Archive for August, 2011

As campaigns go, you have to admire the chutzpah and clarity of the one illustrated above. The photograph shows a banner unveiled today above Korky’s shoe-shop in Grafton Street in Dublin, a couple of hundred metres from Government buildings. The subject of the banner is one of the most vexed issues in Irish commercial property at present, the imminent introduction of legislation to allow commercial tenants to secure current market rents in leases which presently provide for Upward Only Rent Reviews (UORRs). The property industry is blaming the uncertainty over the new measures for the almost complete elimination of investment transactions at present, tenants are clamouring for the new legislation blaming existing rents, which can be benchmarked with boom-era rents, for threatening their livelihood and that of their employees and neighbourhoods, existing investors are nervous about the financial impact of any changes on the value of their assets and I am willing to bet the government is anything but sure-footed over the cost of the new provisions and the potential for constitutional and other legal challenge.

The latest news on the subject that has been reported, was an article in the Irish Sunday Times in July which claimed to preview the new legislation (the article is not available online without subscription but you can get most of the details in the update at the bottom of this blogpost). There was also a meeting between Minister for Justice and Equality, Alan Shatter and tenant representatives at the start of August, reported in the Sunday Business Post here. The Department of Justice did not offer any comment on the Sunday Times story, but the expectation is that a Bill will be unveiled at the end of September which will set out the proposed legislation. There will be a feature entry on here then.

There have been two extensive entries on the subject of UORRs on here previously (available here and here)

And if you didn’t know already, Ronan Keating of Boyzone fame was a one-time employee at Korky’s shoe-shop


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Developer Robert Butler’s 16,500 sq ft mansion in the grounds of Adare Manor, Limerick is up for sale through Sherry Fitzgerald for €2.9m (just €175 psf, the advertisement on DAFT.ie is here). Known as “Winterwood” the house is set on its own plot of 2.8 acres within the wider 840-acre hotel and golf resort; it boasts eight bedrooms, eight bathrooms and five reception rooms and a feature double staircase. Doesn’t look too shabby at all on the inside but a personal opinion is that its external architecture is typically bland – why is it that we can’t do high-end architecture in this country?

The Irish Independent reports on the sale today and says that it was worth €12m at the height of the boom, and today’s asking price represents a 76% discount.

The Irish Independent recently reported that companies associated with Robert Butler were now dealing with NAMA. Apparently loans from these companies transferred to NAMA in February 2011 and would therefore have been amongst the later tranches. A note to the accounts of Robert Butler Holdings said “NAMA has agreed to initially provide financial support to the company’s operation, in very specific terms, for a three-month period commencing May 20, 2011”

I see the advertisement on DAFT.ie is 22 days old. NAMA has said that as part of its approach to agreeing business plans with developers, the developers will be required to bring unencumbered assets to the table. It is not known if the sale of “Winterwood” is at the behest of NAMA.

Robert Butler has properties in the Shannon Free Zone and National Technology Park. He is possibly most associated today with what the Irish Independent claims is a €15m development on Henry Street in Limerick.

You might be tempted to compare the sale of the “Winterwood” mansion in Adare with the sale of Updown Court, “Britains Most Expensive House” to which NAMA appointed receivers this week. Set on 58 acres, the 50,000-sq ft, 24-bedroom pile has five swimming pools, stables, tennis and squash courts, a bowling alley, a helipad and garage space for eight cars. The property is in Surrey, about 30 miles from central London. The property has its own website here and its owner, developer Leslie Allen-Vercoe had been trying to flog it for six years before NAMA appointed CB Richard Ellis as receivers. It is not known how much NAMA want for the property but reporting has suggested that NAMA paid just GBP 20m (€23m) for the loan underpinning it, and given NAMA’s core objective of recouping its purchase price there is reason to suppose the price will be in that region.

UPDATE: 3rd March 2012. The property has now reportedly been sold for €1.9m equivalent to €115 psf.  According to David Raleigh at the Irish Times, the identity of the buyer has not been disclosed.

UPDATE: 5th March 2012. The sale of the above property was first reported by Anne Sheridan at the Limerick Leader on Friday last 2nd March, 2012.

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“There has been some comment that the consequence of this objective is that NAMA, having recovered its outlay, will then absolve borrowers of their further obligations. This is absolutely not the case. Borrowers, as both I and NAMA’s CEO Brendan McDonagh have already said on a number of occasions, will continue to be liable for the debts that they have incurred.” NAMA chairman Frank Daly speaking in June 2010.

The re-igniting of the personal debt forgiveness debate last week by  Professor Morgan Kelly, has led some to compare and contrast the predicament faced by ordinary people in shouldering unsustainable debt, with the perception of the light treatment of developers at NAMA. Professor Kelly indicated that €5-6bn of funding would solve many of problems faced by ordinary people in dealing with mortgage debt; it didn’t take long for the suggestion of blanket debt forgiveness to be shot down by ministers, first by junior minister Brian Hayes and then by the Tanaiste, Eamon Gilmore. In contrast last weekend, Ireland’s Sunday Times suggested that NAMA was in fact forgiving €37bn of developer debt. This understandably generated unease and in certain quarters, outrage – there seemed to be one standard for developers and another for ordinary people; the Government was apparently forgiving €37bn of 850 developers’ debts yet refusing to consider a relatively measly €6bn for tens of thousands of ordinary people. The sense of injustice is compounded by the recent, but unrelated, disclosure that NAMA is offering incentive payments to developers, and of course that comes on the back of reporting that NAMA is offering salaries of €200,000 a year to developers.

The accusations in the pages of the Sunday Times are not new; there was a feature entry on here last year which examined the issues, after Alan Ruddock’s last article for the Independent. This entry examines NAMA’s policies in dealing with debtors.

In overview NAMA has acquired approximately €72bn worth of loans at book value and paid €31bn for them. The book value of a loan is what was actually originally given to developers by the banks plus accumulated interest, less any interest and principal repayments. NAMA paid €31bn for these loans after a rigorous valuation and due diligence process. The difference between the €31bn and the €72bn book value was the discount, or haircut, imposed by NAMA. The banks incurred a simple loss on the loans of €41bn.

Amazingly, it appears to be the case that most loans in NAMA have some form of personal guarantee attached. It’s almost a joke in NAMA that developers went to the trouble of creating elaborate corporate structures with offshore embellishments thrown in, all to limit liability and then the same developers turned around and gave personal guarantees to the banks, rendering the elaborate corporate structures largely useless. So much of the lending, even if to a limited company, is backed by personal guarantees though NAMA has not disclosed the value of personal guarantees – the total might be €5bn, €30bn or €72bn, we don’t know.

To go back to when NAMA was created in 2009, a concern on the part of many was that NAMA would be a bailout for developers. At its worst, the concern was that politically-connected insider developers would have their debts written off (or more accurately paid off by ordinary people) and that developers would escape with their wealth, the Bentleys and private planes and, using their insider connections, buy back their property for a song at a later date. These notions understandably inspired suspicion and antipathy towards NAMA, and I think it is fair to say the agency has had a continuous public relations battle to disprove these notions.

From the start, the official claim was that NAMA would pursue developers for every red cent owed, not just the price NAMA paid for the loans, but the full book value of the loans. So a developer who owed €100m to the banks would be pursued for that sum, even if NAMA bought the loan for €40m from the bank.

What muddied the water were statements from NAMA itself, where the chairman and CEO separately and on several occasions referred to NAMA’s “core objective” of recovering what NAMA paid for the loan, plus any new advances made by NAMA. This was interpreted to mean that NAMA was writing off or forgiving the difference between what NAMA paid and the book value. Those from the accounting profession noted that NAMA was not apparently accounting in its financial statements for the book value of the loans, but the price NAMA paid for the loans. So suspicions arose about blanket debt forgiveness, and in the end, the NAMA chairman was forced to make it clear that NAMA was pursuing the book value, and not just the price paid for the loans.

Before dealing with NAMA’s approach to developers, it is worth reminding ourselves of the difference between limited company debts and personal debts. In this country, as in all other developed countries I know, we allow companies with limited liability to operate. The “limited liability” refers to the fact that if you are a shareholder in such a company, your liability is limited to what you paid for the shares. So for example, bondholders in Anglo Irish Bank can’t pursue individual shareholders for debts and equally NAMA can’t legally pursue shareholders in developer limited liability companies beyond what assets are actually in the company. The above isn’t meant to be patronising to readers on here, it’s just that we sometimes seem to forget that some debts mightn’t be recoverable from individuals because the debts were not incurred by the individuals themselves, but by a limited liability company. So let’s say Developer A borrowed all his loans through a limited company, A Limited, and he now owes €100m but the value of the company’s assets is only €40m, then that €40m is all NAMA can legally recover. NAMA is not “forgiving” A Limited €60m, it will pursue it to the maximum extent feasible but if A Limited doesn’t have any more assets, then you can’t get blood out of a stone. There was an entry here last year which highlighted the problems NAMA would have with recovering such loans.

Having said the above in respect of limited companies, it may be the case that some limited companies have a portfolio of assets and projects, and some may not be as impaired as the NAMA assets so NAMA will pursue the other assets in the company to help offset losses.

But aside from company liability, developers can have personal liability. This might be because they gave personal guarantees or maybe they borrowed in their capacity as individuals or as part of an unlimited partnership. Now this personal liability places developers in pretty much the same boat as ordinary people. So how does the treatment by NAMA of this personal liability on the part of developers compare with the treatment by banks of ordinary people who can’t pay their mortgages?

For ordinary people, it should be said that there are very few personal bankruptcies in this country – just nine in 2005, 17 in 2009 and 30 in 2010. For a developed country with a population of 4.6m, we practically don’t do personal bankruptcy; either deals are cut between creditor and debtor, or as generally happens there is a kicking of the can down the road, so the creditor doesn’t enforce or forgive. NAMA says that it will pursue debts in certain cases, on a cost/benefit analysis basis, up to and including making a developer bankrupt.

NAMA is cutting deals, entering into agreements with debtors for their personal liability to NAMA, and you might say there is some debt forgiveness implicit in these agreements.

NAMA will only reach agreement on personal debt where the debtor is “fully co-operating”. To prove the point, NAMA has already sought orders against Paddy Shovlin, Tony and Patrick Fitzpatrick, Ray and Danny Grehan and the directors of Capel Developments, Edward Keegan, John O’Connor and Liam Kelly. NAMA also secured an injunction against the Joyces in respect of the proceeds from a sale of a property on Kings Road in London (reported here in January 2011). So there is no blanket debt forgiveness for all developers and some developers may be bankrupted.

In terms of NAMA’s agreement with developers, any underlying property which secured the debt must be disposed of during the term of the agreement between NAMA and the developer. So if Developer A had secured the €100m loan on Property A, then Property A must be disposed of during the term of the agreement with NAMA. NAMA says this is to ensure the developer doesn’t benefit from an uplift in the market in the coming years. This may seem an odd position for NAMA to take, but the agency seems to be at pains to promote the fact that it is not bailing out developers.

The developer must use all their assets to “support their agreement” with NAMA. Or to put it another way, they have to sell the cars, helicopters, art collections. Or the wife must buy them, or more practically must give NAMA the money for the assets. Either way the value of the assets must be used to pay back the loan or work-out the asset. NAMA has claimed that it has already forced the sale of second homes, paintings, share portfolios and cars. In addition to surrendering existing assets, NAMA says that a contribution from the ongoing salary being paid to developers may be sought to support the workout. So part of the €200,000 may have to go back into the work-out of the loans.

In reaching an agreement with NAMA, developers are required to submit sworn affidavits in support of their disclosure of assets. NAMA says it has inserted additional clauses in to agreements, prohibiting debtors from engaging in certain activities; although NAMA has not specified what activities it has proscribed, they are understood to include the use of private helicopters and planes for personal use. So NAMA might claim that it is being more draconian than a creditor dealing with ordinary people. Ordinary people might say “Bah! We would never have the use of private helicopters and planes anyway” but I think NAMA is trying to clean up the image of some developers with which it has agreements, so those developers don’t continue to be portrayed as profligate hedonists benefiting from state help.

At the end of the agreement period, be that five or seven years or whatever, NAMA will assess compliance by the developer with the agreement and will only then “forgive” the outstanding personal guarantee or personal liability. If the developer is judged not to have delivered on their side, then NAMA may seek to enforce the guarantee or liability at the end of the agreement period.

So is there debt forgiveness at NAMA? Yes indeed, but only after the developer surrenders their personal assets (or the value thereof) and the developer may need contribute part of their ongoing salary to the loan work-out, and the developer must deliver on the agreement in the work-out of an asset. Otherwise the full personal liability may be pursued by NAMA. NAMA demands a sworn affidavit of personal assets and if a developer is found to have misled NAMA, there will be repercussions. The debt forgiveness is not universal and if a developer doesn’t co-operate with NAMA, then NAMA will pursue the developer for the debt, potentially to bankruptcy.

As described by NAMA, the approach above seems reasonable enough. With receivers costing more than €200 per hour, it seems economical to employ a developer at €200,000 a year, if they’re competent and they bring skills and experience to the job at hand. The possibility of part of the €200,000 being contributed by the developer to the repayment of the loan only enhances NAMA’s approach. The incentivisation plan makes sense if the incentive is appropriately pitched, in other words if the target is too low, then NAMA is gifting a benefit to developers and if it’s too high then developers will naturally focus on more lucrative projects.

The debt forgiveness process looks reasonable and indeed appears to be similar to the bankruptcy process (see table at the top). Like the bankruptcy process, it is open to all sorts of abuse. Will the developer make a full disclosure of assets? Will NAMA get the valuation of personal assets right? It will be for those who audit and oversee NAMA to ensure NAMA complies with its own procedures. The debt forgiveness process at NAMA is akin to a bankruptcy, and wouldn’t at all appear to be akin to the debt forgiveness called for by Professor Kelly last week. NAMA might give some thought to how it can promote the transparency of its processes with developers, to dispel the lingering suspicions.

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This entry examines a report published last month by the Royal Institution of Chartered Surveyors – RICS, a worldwide trade body which includes valuers and estate agents. The report covered commercial property markets across the globe for the first six months of 2011 and also surveyed estate agents for their projections for Q3,2011.  There were 64 responses from Ireland’s property community. Ireland is again in a different league, and again not for the right reasons, and is regularly joined at the bottom of the league tables by Portugal, Greece and Spain.

The summary report from the RICS is available here and there is more detail on Ireland in this detailed chapter from the report. There are specific comments on the Irish market, which covers Cork, Dublin and some regional towns, from respondents in this section of the report.  All of the sections of the report can be accessed from the RICS at this page.

The graphs in the report show the net balance scores of responses (calculated by taking the percentage of respondents who indicate an increase, minus the percentage of respondents who indicate a decrease eg Assume 50% of respondents indicated an increase in rents, 30% indicated they did not change, and 20% said they fell, the net balance would be (50-20) +30)

(1) Rent expectations for Q3, 2011. -60 (lowest expectations for retail property)

(2) Capital value expectations for Q3, 2011 -80 (lowest expectations for industrial property)

(3) Investment demand for Q3, 2011 -20

(4) Occupier demand in Q2, 2011 -10

(5) Available space in Q2, 2011 +40

(6) Investment inquiries in Q2, 2011 -10

(7) Development starts in Q2, 2011 -40

John Moran, managing director of Jones Lang LaSalle in Ireland is quoted in the report as saying “The Irish government’s proposal to retrospectively ban upwards-only rent reviews has crippled the investment market leading to a cessation of activity and further falls in value”

Marie Hunt, Director of Research at CB Richard Ellis said “The Dublin investment market is on standby until such time as the Government produce draft legislation spelling out their intentions regarding rent review reform. There were only three transactions signed in the first half of 2011 with two of those comprising special purchasers (buildings bought by their main occupiers). The occupier market is holding up very well with occupiers doing deals to take advantage of more competitive terms and conditions including rents which are now more than 50% down from peak levels”

David Potter, a director at Savills said “Lack of funding and uncertainty over rent review situation is major impediment to investment transactions”

The Upward Only Rent Review question (reported in some detail here and here), remains vexed and clouded in confusion. The Department of Justice and Equality has not offered any comment on the 17th July 2011 Irish Sunday Times report (not available online without subscription but detailed in an update to this blogpost) which claimed to have details of the Bill expected to come before the Dail in September or October 2011. There was a meeting between Minister Shatter and representatives of a group of tenants at the start of August 2011 (reported as an update on here) but we appear to be none the wiser as to the provisions of the new Bill.

Lack of funding remains an issue, and unlike the British government with its Project Merlin deal which forces banks to lend and keeps tight tabs on reporting compliance with targets, inIreland we have a vague-ish €10bn of new lending per annum commitment from the pillar banks apparently, but there is seems to be precious little oversight of performance. Last year, Barclays was said to have advanced €40m for the purchase of Irish property but there remains a general repulsion by foreign banks towards lending for Irish property at present.

Whilst the RICS report does paint a downbeat picture of commercial property in Ireland, other parts of the world are booming – Brazil, Poland, Russia and Malaysia seem noteworthy.

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Quick someone, get the smelling salts. Ryanair’s Michael O’Leary has fainted at the news that a group of 16 influential and rich French businesspeople has written an open letter to their Government to seek the introduction of a temporary new tax on high incomes until such time as the French deficit is eliminated. And today the French government obliged and announced a temporary 3% levy on incomes over €500,000 which would apply until 2013 when the deficit is due to come back down from 5.7% today to 3% (by the way 3% is the ceiling in the EuroZone’s Stability and Growth Pact and although it’s not the same as eliminating the deficit, 3% is seen as a safe deficit level). It is not clear how much the new tax will raise as part ofFrance’s €10bn fiscal adjustment in 2012, but the letter and the new tax would certainly seem to promote solidarity.

The original letter in French is published today by the French weekly magazine, Le Nouvel Observateur. This is my translation

“We, the presidents or CEOs of industry, men or women in business, financial, professional or wealthy citizens, want the establishment of an “exceptional contribution” that would affect the most well-off French taxpayers. This contribution would be calculated within reasonable proportions, in order to avoid adverse economic effects such as capital flight and increased tax evasion.

We are conscious of having fully benefited from a French model of doing things and a European environment to which we are committed and which we want to help preserve. This “contribution” is not a solution in itself: it must be part of a broader effort to reform State expenditure just as much as taxation.

At this time when our fiscal deficit and the prospect of worsening government debt threatens the future ofFrance andEurope, when the government asks everyone for solidarity, it seems to us necessary to make a contribution.”

The letter was signed by 16 of France’s prominent business people, Jean-Paul Agon, CEO  L’Oréal, Liliane Bettencourt, shareholder L’Oréal, Antoine Frérot, CEO Veolia Environnement , Denis Hennequin, CEO Accor, Marc Ladreit de Lacharrière, President Fimalac Maurice Lévy, CEO Publicis, Christophe de Margerie, CEO Total Oil Frédéric Oudéa, CEO Société Générale, Louis Schweitzer, President Volvo and AstraZeneca, Marc Simoncini, President Meetic, founder Jaïna Capital  Jean-Cyril Spinetta, President Air France-KLM, Philippe Varin, President  PSA Peugeot Citroën, Claude Perdriel, président du conseil de surveillance du Nouvel Observateur, Jean Peyrelevade, Président de Leonardo & Co France  Franck Riboud, CEO Danone, Stéphane Richard, CEO Orange

I wonder will we see a similar letter from the great and good of Irish business and commerce in September 2011 in advance of Minister Noonan’s publication of his three-year plan in October 2011 which will set out in some detail the spending cuts and new taxation needed to eliminate the Irish deficit. I don’t recall seeing such a proposal in the Ireland First manifesto published in March 2011.

Michael O’Leary has threatened to be outtahere if the Government increases taxes on “the wealthy” to what he calls an “exorbitant level” but in the interview published in last week’s Sunday Independent  he does say that he would be prepared to pay a top rate of tax of 50%. The present top rate of income tax is 41% but the Universal Social Charge and PRSI might bring that to over 50% so it’s not clear if he is saying he would in fact be willing to pay more or if he is saying that present rates are high enough. Regardless of Michael’s view though, the question needs to be asked if there is scope for a tax increase which in the words of the French above would avoid capital flight and tax evasion but at the same time contribute to the elimination of the deficit?

UPDATE: 28th August, 2011. Odd that in the week that gave us the French letter above which grabbed the headlines in France, that an Irish letter has created as many headlines here. The Irish Times on Thursday published a letter from someone who signed the letter M.P. Mac Domhnaill who is from Co Kerry. This is the text of the letter

Sir, – As I write this letter I am hoping that sleep can provide me with some escape from the anxiety and pain that the economic situation is wreaking on me and my family.

Until recently I have been able to meet my mortgage repayments and provide for my young children. At this juncture, seeing as the part-time work on which I depended has entirely ceased, I have found myself and my loved ones having to cope with a new torment – hunger.

Today I have had nothing to give my children only bread and cereal. My dole payment is completely servicing my mortgage and my savings have run dry on essentials. I dread what each day will bring.

The wolf that I have been keeping from the door has finally moved in. – Yours, etc,”

On Saturday, the Irish Times carried a follow-up report having contacted the letter writer by phone. It’s a heart-breaking story, and today the Minister for Social Protection, Joan Burton asked that the man might contact his community welfare officer as there might be entitlements not presently being claimed by the man and his family. The Society of St Vincent de Paul aslo expressed concern and offered its emergency number to the man – 087 784 8825.

UPDATE: 6th September, 2011. Apparently Italy is now set to follow the lead in France and introduce its own 3% levy on incomes over €500,000.

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“So if a property bubble is about to pop, that’s good news for NAMA – all in all, a very good time for the agency to get the hell out of London.” Guardian’s Lisa Carroll writing on 19th August, 2011

[in the following blogpost, the term “yield” will be used a lot. Simplistically it refers to the rent on a property divided by its value eg property worth €1m generating €100,000 rent per annum has a 10% yield]

With news earlier this week that a shop in Knightsbridge generating GBP 400,000 a year in rent presently, has sold for GBP 13m, representing an initial yield of 3%; with upmarket residential agent, Knight Frank reporting that prime central London residential prices were up 9.6% in the year to the end of July 2011 and were now 35% up from the post-credit crunch trough in March 2009 and amidst a consensus that the London property market is red-hot, and given that NAMA has said that much of its UK portfolio is centred in London, now might be a good time to examine if the London property market is a bubble which might burst with unpleasant consequences for NAMA.

It should first be said that London comprises a number of markets. That may seem obvious but remember we are talking about a city whose urban area has a population of 8.3m. There is plenty of scope for segmentation of the market but this entry will really just consider two segments – prime commercial and residential. Prime typically refers to central London, the boroughs of the City of London (not technically a borough), the City of Westminster, Kensington and Chelsea. Other definitions might include outlying areas which maintain their values like Hampstead and DulwichVillage, but in the main “prime” equals “central”.

The NAMA transactions inLondonthat we have heard about so far have been in prime areas, Knightsbridge, Mayfair, St James’s, Oxford Street, Chelsea and the City of London. Having said that, NAMA has indicated that it has approved €3bn of disposals and the specific transactions that have been identified with NAMA in the media represent a fraction of that, so there may well have been disposals in non-prime parts ofLondonas well, it’s just that they might not have been reported.

In terms of commercial property overall the UK is still 35% off peak prices reached in 2007 but London prime property is down considerably less than that, but in general is still down from the peak eg City of London office rents were GBP 67.50 in 2007 and today are still hovering at the GBP 55 psf mark, the West End was GBP 120 psf in 2007 and is GBP 92.50 psf today, according to Capita Symonds and CB Richard Ellis. There are exceptions of course reflecting the fact that even the prime commercial market has many segments. Retail rents on London’s Bond Street for example continue to create new British records – GBP 900 psf in 2009 and the record is Piaget’s store at 169 Old Bond Street paying GBP 965 psf from a deal done in December 2009 – both values are for Zone A rent, that is the rent on the space closest to the shop-front.

Many property-market commentators point to yields as a guide to troughs and bubbles. Remember our very own Minister for Finance, the late Brian Lenihan holding forth on yields in September 2009 claiming that the historically high yields pointed to the bottom of the market – his rationale was that if property was delivering a yield of 8% and deposit accounts were paying 2% then people would naturally tend to withdraw their deposits and pile into property, and the increased demand for property would drive up prices. This was Baby Infants property economics and ignored the fact that the numerator in the yield calculation, rent, was also falling. The Minister’s mistake was to assume the economy had bottomed out and that rents were resilient. But the Minister and his advisers could have been partly forgiven for their faith in yields, remember 2-3% yield deals in Dublin’s commercial market just before the peak of the boom in 2007, like the 2.4% yield sale by Arnotts of 102-104 Grafton Street to David Daly for €115m. Irish property experts were looking at such deals with such low yields as evidence of a peak market, were they not entitled to view 8% yields in 2009 as indicative of the trough? And in London today with a 3% initial yield sale in Knightsbridge and with 4% being regarded as the going-rate in the West End and 5.25% in the City of London, you might be tempted to think that we were at the peak in London because investors might be able to get better returns on other classes of investment. But I don’t think that would be a safe conclusion. Here’s why.

(1) DTZ reported this week a re-assessment of investment returns in the UK commercial property market and their view of the outlook, particularly for prime property, is rosy. The rationale: other investment classes offer low return prospects, particularly UK Government bonds, for example the five-year bond currently pays 1.4% per annum. The full report – titled “DTZ Foresight UK Fair Value Q2 2011” – from DTZ is available here  (free registration required). Of course NAMA is not concerned about relative performance between asset classes, it has a finite lifespan with about nine years remaining but NAMA might be interested in DTZ’s forecasts which see rents rise by 6% per annum between 2011 and 2015 in London’s West End and 5% in the City of London and 4% in London Mid-Town (Holborn, Bloomsbury, King’s Cross, Euston)

(2) Prime central London estate agents Savills reported their preliminary H2, 2011 results last week and attributed the good performance to “strong growth in transaction advisory business driven by demand for Prime Central London Residential property and continued strength of Asia Pacific markets, particularly Greater China” and in terms of outlook “in the UK and continental Europe, we expect transaction markets to remain unsettled although the fundamentals of the Prime London Residential market remain positive”

(3) Supply, availability and vacancy is constantly cited as the reason for prime London’s robust performance. Property consultancy Driver Jonas Deloitte produce so-called “crane” surveys on the construction pipeline in UK cities. Their Summer 2011 central London report is available here.  On the commercial front, construction fell dramatically after the financial crisis in 2007 (Northern Rock heralded the start of the UK’s crisis, ours came a year later). And the immediate outlook for construction is not great until after 2015, and even then supply tends to be in non-prime areas – the Battersea Power Station development and the proposed Earl’s Court redevelopment and further developments in east London and Docklands would fall into the non-prime category. Truth be told, central London is a small area with difficult and expensive planning considerations and burdensome construction regulations. Lack of supply is cited by all the major property consultancies – Colliers International dwells on the subject more than is usual in its Q2 2011 central London offices report – as the prime driver for higher rents and capital values.

(4) Anecdotally, that is, speaking to agents and summarising personal observations, there is a lot of Chinese, Russian and Indian money coming into London residential property. The fourth member of the so-called BRIC countries, Brazil, seems to be curiously absent from the London property scene. This assessment is backed up by Knight Frank’s Spring 2011 outlook which claimed that 6% of Prime central London purchasers were from Russia and CIS countries, 5% from China/Hong Kong, 3% from India and only 0.1% from Brazil.

(5) Residential developers have grown more confident about prospects in central London, according to Jones Lang LaSalle which says  “we are now seeing increased activity from parties looking to develop in prime central London, from South East Asia, the Middle East and Turkey, with much of this being on the basis that the UK is seen as a stable and safe bet with by worldwide investors looking to diversify their assets during this uncertain period.”

(6) Inflation continues at an elevated level in the UK, running at 4-5% per annum, this despite the base rate of interest set by the Bank of England being at 0.5% since February 2009. Property is seen as a hedge against inflation and depending on NAMA’s foreign exchange hedging, property growing in value by 4%+ per annum might be worth holding onto rather than property dropping by 5-10% as in Ireland at present. Standard Life examined the resilience of property in the context of inflation here,

Of course one uniting connection between the above companies is that their businesses all depend on transactions for success, so an appropriate pinch of salt might be in order. Having said that, the independent Office for Budget Responsibility and the IMF are both modestly upbeat about fiscal management and growth in the UK.  UK Chancellor of the Exchequer, George Osborne recently claimed that the UK was seen as a safe-haven amidst the turbulence on both sides of the Atlantic. Despite facing extreme challenges with reducing a deficit which is worst than ours at over 10%, many commentators have been complimentary about the UK and its prospects. Recent revisions to economic estimates by the Bank of England might have taken some of the shine off of George’s rosy cheeks but compared with the ongoing train-wreck of the EuroZone and the uncertain handling of theUS economy, there is a basis for claiming theUK is, relatively, a safe haven.

So is there a bubble inLondon’s property market? I’d suggest it’s difficult to say. Low yields alone are not at all determinative of the future state of the market. However it will be very tempting for asset managers in NAMA to bag a profit in London now over the price paid by NAMA for loans, and to an extent in prime London that is almost like shooting fish in a barrel but a proper asset management approach would be to consider all of NAMA’s markets, as it might be financially better to offload non-performing assets in a falling market than to sell in a rising market. The Guardian last week suggested that now might be the time “to get the hell out of” London but on another view, “for heaven’s sake” stick in London and harvest profits in the years to come.

You might also be interested in this post on the “Asset Management Game”.

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(UPDATE: 22nd September, 2011. There is a more up-to-date preview of the 23rd September auction here)

This afternoon, the Allsop/Space auctioneering joint venture has published its catalogue for the third auction which will be held again in the Shelbourne Hotel on 23rd September. The catalogue is available here free of charge (might take a few seconds to load, the PDF is 10mb), if you want your personal printed copy it will cost you €5 and is available here. This entry takes a look at the catalogue and assesses the maximum reserves.

There are 74 lots comprising the usual range of geographically dispersed, residential and commercial property – these auctions are certainly giving a taste of property throughout the country. To my eye at least, the maximum reserves – the minimum amount of money to secure the property but which may be reduced on the day of the auction – seem generally lower than the previous two auctions. Where property is subject to an existing tenancy the implied yields are generally – there’s the odd exception at 6% or 24% but generally – 10-17% on residential and up to 20% on commercial. This auction has only 74 lots which is less than the 80+ in each of the previous two auctions. There’s no trophy home or trophy address and to my eye, the range of property is more limited than previously. Many of the properties are foreclosed but there’s a fair smattering that appear to be owner-vendor sales. There appears to have been quite a lot of last minute finalisation of details and there are a number of errors in the catalogue.


a 2-bedroom, 700-sq ft apartment in the holiday town of Bundoran in Co Donegal is the cheapest property on offer with a max reserve of €20,000

Michael Daly’s Foundmount Group’s development at River Point in Limerick City has a few apartments on offer

A 5-storey Georgian mid-terrace on Gardiner Street with a max reserve of €225,000

Chapman’s Garage in Kildare with a max reserve of €365,000

A single block of 5 flats at Synge Place, in Dublin8 (central Dublin) with a max reserve of €425,000

Len Woodbyrne & Joe O’Reilly development at95-97 Francis Street, Dublin8 (central Dublin) has a range of apartments on offer

64-65 Prussia Street in Dublin7 (central Dublin) with 14 apartments and four commercial units is the most expensive property on offer and has a max reserve of €850.000 and is presently generating €111,720 in rent.

The maiden Allsop/Space auction was held in Dublin on 15th April, 2011 and saw pandemonium on the streets with the culmination of a frenzy of anticipation and is reviewed here.

The second auction was held on 7th July, 2011 and was a more businessman-like affair and is reviewed here.

I would expect a lot of interest in this auction also as the reserves seem low and would expect most of the lots to be sold.

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