Jones Lang Lasalle (JLL) has today published its commercial property series for Ireland for Q3, 2011(free registration required). The JLL series is one of the two Irish commercial indices 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 other quarterly Irish price series is published by SCSI/IPD and will be available on Tuesday 25th October 2011; because it is generally published after JLL’s, it is not used here but the index does historically show a very close correlation with JLL’s.
The JLL Index shows that capital values are continuing to decline. The Index declined by 4.2% in Q3, 2011 compared with Q2, 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have declined by 21.5%. Commercial prices in Ireland are now 64.7% off their peak in Q3, 2007. On an annual basis prices are down by 13.7%. The NWL index is now at 835 which means that NAMA needs to see a blended increase of 19.8% 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).
Today’s figures from JLL are worrying although the quarterly decline is “only” 4.2% compared with a decline of 5.7% in Q2, 2011. JLL continues to emphasise that the effect of the proposed change to Upward Only Rent Review (UORR) leases is EXCLUDED from these falls. JLL says “It must be noted that capital values at Q3 2011 do not allow for the proposed legislation on the abolition of upwards only rent reviews in existing leases.” Having said that, it is likely that there is some degree of anticipation by the market of the proposed legislation and that anticipation which is based on a proposal, then a commitment in the election manifestos in February 2011, then statements by the justice minister Alan Shatter and finally leaks of the proposed legislation, has meant that notional values have declined. So the view on here is that there will be some further capital declines when the UORR legislation is introduced, but it will be far less than the 20-30% declines being talked about at the start of the year when the changes were just proposals.
JLL’s capital index is now down 11.1% for the first six months in 2011. If the expected changes are made to UORRs, then a 20% reduction from today would see a total decline of 29% for 2011. That compares with a Central Bank ofIrelandadverse scenario in its March 2011 stress tests of 22%. A more-likely 5-10% decline in Q4, 2011 would see a 16-20% decline for this year.
Also based on a NAMA portfolio acquired for €30bn, NAMA is nursing a loss of over €5bn. That is, if NAMA paid €30bn for the loans, that would comprise €28.5bn NAMA bonds and €1.5bn subordinated bonds which need not be honoured if NAMA makes a loss. The €30bn includes a Long Term Economic Value premium of an average of 10%. So the loans were worth €27.3bn in November 2009 (€30bn / 1.1) and are now worth 16.5% less (index of 835 is 16.5% less than 1000; 857 plus 19.8% = 1000) or €22.8bn. So if the loans have cost NAMA €28.5bn and are only worth €22.8bn today, NAMA is nursing a paper loss of €5.7bn.
Elsewhere the JLL report shows that the fall in capital values is spread across different commercial property categories with Offices down 4.1%, Retail down 4.3% and Industrial down 4.6%. Rents also continue to fall with JLL’s net income index was up 1.1% in the quarter (the first increase since Q2,2010), but its ERV index was down 2.3%, the latter representing the notional fall if properties were vacant and available to rent.
UPDATE: 25th October, 2011. Ireland’s other commercial property index was published this afternoon by the Society of Chartered Surveyors in Ireland (SCSI) in association with IPD. The quarterly fall for Q3, 2011 was 4.6% compared with 4.2% recorded by JLL. Below is the recent history of the two indices.
NAMA Wine Lake 