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 
[…] […]
I am somewhat confused by this. Loans were taken in at average 52% discount (30bn). This was equivalent of 28.5bn (representing 100% NAMA valuation of associated security) at 11/09 and 1.5bn increase allowed for long term economic value. Security would have consisted broadly of residential property (at various stages of completion at home) commercial properties (broadly completed at home)and residential/commercial properties abroad. Commercial property (RoI) has declined by 21.5% since NAMA valuation date and from this data you deduct that NAMA has a paper loss of 5.7bn. I would have thought the calculation would have required more specific data on the breakdown of commercial property related loans (RoI) in order to make this assumption. Is this breakdown available or am I missing something??
@44Brendan, maybe this could be expressed more clearly but from the above blogpost
“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.”
As to the calculation of the NWL index, here’s how it is calculated (this is linked to above)
https://namawinelake.wordpress.com/2010/10/20/new-feature-namawinelake-index-to-track-nama%E2%80%99s-asset-values/
– in summary though it assumes 80% of NAMA’s acquisitions were commercial, 20% were residential, and that in terms of Ireland and UK property, that 71% is in Ireland and 29% in the UK
So in direct response to your question, you need take account of the type and geography mix of property, the LTEV premium, the 5% subordinated debt not payable if NAMA makes a loss.
Thanks AWL. the index clarifies your rationale for the overall drop in value.
‘So in direct response to your question, you need take account of the type and geography mix of property, the LTEV premium, the 5% subordinated debt not payable if NAMA makes a loss.’
Perhaps another factor is % of performing v non-performing its a reasonable assumption that the correlation to the index of non-performing v performing would be less due to a number of variables including lack of capital for lease up etc.
@nwl according to Peter Mathews below with 60% Non-Performing ‘worrying’ may be a slight understatement!!
Summary:-
Experts agree that the NAMA result with highest reasonable probability is:- 65% recoveries on “Performing” Loans and 35% recoveries on Non-performing Loans. That reasonably forecasts the losses on NAMA Loans Recoveries as follows:-
Purchase Price of Total NAMA Loans (Pre NAMA book values €77.00 bn) €54.00 bn
Recoveries Performing Loans 65% X €30.8bn = €20.02 bn
Recoveries Non-performing Loans 35% X €46.2bn = €16.17 bn
Total NAMA loans Recoveries €36.19 bn
Total Estimated NAMA Loans Recoveries Losses [ignores other costs at (iv) above] :- € 17.81 bn
This implies an additional write-down requirement of 23% on €77.00 bn [i.e. 17.81/77.00%],
a marginally higher additional write-down % than the 20% mentioned at (vii) above.
http://bankermathews.com/nama-whats-wrong/
@John, thanks for the link but we’re comparing apples with oranges here. The NWL index is an attempt to track values of the property securing the loans acquired by NAMA. Remember the property was valued by reference to values at 30th November 2009 and NAMA paid a ~10% Long Term Economic Value premium on top. NAMA paid for the loans it acquired from the banks with two types of bond – the NAMA bond which comprises 95% of the price and the NAMA subordinated bond which comprised the remaining 5%. The NAMA bonds which comprise 95% of the payment is not conditional and is a final/irrevocable sum, the 5% subordinated bonds will only be honoured if NAMA makes a profit by 2020 when it was due to be wound up.
The above is convoluted and bearing in mind that the NAMA properties are split geographically (though 90%+ are in Ireland / UK) and by type, the NWL index resolves all of the above to give you a simple indication of where we are, and how the changes in property types in Ireland and the UK affects the underlying security in NAMA.
all the numbers assumed in Matthews analysis pre NAMA were incorrect. (not Matthews’ fault)
eg NAMA did not pay 54bn for loans etc etc
@ nwl is it ‘weighted’ towards performing or includes all assets I ‘get’ tracking performing loans to an index which must be based on a very small sample given the dearth of investment sales and leasing transactions.
But by their very nature ‘non-performing’ loans indicate an owner in default without sufficient capital to pay leasing commissions make capital improvements etc its a deterrent to major tenants if the owner is in ‘distress’.
Not convinced that there is a strong correlation to any index of the ‘value’ of non-performing loans but take your point and its a ‘guide’.
With various reporting suggesting that 60% were non-performing at ‘buy in’ given the further deterioration in the RE markets since then some up to date numbers from Nama may be available shortly on % of non-performing which in my opinion is most important number regarding ‘loses’
‘A chance to get to know Nama better..On Monday, Minister for Public Reform Brendan Howlin told Vincent Browne on TV3 that the Government had decided to include Nama in his widening of the FOI Act next year’
http://www.irishtimes.com/newspaper/finance/2011/1014/1224305751250.html
@John, the aim of the NWL index is to track changes to property prices of all of NAMA’s property. The index covers 90% of the geographical spread of NAMA’s properties (UK and Ireland). The index uses the split between commercial and residential implied by the first two tranches transferred to NAMA. The NWL index relies on four indices – the CSO residential in Ireland, the JLL commercial in Ireland, the Nationwide Building Society residential in the UK and finally the IPD commercial index in the UK. These indices have an established status because they are referred to in NAMA’s Long Term Economic Value regulations.
The assumption is that no NAMA loan performs beyond the valuation in November 2009 adjusted for price changes to property since then.
Is that a fair assumption?
@Kirsten, I think it is a fair assumption. I think there is a strong correlation between the value of the property and what NAMA paid for the property and the sum NAMA will finally realise for the property. And I think that changes to values since November 2009 will affect the sum recovered by NAMA.
‘ Last month, Information Commissioner Emily O’Reilly decided it should be subject to requests under environmental freedom of information following a challenge by an online journalist.’-same link above
Thanks to Gavin Sheridan at The Story for that can the IT not ‘stomach’ giving credit where its due THANKS GAVIN.
http://thestory.ie
An Idiot’s Guide to NAMA.
NAMA creates bonds out of thin air, which are backed by the Irish taxpayers. These bonds are used to “buy” the really bad loans on the bankrupt banks balance sheets at a very deep discount, around 50%. Banks are still bankrupt but so what and owned by the Irish taxpayers. Now, NAMA has around 10 years to fool around with the property and see if they can sell it or the loans for a “profit”. Meanwhile, the people running NAMA are making some the highest salaries around, at the expense of the Irisht taxpayers, with no real incentive to get anything done other than keeping their jobs for as long as they can. Looks great to me. But there does seem to be a very important entity backing this whole farse, the Irish taxpayer, who has no real control of what is going on with their money. Why were shares not distributed to each and every citizen with voting rights? I know the short answer, just vote them out of office. Well, that seems to have worked spectacularly, no?
@nwl with Nama basically on a ‘asset strip’ to appease its ‘audience’ one has to wonder what the % TODAY of non-performing loans is which in my opinion will determine the level of ‘loses’.
Anyway we should get much more info now that Howlin has publicly stated that Nama will be included in FOI.
And it is very reasonable assumption regarding performance since Nov. 2009.
@John, I think Gavin at thestory.ie did a marathon terrific job with getting a ruling forcing NAMA to accept it is subject to environmental requests.
But I honestly can’t see what useful information can be extracted from NAMA under the environmental legislation. FoI will help but remember that commercially sensitive information is excluded from FoI. So FoI will be welcome but it won’t open up NAMA completely at all, and I think people might build unrealistic expectations of the transparency they think it will deliver.
if the irish taxpayer can find out the ‘burn’ rate to REO for a ‘environmentally’ sensitive site like BPS then its a terrific outcome but extremely disappointed in the Irish times expected better.
@JW-‘Meanwhile, the people running NAMA are making some the highest salaries around, at the expense of the Irisht taxpayers, with no real incentive to get anything done other than keeping their jobs for as long as they can.’
I completely agree and suggest a radical review of Nama’s compensation package it should have been set up more like an RE Opportunity Fund with the floor established as the ‘buy in’ price.
A tremendous opportunity to attract the ‘best and brightest’ was missed a % participation in ‘profits’ combined with LOWER salaries would have created instant espri de corps appeased the pubic etc ALL great companies are built on a shared goal and SHARED PROFITS.
It is/was one the biggest RE Opportunity funds and is been mis managed by a bunch of ACCOUNTANTS and TAX INSPECTORS who are expected to negotiate/deal with some very sharp operators quite simply they are out of their debt.
With political masters nipping at their heals and sensationalist and some what hostile press reporting.
The Indo group with its unreliable reporting on the Tullamore ‘squatter’ situation is a perfect example.Does the number of children the gentleman has have any relevance.. some more reporting on who owns the estate and some basis for claiming its owned by NAMA would have been worth a line or two as fascinating as his ‘life story’ is.
“Squatter told he can stay in Nama ghost estate home’
The basis for this sensational headline by the ehm ‘reporter’ is completely unreliable does Claire O’Brien the ‘reporter’ not have use of a computer to check her facts ?
make your own mind up…
“Solicitor John Hughes explained that his client had been left to his own devices in the house and, as they had recently learned the name of the owner, who is in NAMA, Mr Tuohy would like to pay rent and arrears.’
So now its a NAMA ghost estate……………..
@kd including the performing v non-performing % which is what i was referencing not the pricing
you get what you pay for……….
‘THE IRISH-owned banks might be bleeding the exchequer dry but we can at least take some small comfort from the fact that former HSBC chief executive Michael Geoghegan did not charge a fee for his recent work in reviewing the National Asset Management Agency. A spokesman for Nama was “happy to confirm” that Geoghegan “did not charge any fee for this work”.-link above
That Geoghegan did NOT suggest a radical review of pay and incentives was extremely disappointing given the culture he operated in at HSBC.
AIB got the message from interviewing candidness..
‘The Sunday Business Post, which did not cite any sources, said AIB’s salary proposal for Duffy, who runs a consultancy in Singapore, was believed to be within a government-imposed 500,000 euros (438,000 pound) annual cap.
But the newspaper said AIB would seek clearance for Duffy to be part of any future long-term incentive scheme agreed by the government for bankers.’
http://uk.reuters.com/article/2011/10/16/uk-aib-ceo-idUKTRE79F0LM20111016
Commercial tenants are overrented for at least 5 years and in many cases more, but because of ruinous Irish lease law commercial tenants cannot reduce their rents to market rents. If the cartel who are responsible for this ruinous lease law continue to destroy hundreds of thousands of sustainable Irish jobs and businesses they will create an economic wasteland. When they arrive at this wateland , nonsense commercial property valuations will be irrelevant.
Commercial property prices are a function of the health of the Irish economy not on absurd surveyors valuations based on their ruinous commercial lease law.
@cb ‘pay’ the market rent to a lockbox organize the affected retailers into some ‘group’ stop paying rent and force the govt. hand after all state employees have been doing it long enough !
some people call it negotiating others may have different view…………
@nwl not convinced that without very ACTIVE and experienced asset management by turnaround specialists that the correlation of non-performing loans which we know account for at least 60% of asset base will track any index.The longer that they are cash starved ignored mismanaged by distressed ‘ownership’ the more likely they will dramatically under perform relative to the correlation of performing loans which can be benched off a index.
mwl
Congratulations on your dlligent chronicling of the Famine..
‘FoI will help but remember that commercially sensitive information is excluded from FoI’
People are hurting. In practice, the definition of commercially sensitive information is bound to be a very broad one, to wit, any information potentially embarrassing to:
* civil servants current or retired
* politicians and parties
* bankers domestic or foreign
* auditors,legal and accounting firms
* arcitectural, surveying, engineeriing companies
* auctioneers, property professionals or media companies
* WAGs, progeny, extended clan and club buddies of same
NAMA’s essential function,IMHO, is to preserve public confidenc in our current establishment, and kick the can down the road for an Irish mile or so. There are still some nice pickings to be found in the rubble, so it’s still terribly confidential and hi-falutin. We”ll probably get the disclosures when the asset cupboard is fairly bare, and the principals are mostly in a sunnier clime.
@nwl completely off topic apologies but SERIOUSLY
Nama is beginners stuff in comparison to the asset stripping at B of I.
is ANYONE paying attention………………… that’s a 20% haircut to the’new’ shareholder the bank had to do a ‘fair value study’
the more things change the more they stay the same………..
KW invested 25 mil in the deal and have SO FAR you can be certain after a widespread an exhaustive marketing campaign snagged the UK loan book of 1.33bil at a 20% discount picked up at a nominal sum WE ARE NOT ALLOWED KNOW THE PRICE Bof I RE management business-the FEES here alone give you a one year pay back on investment.
‘The BoI unit manages €1.6 billion ($2.3 billion) worth of investment property’
http://www.irishtimes.com/newspaper/finance/2011/0602/1224298258803.html
‘A further £1.33 billion (€1.5 billion) of UK commercial property loans were sold to US company Kennedy Wilson, which has invested directly in Bank of Ireland, and institutional partners.The price paid to the bank was £1.07 billion – a discount of 19 per cent to the face value of the loans.’
http://www.irishtimes.com/newspaper/finance/2011/1015/1224305837978.html
‘Its UK commercial real estate loan portfolio was sold for £1.07bn (€1.21bn) to Kennedy Wilson, the US fund that has already purchased Bank of Ireland assets.
This company, listed on the New York Stock Exchange, is a shareholder in the bank. To make sure of no conflicts in this relationship, the bank said it commissioned a fair value study before it sealed the sale with Kennedy Wilson.
The bank said yesterday the stock exchange did not regard the sale as a related party transaction.’
http://www.independent.ie/business/irish/boi-sells-euro45bn-of-assets-to-pay-off-central-banks-2907038.html
‘KENNEDY WILSON ACQUIRES BANK OF IRELAND REAL ESTATE INVESTMENT MANAGEMENT BUSINESS’
http://www.kennedywilson.com/435-kennedy-wilson-acquires-bank-of-ireland-real-estate-investment-management-business
‘Bank of Ireland Real Estate Investment Management was sold to the Beverly Hills-based company Kennedy Wilson. Neither the bank nor the US firm would disclose the price paid.’-IT link above
“Mr. Ross, who invests in distressed assets, along with Fairfax Financial Holdings, Capital Research, Fidelity Investments and Kennedy Wilson has put 1.12 billion euros ($1.6 billion) into the troubled Bank of Ireland. With the deal, the group will own 34.9 percent of the bank’.
http://dealbook.nytimes.com/2011/07/28/bank-of-ireland-gets-capital-boost-from-wilbur-ross-investors/
‘He said Kennedy Wilson will get a much smaller amount after investing 25 million euros.’
http://www.reuters.com/article/2011/07/28/bankofireland-idUSL6E7IS0E720110728
Looks like Fairfax doubled down………..
2010 -‘ Fairfax Financial invests $132 million in Kennedy Wilson and commits another $278 million for joint venture investments.’
http://www.kennedywilson.com/our-history
nwl venting at this point but………lots of negative attention and somewhat misplaced media nonsense towards Nama they got somewhat of a poisoned chalice.On the other hand the ‘new’ B of I shareholders keep BUYING Irish taxpayer assets………….and GOOD ones too !
‘The BoI unit manages €1.6 billion ($2.3 billion) worth of investment property’
at a MINIMUM of 3%p.a. in FEES its more pretty certain that’s 48,00,000 p.a. on a measly 25mil investment ………..
KD ‘negotiated” meaning the guys stepped out of the room hope the Fairfax people did too.. a 19% DISCOUNT or 260,000,000 on the British loan book was it DISTRESSED……..
NAMA seems to have a higher concentration of apartments than houses in its portfolio.
Would it make much difference to the NWL index if the Irish residential property index was the apartment sub-index from the CSO?
@Dreaded, the CSO national index has declined by 21.3% (as shown at the top of this page) between 30th Nov 2009 and end of August 2011 (Sept 2011 figs should be released by the CSO next week), the national apartment index has declined by 28.3% over the same period. Given the weighting applied to residential (20%) and to Ireland (71%), the NWL index would fall from 835 (above) to 825 and NAMA would need see a blended average increase of 21.2% in its portfolio to break even at a gross level, and NAMA would be sitting on a €5.99bn paper loss today rather than €5.7bn.
However not all of NAMA’s residential property and development are apartments and it seems that much is concentrated in Dublin and the commuter counties around Dublin. So you could make the index more detailed but I don’t think the detail would add a great deal.
The main point of the index is to show that declines in property affect NAMA’s prospects and when NAMA says that some markets have done better than Ireland, you can counter with saying you know that, but those markets are only doing modestly and they represent a small part of NAMA’s portfolio.
Thanks NWL
In my opinion JLL are playing “catch up”. Most of these falls took place with average consistency over the last 18 months through declines in rental levels and cap rates, but because of the dearth of investment sales (only 3 of significance), there has been no evidence on which reporting agents could “hang their hats”.
If you really want evidence of what is happening in the market, any real estate market, this is the place to start – the Rolls Royce of property analysis – but it will cost you up to €150,000 per annum. I understand that NAMA is thinking of subscribing. Actually, they need it. They might learn something:
http://www.rcanalytics.com/
@WSTT, the Property Services (Regulation) Bill is reported to have passed the committee stage yesterday, so with a fair wind and a bit of political shoulder to the wheel, we might shortly have a register of commercial rents (not to mention residential sales). And given the absence of transactions here and rents being one of the most established valuation factors, we might soon have some better transparency.
JLL only examine 32 properties but the JLL index shows a remarkable correlation with the SCSI/IPD (which will be published next Tuesday for Q3,2011) and the SCSI/IPD index examines 290 properties-odd.