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Archive for October 14th, 2011

According to Tory MP, Ben Gummer’s website the next opportunity to met Ben will be in the pub. And maybe his constituents should take advantage of that opportunity because the next opportunity to meet him after that, might be in Dublin’s Mountjoy prison. Why? Because Ben is apparently intent on travelling to Dublin along with British MEP, Vicky Ford to visit with NAMA and according to the East Anglian Daily Times “to put pressure” on the agency “to pave the way for work to restart” on developments on Ipswich’s Waterfront – Ipswich being part of Ben’s constituency.

According to the latest NAMA foreclosure list, there are three foreclosed properties inIpswich –Sproughton Road, The Mill and Regatta Quay. The Mill is shown on the foreclosure list as a multiple residential development and Regatta Quay is shown as a commenced development. These are the two properties referred to in the Daily Times’ reporting.

Ben is quoted as saying “it is important that we go toDublinto speak to those who are now running NAMA to ensure they understand the situation we are in back here inIpswich. Although the sums involved here seem a great deal of money and they have a massive impact on the Waterfront, in the whole scheme of things so far as NAMA is concerned they are pretty small” and “they [NAMA] are looking at billions of pounds, and the two developments in Ipswich are a few million – we want to make sure they are not forgotten about and don’t just sit at the bottom of the pile when it comes to dealing with NAMA’s debts”

Now you might recall last year former defence minister and barrister Willie O’Dea having conniptions over whether he could communicate with NAMA about health and safety issues with a NAMA site in his constituency, or then-Minister Mary Hanafin tip-toeing around his meetings with NAMA to discuss the agency’s dealings with its hotels. But in more recent times, Wicklow and East Carlow TD Stephen Donnelly has apparently secured a commitment from NAMA to look at a developer’s business plan and fellow constituency TD, Fine Gael’s Simon Harris secured a commitment from NAMA to tidy up a derelict hotel site. Last Friday, Minister for Finance Michael Noonan told the Seanad “they [TDs and Senators] are forbidden under law from lobbying but they are entitled to information, which is a way around much of the confidentiality restriction. If someone feels he has been wronged, he can get a read-out by getting a public representative to make a telephone call. He is legally protected because this has been officially agreed”

A long-standing view on here is that NAMA’s much-touted anti-lobbying rules are effectively useless despite the dark warnings about 6-month jail terms for those found to have broken the rules. Let’s see how Ben and Vicky get on?

NAMA was asked for a comment on the story reported by the East Anglia Daily Times. If there is any response, this blogpost will be updated.

UPDATE: 17th October, 2011. The NAMA response is, as might have been predicted, an invitation to read the anti-lobbying rules and a reference to Ben’s statements published by the East Anglian Daily Times.

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Last Sunday in London’s Sunday Times (not available online without subscription) journalist Oliver Shah claimed that NAMA was close to selling the 196-bedroom Crowne Plaza in Shoreditch, London“to a consortium led by Ian Schrager, the New York hotelier credited with inventing the boutique hotel genre. Schrager, who co-founded Studio 54, the famous New York1970s celebrity nightclub” The sale price was said to be £75m (€87m). The hotel was formerly owned by developers Ray and Danny Grehan, and it was Ray who told Ireland’s Sunday Business Post in September 2011 that “the week they [NAMA] appointed the receiver, I had just done a deal for our Crowne Plaza hotel in London for e83 million. I am told now that they may not get that amount for it, and that the deal has fallen through.” So it seems that NAMA has done a deal which grosses €4m more than the one which Ray Grehan had brokered. And if this is all confirmed then NAMA must be pretty pleased with itself. Of course the deal underlines the strength of London’s property market, particularly the centralLondon commercial market which just about includes Shoreditch on the edge of the City of London.

Today sees the publication of the UK September 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of September 2011. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values are still increasing but at a modest rate compared with the end of 2009/start of 2010. The Index rose by 0.1% in September 2011 compared with August 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 11.5%. On an annual basis prices are up by 1.8%%. Commercial prices in the UK are now 34.1% off their peak in June 2007 though remember that the UK has had elevated inflation rates (14.1% between June 2007 and August 2011). The NWL index is now at 853 which means that NAMA needs to see a blended increase of 17.2% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The first table below shows the month-on-month % change in commercial property capital values since 30th November, 2009. The IPD index is broken down into three components – retail, office and commercial.  The second table shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner. Overall it shows that commercial property in the UK is worth 11.5% more at the end of August 2011 compared with the end of November 2009

The outlook for the UK is bumpy with forecasts of economic growth becoming more pessimistic in the last month. The UK has also announced a further GBP 95bn of so-called quantitative easing (QE) which effectively prints more money to circulate in the British economy. This latest round of QE will bring to GBP 295bn the sterling created since the start of the financial crisis in 2007. The UK is tackling its deficit in part by depreciating its currency so that living standards generally fall across the population in real terms. The latest round of QE announced is probably good news for NAMA as commercial property is likely to outperform inflation but the more pessimistic economic forecasts will temper the excitement.Central London continues to display ruddy good health in terms of the robustness of commercial prices.

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Figures released by the Central Bank of Ireland (CBI) this morning show that Irish banks in September 2011 remain dependent on funding from the central banking system. Although funding from the CBI itself to Irish banks fell by €2.6bn from €55.9bn to €53.3bn during the months, funding from the ECB rose by €2.5bn from €97.9bn to €100.4bn, meaning that the overall reliance by our banks on central bank funding fell very slightly by €0.1bn to a total of €153.7bn. Funding from the central banking system to Irish banks peaked in February 2011 at €187bn and is now at its lowest level since the end of September 2010 when the total was €142.3bn.

However despite the stress testing in March 2011 and the further recapitalization of the banks in July 2011, our banks show no real sign of getting back to a pre-crisis environment where depositors and inter-bank lending was the normal source of funding.

It will be the end of October 2011 when we get to see how deposits in Irish banks fared in September 2011 but a briefing by the Department of Finance last week stated “retail deposits have seen some momentum in September following the stabilization of the banks and their recapitalization”. So the figures released this morning are only generally indicative of a marginal strengthening in the funding position of Irish banks.

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Yesterday Ireland’s Central Statistics Office released its inflation data for September 2011 which showed annual Consumer Price Index (CPI) inflation rising by 2.6%, with a rise of 0.3% in the month of September 2011 alone. But the increase in one component of the CPI, mortgage interest costs, had risen a whopping 17.2% in the past year and 3.1% in the past month alone. This morning, the Financial Regulator Matthew Elderfield has come out with demands that banks and mortgage companies put a stop to further increases. This entry examines the scale of the increases in mortgage interest costs, set in the context of CPI generally and ECB interest rate movements, and concludes that Irish mortgage borrowers are being scalped, and have been for some time.

Firstly take a look at CPI since 2007.

You see that inflation overall has been muted since the onset of the financial crisis in 2008; in Ireland we’d probably mark September 2008 as the point at which our crisis sprang centre-stage, even though house prices peaked in 2007 and there had been banking crises elsewhere, notably in the UK and US. Muted inflation is hardly surprising given the weakness in the economy, particularly the domestic economy where demand is weak, as a result of anaemic economic growth, high unemployment, a debt overhang which includes substantial mortgage debt and housing negative equity, downward pressure on headline wages, higher taxes and levies and fear/uncertainty for the future. The table above shows that between November 2007 and September 2011, CPI inflation inIrelandhas stayed broadly flat with the CPI actually dropping slightly from 104.6 to 104.4, which is probably what you might have expected.

However, take a look at one of the most important components of CPI inflation, mortgage interest which comprises nearly 7% of the basket of goods/services upon which the CPI is based.

From July 2009 to March, 2011 it has increased from 73.0 to 100.7, a 38% increase.

Mortgage interest of course is less dependent on demand, and more dependent on monetary policy by governments and central banks, and in our case the European Central Bank which sets interest rates for the entire EuroZone. So let’s look at the main ECB refinancing rate.

In the period from July 2009 to March 2011, the ECB main rate stayed flat at 1%. In the same period, CPI for all items rose by 2.1%. Plainly mortgage interest costs which increased by 38% had rocketed at a time when you might have expected them to stay flat or increase only marginally.

So in Irelandyou have the bizarre situation of mortgage interest rates rising despite inflation overall being muted, and in the context of the ECB keeping rates flat. And on top of that you have more than one in ten mortgages being in trouble (according to figures produced by the Financial Regulator for Q2, 2011, 7.2% of all mortgages were more than 90 days in arrears, a further 5% had been restructured which in some cases involved moratoria on payments and some 2% were in receipt of social welfare mortgage interest payments).

So this morning’s demands from the Financial Regulator who took up his post in January 2010, seem to come quite late in the day when rates have already rocketed. But will the banks listen?

The Financial Regulator seems to have no powers whatsoever to directly force banks to abandon plans for further rate rises. Reporting suggests that he may have to rely on threats involving unrelated areas of regulation. Of course the State has a strong controlling interest in the banking sector with practically total control over the largest mortgage lender (by reference to legacy mortgages) PTSB as well as AIB, which has now absorbed EBS. Bank of Ireland is nominally in private control but the State has a 10%+ stake and still provides the bank with a guarantee. However beyond these banks, there are others who have mortgages including KBC,Ulsterand Bank of Scotland (Ireland)/Halifax. It is not clear what pressure the Financial Regulator can bring to bear on these banks, one of which BoS(I) has in fact exited the Irish market for new lending and is now running-off its loan book.

Maybe he can scowl at them.

He might also try to bring pressure to bear on the National Consumer Agency to provide a mortgage comparison tool as demanded by the European Commission approval of the Bank of Ireland restructuring plan. Remember the EC was concerned that if banks like Bank of Ireland were supported by the State then competition in the State might suffer, and the EC wanted borrowers to have the means to move between suppliers of credit so as to avoid a distortion in competition.

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