned KBC, Danish-owned National Irish Bank and Irish Nationwide Building Society. The index is hedonic in the sense it firstly groups transactions on a like-for-like basis (location, property type, floor area, number of bedrooms, new or old and first

time buyer or not) and then assigns weightings to each group dependent on their value to the total value of all transactions. The index is an average of three-month rolling transactions.

As for the key questions:

How much does property now cost in Ireland? The CSO deliberately don’t produce average prices. The former PTSB/ESRI index did, and claimed the average peak price nationally in February 2007 was €313,998, in Dublin in April 2007 was €431,016 and outside Dublin in January 2007 was €267,987. If, and it is a big “if”, you were to take PTSB/ESRI figures as sound and comparable to the CSO series, then the average today

Nationally, would be €182,142

Dublin, would be €221,436

Outside Dublin, would be €163,955

I don’t think the CSO would be happy with this approach but it seems to me that the PTSB/ESRI series as represented by its historical indices, closely correlates with performance of the CSO indices.

What’s surprising about the latest release? After recording an increase of 0.3% in May 2011, houses inDublin declined by 2.4% in the month of June 2011 alone. OutsideDublin, property fell by a more modest 1.9-2% and the expectation is that the country has some way to decline, to bring it in line with cumulative declines inDublin.

Are prices still falling? Yes and the pace of decline shows no signs of easing. A 2.1% decline nationally in the month of June 2011 and an annual decline of 12.9% are both worse than last month.

How far off the peak are we? Nationally 42%. Interestingly, as revealed here two months ago,Northern Ireland is some 44% from peak. Are forbearance by mortgage lenders, a draconian bankruptcy regime and NAMA’s (in)actions distorting the market? Or are cash transactions which are not captured by the CSO index so significant today that if they were captured, the decline in the Republic would be even greater?

How much further will prices drop? Indeed, will prices continue to drop? Who knows, I would say the general consensus is that prices will continue to drop. This is what I believe to be a comprehensive list of forecasts and projections for Irish residential property, drop me a line if you think there are any omissions.

What does this morning’s news mean for NAMA? The CSO index is used to calculate the NWL Index shown at the top of this page which aims to provide a composite reflection of price movements in NAMA’s key markets since 30th November 2009, the NAMA valuation date. Residential prices are now down 19.4% from November, 2009.  The latest results from the CSO bring the index to 856 (16.9%) meaning that NAMA will need see a blended average increase of 16.9% in its various property markets to break even at a gross profit level.

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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.

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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