Archive for March 1st, 2012

It was another successful auction for Allsop Space at the Shelbourne hotel today which was again packed to the rafters, leading to requests again that non-buyers might give up their space for serious punters. Outside there was a small protest, and inside a punter did a runner after offering the highest bid, but mainly it was business as usual as 93 were offered after seven had been withdrawn from the original line-up of 100. All but six were sold for a total of €12,416,500 which was 34.8% on average above the maximum reserves for those properties which totalled €9,209,500. The preliminary success rate was therefore 94% which is spectacularly successful for such a large auction. Only one property sold below its maximum reserve and of the six that remained unsold, three were within €2,500 of the maximum reserve.

Allsop’s Gary Murphy reprised his role as probably the best auctioneer in the world, though he did get a short break in the afternoon. The highlights of the day might have been the 55-bedroom hotel in Rossnowlagh, Donegal which was apparently bought by the hotel’s manager for its maximum reserve of  €650,000 – just €12,000 per room; and the most valuable sale of the day was an apartment building on Dublin’s Upper Ormond Quay which sold for €1,020,000 against its maximum reserve of €610,000; the “cheapest home in Ireland”, the cottage in Leitrim which had a maximum reserve of €7,500 was withdrawn. There will be a more complete analysis tomorrow examining what these prices, which if past experience is anything to go by, will be mostly cash offers, tell us about declines in property prices in Ireland. Click the following to enlarge.


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When the new Minister for Finance, Michael Noonan eventually got his feet under the desk at the Department of Finance after winning the General Election a year ago, he was presented with briefing notes by his Secretary General, Kevin Cardiff. The briefing notes – with heavy redactions – were released and it was striking that objective number one for the Department was to exude confidence in Ireland’s economy. This is the extract:

Since February 2011, we have witnessed the fiasco of the Department of Finance getting the calculation of the General Government Debt statistic wrong to the tune of €3.6bn (actually €3.719bn). We’ve witnessed the subsequent fiasco of an investigation under the auspices of the Secretary General whose Department made the mistake, and four months after the mistake was uncovered, we are still waiting on the results of the two investigations into how Employee A in the NTMA communication to Employee B in the Department of Finance wasn’t acted upon or escalated when it became clear it wasn’t being acted on.

But the Department of Finance has found the time to curiously stick its toes into an area which you might have expected to have been the preserve of the Central Bank of Ireland– reporting on deposits in Irish banks. The Department first issued a presentation in October 2011 in which it claimed that deposits in Irish banks were picking up momentum – “retail deposits have seen some momentum in September following the stabilization of the banks and their recapitalization, but it was last month 2012 that the Department started producing a monthly publication on “deposit trends” in Irish banks. Neither the Department nor the CBI has explained why it is the Department that is producing this information, and not the Bank. And the Department is not reconciling its figures with the monthly figures produced by the CBI, but says in general terms the differences are down to overseas deposits and “consolidation differences”.

The problem is that the Department is trumpeting its figures as evidence that confidence is returning to Irish banks and that the deposit position in Irish banks is improving after three years of turbulence. Last month the Department said that deposits at Irish banks had improved by €7bn or 4% in the last six months of 2011. Which is very impressive indeed. The Department declined to say how much of this was due to deposits in overseas branches of Irish banks, but thanks to a slide buried in a Department presentation that originally seems prepared for the Troika, we get the following:


So we see that even though deposits overall at the Irish covered banks increased by €6.8bn in the last six months of 2011, deposits in Ireland at Irish covered banks actually decreased by €0.2bn. So the increase in deposits has been entirely down to overseas branches of the covered banks increasing their deposits. It is indeed hard to see how Bank of Ireland’s €19bn of UK deposits has any impact on the Irish economy.UK retail deposits are covered by a GBP 100,000 guarantee from theUK government and it is not clear howUK deposits can promote lending inIreland.

But what is mostly unsettling is the Department of Finance plainly has access to the overseas deposit information – it produced it for its presentation to the Troika – but that it declines to draw attention to it domestically. Is it this Department of Finance that is prompting Government back-benchers to claim that “deposits are flowing back” into Irish banks?

The Department published its second “deposits trends” report yesterday and says deposits rose by €0.2bn in January 2012. You can read the report here but you might want to get your grain of salt first.

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It may seem like pulling teeth with getting NAMA to explain how it accounts for interest income in its financial statements. A Fianna Fail deputy, Sean Fleming was warning of a showdown with NAMA for its alleged stone-walling of the public accounts committee. Sinn Fein’s finance spokesperson Pearse Doherty wrung from NAMA a schedule of its interest shown in its accounts together with a note of actual interest received, which showed there is a significant difference between the two – €249m in the first nine months of 2011 between what NAMA showed in its accounts, €786m and what it actually received in cash, €537m. But now, the NAMA CEO Brendan McDonagh has written to the Committee of Public Accounts – copy of letter here – in response to Deputy Fleming and explains its accounting and provides a worked example. Looks like we’re finally getting clarity!

NAMA uses a convoluted accounting method to account for the interest it receives from developers whose loans the Agency has absorbed. The method called the “Effective Interest Rate” (EIR) and it isn’t some hocus-pocus dreamt up by NAMA, it is an accepted international accounting practice enshrined in the International Financial Reporting Standards. But despite all the impressive sounding terminology, what EIR ultimately boils down to is someone’s estimate of how much a loan will be worth over its lifetime. And since most of NAMA’s loans are not performing and are secured on property in Ireland, that means that someone has to estimate what the value of the underlying property will be in a number of years. No seriously, this is really how it works!

Here’s NAMA’s worked example


So, NAMA spent €9.25bn on Irish commercial property as part of its €32bn of acquisitions (the face value of Irish commercial property loans isn’t public but in overall terms NAMA’s loans have a face value of €74bn). Irish commercial property has fallen by more than 20% since November 2009, the date used by NAMA for valuation purposes. But what will an individual commercial building be worth in say seven years time, the typical length of a supported NAMA business plan? Where would you even start to estimate future values? Will we be in the euro, will we be in the EU, what will inflation look like between now and 2019, how will our economy perform, what type of businesses will be expanding and where, will our banks be restored to stable health?

What will trouble many people is that NAMA’s record over its short lifetime in respect of forecasting hasn’t been spectacular. Its draft business plan was a bit of a joke for such a large undertaking, its second business plan wasn’t much better but the figures changed substantially – it’s profitability dropping by 80% and operating costs dropping 40%, in the space of 10 months; NAMA blamed the perfidious banks for the former jump but stayed schtum on the latter. NAMA was behind the former Minister for Finance’s assertion in the Dail in mid-2010 that Ireland’s declines in property prices were broadly offset by increases elsewhere, when at the time any eejit could see that domestic prices were plummeting whilst UK prices overall were growing modestly and in the event, NAMA booked a €1.5bn impairment loss in 2010. In September 2011, NAMA thought its 2012 operating costs would be €242m but four months later the projection is €194m – now if this 20% decline was down to NAMA’s ability with negotiating prices or figuring better ways of doing things, we should be impressed but past performance tells us that NAMA just got its assessment wrong again. Doubtless in part informed by its desire to generate a profit, NAMA keeps on talking about price stabilisation in Ireland, the latest that Irish commercial property prices should stabilise this year. On one hand, let’s hope the Agency is right but on the other, the National Competitiveness Council points out that commercial property prices are still overpriced by reference to economic value and even rents.

So how comfortable do you feel with NAMA’s estimating? And how comfortable are you that NAMA is receiving far less in cash than it is showing in its accounts? Of course not all EIR calculations will involve looking seven years or even five years ahead. But would you be confident in NAMA’s ability to project 12 months ahead?

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The Nationwide Building Society has this morning published its UK House Price data for January 2012. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £162,712 (compared with GBP £162,228 in January 2012 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 12.5% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of January 2012 being GBP £162,712 (or €191,837 at GBP 1 = EUR 1.179) is 18% above the €162,653 implied by applying the CSO January 2012 index to the PTSB/ESRI peak prices in Ireland. The average home in Northern Ireland in Q4, 2011 was worth €163,510, according to the University of Ulster/Bank of Ireland survey.

With the latest release from Nationwide, UK house prices have now fallen by 0.0% – or a measly GBP 52 to be precise – since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 829 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK, small changes in UK residential have a negligible impact on the index) meaning that average prices of NAMA property must increase by a weighted average of 20.7% for NAMA to breakeven on a gross basis.

The UK residential outlook remains shaky with unemployment, slow economic growth and availability of credit all pressing down on prices and in the short term stamp duty concessions are set to run out in March 2012 which may depress the market in the short term. Inflation remains elevated, though dipped to an annualized 3.6% in January 2012, and is set to be 3-4% in 2012. Supply concerns remain in some regions and the UK is being slow to unblock its planning constraints, the base interest rate remains at 0.5% and the UK has a healthily expanding population.


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