UK commercial property prices in February 2012 – third monthly decline in a row and the declines are getting bigger

Image above of the €120m Gerry Gannon Chrome portfolio for sale through Savills in theUK.

Today sees the publication of the February 2012 IPD Monthly Property Index for the UK. 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 fell by 0.3% in February 2012, following two previous months of declines and several months of almost flat performance. Prices reached a peak in the UK in June 2007 and fell steadily until August 2009 when the current rally started. Prices then increased by 15% in the year to August 2010 but since then prices are up a measly 1.4% and in the last 12 months prices have increased by an even more measly 0.4%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 10.9%. Commercial prices in the UK are now 34.5% off their peak in June 2007. The NWL index  remains at 828 which means that NAMA needs to see a blended increase of 20.7% 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 table below 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.

The overall outlook for the UK economy is muted in the short term. The UK chancellor, George Osborne is set to unveil Budget 2012 on 21st March, 2012 and the next economic outlook from the UK’s Office for Budget Responsibility – roughly the equivalent of our own Fiscal Advisory Council – will also be published on 21st March. The UK economy contracted by 0.2% in real GDP terms in Q4, 2011 and the expectation is that growth will be less than 1% in 2012, that inflation will be 3-4%, that interest rates will remain low – the current Bank of England rate is 0.5% and has been since February 2009. And there might even be another round of quantitative easing that has so far seen almost GBP 300bn pumped into the GBP 1.5tn UK economy.

About half of NAMA’s UK portfolio was located in London which has so far performed very well from Aug 2009 to Dec 2010 but has been more subdued over the past year. Supply shortages and money chasing a relatively stable investment have maintained prices and there might even be a short term fillip from this years Olympics. Beyond London and the English south east, there is evidence of prices waning amidst sluggish economic growth and stunted lending.

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Surprise at omission of CBRE from NAMA Top 10 valuation service providers; raised eyebrows that company in which NAMA director has shareholding is No 1

It’s not new news that John Mulcahy – NAMA’s most senior property man from the start in 2009, he was an adviser before NAMA came into being and appointed the Head of Portfolio Management in February 2010 – has a €2.3m shareholding in his former company, Jones Lang LaSalle. This was reported in 2010 and addressed by NAMA at its first outing at an Oireachtas committee hearing in April 2010 when the following exchange occurred

“Deputy Joan Burton –  At our last meeting, I raised with Mr. McDonagh the issue of conflicts of interest between NAMA employees and either the banks which are having their loans taken or some of the individual loans. Mr. McDonagh went to great lengths to assure me that he and other people involved in NAMA had made extensive declarations in regard to their own interests and so on, and that these were published. There was a report in a Sunday newspaper that Mr. Mulcahy, who attended the last meeting as the valuation expert for NAMA, retained shares to the value of €2.3 million in Jones Lang LaSalle, his former employer. That company is providing key professional advice to NAMA. Can Mr. McDonagh comment on this? On the face of it, there seems to be a conflict of interest.”

“NAMA CEO, Brendan McDonagh – Deputy Burton raised issues about NAMA’s employees and conflicts of interest. Under section 42 of the NAMA Act, every person who works in NAMA must complete a statement of his or her interests, assets and liabilities. This is also true of everybody — myself included — employed by the NTMA who will be assigned as NAMA officers. I will not comment on newspaper speculation about a particular individual because it would be unfair to do so in the public domain. All I can state is that there was full disclosure by all employees who joined NAMA. We ensured full disclosure”

“Deputy Burton – A statement was made — whether true or not — in a major Sunday newspaper about what by most people’s standards was a significant investment of a couple of million euro by NAMA’s chief valuer. I am not sure what is his official title, but that is what he seemed to be when he appeared before the committee on a previous occasion; he was the person advising on valuations. He has a major shareholding in one of the key providers of professional services for NAMA. It is very reasonable for the Oireachtas committee to ask Mr. McDonagh whether this is correct and, if so, what measures have been taken to ensure there will be no conflict of interest where there is a crossover in the provision of services and where someone is a significant stakeholder in one of the service providers. That is what conflict of interest is all about.”

“Brendan McDonagh –  I can answer that question for the Deputy. The individual in question worked as managing director and chairman of that organisation inIreland and would have built up shares in it prior to joining NAMA. He would not be permitted to take part in any allocation of work to his former company — this applies to anyone who joins the NTMA or NAMA. This is a house rule and how we manage conflicts of interest. Effectively, there would not be any inference of favouritism towards a former employer. We had to recruit people with experience from the market. Many people would have potential conflicts of interest and the question is how we manage them. We have an internal procedure to manage them”

“Deputy Burton – It is obviously true that he has a significant shareholding in a business providing significant services for NAMA for, presumably, reasonable amounts of money. Mr. McDonagh has stated the individual in question is not allowed to allocate work to the company in which he has shares and that is fine, but what about his shareholding? Is he allowed to be an active shareholder in that company with regard to the management of his holding and interest in it?”

“Brendan McDonagh – No, he is not allowed to be an active shareholder in that company. To be realistic, it is a publicly quoted company and once a senior employee declares he or she has a shareholding, that is what is required under the NAMA Act. All employees are required to make a full disclosure of their assets, liabilities and interests. It does not mean to say the conflict is not managed. It is. That is all I can say to the Deputy.”

It is not clear if John Mulcahy still has that shareholding, but we do know that John’s star is in the ascendant at NAMA where he was recently appointed to the board as Director of Asset Management.

What is news is the response from Minister for Finance, Michael Noonan yesterday to a question from Sinn Fein’s Gerry Adams in which Minister Noonan set out the fees paid by NAMA to companies providing valuation services to the Agency. In total NAMA has spent  €13.3m to date – €4m in 2010 and €9m in 2011. The Top 10 recipients of NAMA’s largesse are:

So JLL is top beneficiary, and NAMA’s most senior property man is John Mulcahy who holds or held a substantial personal shareholding in JLL. Take NAMA’s assurances at face value and conflicts of interest were avoided by NAMA having an internal procedure to avoid them.

On the other hand, there will be surprise at the fact that JLL’s bigger and assumed main competitor in Ireland, CB Richard Ellis (CBRE) doesn’t even make it onto the list at all!  CBRE was one of the five valuation companies which were appointed for national valuations inIreland in December 2009 – the other four were JLL, Lisney, Savills and DTZ Sherry Fitzgerald.

UPDATE: 14th March, 2012. Industry sources have suggested the reason for CBRE’s surprising absence from the Top 10 might be because of that company’s disproportionate success in winning contracts to value property for the banks, and that when the loans were transferred from the banks to NAMA, CBRE might consequently have been compromised in its position,

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Is NAMA’s disposal target a term of Ireland’s bailout with the Troika?

How many times have we heard NAMA say that it was its target to pay down 25% of its debt by the end of 2013? And given that NAMA has issued €32bn of bonds in consideration for the €74bn of loans it acquired from the banks, that means that NAMA claims a target of paying down €8bn by the end of 2013. This target first appeared in the July 2010 NAMA business plan but the NAMA chairman, Frank Daly has gone further and claimed that the target is “copper-fastened” into the bailout agreement Ireland now has with the bailout troika of the IMF, EU and ECB. Frank told an Oireachtas committee in September 2011 “we have a clear target, which was originally NAMA’s but has now been copperfastened by the troika, of realising a sum of €7.5 billion by 2013”

Signally unhelpfully, NAMA has thus far declined to provide direction as to where that target appears in the bailout agreement, but yesterday Sinn Fein’s Gerry Adams asked Minister for Finance, Michael Noonan “if he will confirm if the National Assets Management Agency’s target of repaying 25% of its debts by the end of 2013 has become a term of the bailout agreement with the Troika” and the response from Minister Noonan was “the NAMA Board initially set itself the target of repaying €7.5bn of its debt by end 2013. By agreement, the May 2011 Memorandum of Understanding with the European Central Bank, European Commission and International Monetary Fund included a target for the disposal of assets equating to approximately €7.5bn in cash by end 2013. As a consequence this target is now a commitment under the agreement with the Troika. The Troika seek progress reports on the asset disposal target at the quarterly meetings with NAMA.”

Not for the first time yesterday, Minister Noonan is being extremely obtuse. If we examine the batch of documents released by the IMF in May “Ireland: First and Second Reviews Under the Extended Arrangement and Request for Rephasing of the Arrangement – Staff Report; Letter of Intent; Memorandum of Economic and Financial Policies; Technical Memorandum of Understanding; Letter of Intent and Memorandum of Understanding on Specific Economic Policy Conditionality (College of Commissioners); Staff Supplement; and Press Release on the Executive Board Discussion” there is indeed a reference to NAMA and its targets which says

“Strengthening NAMA. NAMA will be required to maintain the highest standards of governance with appropriate accountability and transparency arrangements. We will ensure that the costs of NAMA operations are reduced and that NAMA constructively contributes to the restoration of the Irish property market in the course of meeting the asset disposal targets established and monitored by the NAMA Board, including disposal of 25 percent of assets by end 2013.”

Now this appears on page 42 of the IMF report in May 2011 in a section titled “Attachment II. Ireland: Memorandum of Economic and Financial Policies” and in the earlier “Letter of Intent” in the document, Minister Noonan and central bank governor, Patrick Honohan say

“In the attached Memorandum of Economic and Financial Policies (MEFP), we set out our plans to further advance towards meeting the objectives laid out in our programme under the Extended Arrangement. Based on the strength of these policies, and in light of our performance under the programme and our continued commitment, we request moving the timing of the second review to May 15, 2011 and the completion of the combined first and second programme reviews under the Extended Arrangement.”

But hang on a second, a Letter of Intent is different to the bailout agreement signed by the Irish government in December 2010. And what the “Memorandum of Economic and Financial Policies” does is set out a series of intentions.

And the Memorandum does not state that NAMA will pay down 25% of its debt by 2013. It states that NAMA will dispose of 25% of its assets by then. The proceeds might be used for purposes other than paying down debt.

In fact Minister Noonan’s response is so obtuse that it verges on misleading. It is not a term of the bailout agreement that NAMA pay down 25% of its debt by 2013, and the NAMA bonds allow the debt to remain until 2020. Further, the Letter of Intent is different to the memorandum of understanding under which Ireland receives its bailout funding, so how can it be claimed that the NAMA target is “copper-fastened by the troika” Will Ireland be in default of the bailout agreement if the target set out in a Letter of Intent is not adhered to? That’s not my reading, but that’s not what Minister Noonan is saying “this target is now a commitment under the agreement with the Troika”

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NAMA reveals it expects to slow down its disposal of assets

It came as a surprise a fortnight ago to see in the IMF staff report on Ireland that NAMA had a target for asset disposals in 2011 – €3.1bn – which the Agency comfortably exceeded by generating €4.4bn of sales. It now appears that NAMA has disposal targets in both 2012 and 2013. Yesterday in the Dail, Minister for Finance Michael Noonan responded to a question from Sinn Fein’s Gerry Adams in which he said

“NAMA does not have specific annual targets for approved sales for each year up to 2013. However, NAMA advises that it has developed expected levels of cumulative approved sales as broad internal guidelines to ensure that it can reach its target of repaying €7.5bn of debt by 2013. These cumulative levels of expected approved sales are set at €7bn for end-2012 and at €9bn for end-2013.Levels of approved sales at year end will differ from actual sales at year end as in the property market there is typically a lag of about six months between sales approval and sales completion.”

For a man whose communication skills are sublime, this is a confusing answer from Minister Noonan. We can tell from the above that NAMA has an “level of expected approved sales” of €2bn in 2013, that is €9bn minus €7bn. But what is the “level of expected approved sales” in 2012? Because the Minister has bizarrely given his answer as a cumulative despite being asked for annual numbers, we have to form a view of cumulative approved sales at the end of 2011, so that we can subtract that from the €7bn at end-2012.

According to the NTMA which ran an investor road-show in January 2012, NAMA had approved sales of €6.6bn at the end of 2011. So that would imply a “level of expected approved sales” of just €0.4bn in 2012, that is €7bn minus €6.6bn.

No wonder this Government seems at sea in its negotiations on Anglo’s promissory notes if the above ministerial response is typical of the clarity of communication and understanding of concepts displayed by senior Irish politicians.

However what the above does seem to demonstrate is that NAMA is now going to slow down its disposal of assets – in 2010 and 2011 it generated €6.6bn apparently and is only going to generate an additional €2.4bn in 2012 and 2013. Critics have claimed that NAMA was disposing of the “low-hanging fruit” in its initial phase and that the Agency would imminently be left with “unsaleable crap”. If you tease apart the Minister’s response yesterday, that criticism seems to get support.

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NAMA before the Oireachtas finance committee later today

[The transcript of the hearing is now available from the Oireachtas here]

At 2pm this afternoon, NAMA will appear before the Oireachtas Joint Committee on Finance, Public Expenditure and Reform. NAMA will be represented by its CEO, the owlish Brendan McDonagh and its chairman – and now also, a member of the politically accountable NAMA advisory board – the hawkish Frank Daly. NAMA last appeared before this committee last September 2011 and it can expect to be as robustly questioned today.

We are set to find out that NAMA has been exceptionally busy in the past month. The NAMA chairman Frank Daly told the Dublin Chamber of Commerce on 9th February 2012 that NAMA had dealt with 6,000 credit decisions since its inception – an average of 12 per working day. NAMA is set to tell the Committee later today that just one month later, the Agency has dealt with 7,000 credit decisions, an almost incredible 1,000 increase in the space of a month!

Not only that, we are set to learn that NAMA has approved €147m of new advances to developers in just three weeks –  it told Sinn Fein’s Gerry Adams on 16th February 2012 that it had approved €980m, and that is understood to now stand at €1,127m. And with 45% of this in Ireland, that’s up from the 41% just four weeks ago!

NAMA is also likely to defend its record with delivery on its social and economic objective, and to strongly affirm its commitment to job creation and investment. The Sunday Independent claim that NAMA nearly cost 230 jobs in southDublin is likely to be again refuted in the strongest terms. In fact, NAMA is set to claim that it is directly supporting nearly 10,000 jobs in Ireland through its workings with developers.

There will be a review of the hearing here later today.

UPDATE (1): 14th March 2012. The opening statements from the NAMA CEO and the NAMA chairman are now available.  There will be a summary of proceedings here shortly.

UPDATE (2): 14th March 2012. Here are the highlights interpreted on here from the 3.5 hour hearing this afternoon.

(1) NAMA “would be confident” of recovering the €32bn it has paid for loans plus NAMA’s carrying costs – interest, new advances and operating costs. NAMA says it will be a “huge challenge” but there is nothing that would “seriously suggest”  NAMA won’t reach that figure and furthermore, the board of NAMA doesn’t accept that it is looking into “loss territory”. All of this despite banking expert Deputy Peter Mathews suggesting that NAMA was now looking at a €5-10bn loss.

(2) NAMA has a cash mountain of €4.3bn of which €2bn is on deposit with the Central Bank ofIrelandand the remaining €2.3bn is “invested” in short term Government bonds.

(3) NAMA has “no intention” of borrowing money to fund advances to developers, as provided for under the NAMA Act which places a cap of €5bn on such borrowing. Instead NAMA will use its cash mountain to fund any such advances.

(4) Of the 790 developer business plans, NAMA has “assessed” 550, enforced 180 and has yet to “assess” 60. Although NAMA told a public accounts committee in November 2010 – after it had acquired 90%-plus of its loans from participating banks – that it had a process of agreement which involved a memorandum of understanding, heads of terms and final agreement and each needed be signed by NAMA, the developer and potentially the developer’s spouse, NAMA subsequently abandoned this system for “assessments” which involves taking control of rent rolls and agreeing an asset disposal schedule.

(5) Following the introduction of a scheme in December 2011 to deal with Upward Only Rent Review clauses in agreements with NAMA developers, NAMA has received 150 applications from developers and tenants to reduce rents and 120 have been reduced and 30 more are pending.

(6) NAMA describes the Irish property market as “very moribund”. Deputy Richard Boyd Barrett described it as the “absolute doldrums”. In 2006 there were some €45bn of residential, development and commercial property transactions, last year there were less than €3bn.

(7) NAMA has softened its stance on selling property back to defaulting developers and says that legislation may be needed in future to deal with this prohibition which can impede NAMA’s ability to maximise revenue. This is the first time that NAMA has expressed any level of desire to change the NAMA Act.

(8) NAMA’s cost of funding is close to 2% – given the six month Euroibor rate is just over 1% and the subordinated bonds, which comprise 5% of the consideration paid for the loans, carry a rate of 6%, it seems as if NAMA has some major interest hedging costs.

(9) The loan relating to Priory Hall was not acquired by NAMA because the Agency assessed the loan was not just worthless but had a negative value because of the remediation work required. NAMA says it was prevented by section 85(3) of the NAMA Act from acquiring loans with a negative value.

(10) NAMA claims that in ALL cases, if a developer has a tenant, then it has pursued a mandate for the rent to be paid directly to NAMA.

(11) Here’s a nugget. It seems as if any ultimate loss made by NAMA over its lifetime may not now be recouped from the banks – AIB/EBS and Bank of Ireland. Brendan McDonagh says that once the subordinated bonds which comprise 5% of the NAMA acquisition consideration for the loans is used up, then it is the taxpayer that will foot the bill for any loss. This is not what the NAMA Act says, so it will be interesting to examine this claim further.

(12) NAMA is confident that once it gets approval for its negative equity mortgage product – was apparently expected in February 2012 from the European Commission but seemingly still hasn’t been given – then it will be able to offload property to people currently renting NAMA property.

(13) NAMA acknowledges that some developers have gone to the UK to seek bankruptcy but NAMA menacingly (or reassuringly depending on your perspective!) that even after bankruptcy has ended after one year, there is a further two year probationary period and if, during the period, previously undisclosed assets are uncovered then the bankruptcy starts all over again.

(14) NAMA says that in its opinion, the Irish residential property market is nationally down 57% from peak values, compared with the 48% published by the CSO in February 2012. NAMA says that although the CSO says that prices outside Dublin have fallen by just 43%, that NAMA’s experience is that they have fallen by much more.

(15) Both Deputy Pearse Doherty and Deputy Stephen Donnelly raised a general question as to how the Committee and politicians generally can be reassured about NAMA’s performance. The response from Frank Daly was process-focussed, that decisions within NAMA were rigorously examined. Furthermore the Comptroller and Auditor General was on site at NAMA to ensure it operated properly. And that was that – what expertise does the CAG’s office have in asset management?

(16) Both Brendan McDonagh and NAMA’s Director of Asset Management said they were very keen to speak to people who wanted to buy NAMA property, especially if they were not getting satisfaction with the developer or receiver. They could phone either of them, or contact them via email at info@nama.ie .

(17) NAMA says that its plan to send 15 of its existing staff into the banks to “intensively” oversee the management of the smaller loans by the 500 bank staff will satisfy their interpretation of the recommendation in the Geoghegan report that NAMA take back the smaller loans from the banks.

(18) A year after the conclusion of the Paddy McKillen case, NAMA still hasn’t got a final figure for its legal costs.

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