Archive for April 26th, 2012

According to Laura Noonan reporting in the Independent, Bank of Ireland’s annual general meeting on Tuesday this week was a generally civilised affair. In recent years, shareholders have gone to some lengths to express their rage at the collapse in the bank’s share price from a peak of €18 to just €0.11 today – remember Gary Keogh who specially “matured” eggs in his garage and strapped them to his body to avoid them being confiscated by security before he could deploy them? – that was for an AIB AGM but the share price collapse has been similar to Bank of Ireland’s. Instead, at this year’s AGM we had a few civilised criticisms from what appeared to be smaller-scale shareholders including comments from Deputy Shane Ross. Nobody however seems to have questioned the role of Bank of Ireland in funding of the Anglo promissory note payment at the end of March 2012 – remember the Government didn’t borrow €3.1bn from the Troika to pay the promissory note as originally planned; instead the Government issued a new sovereign bond to Anglo (or IBRC as it is now known), NAMA gave Anglo €3.1bn in cash with Anglo pledging the sovereign bond as security and it is intended that in June 2012 that Bank of Ireland will reimburse NAMA with €3.1bn in cash which will be a loan for one year. What does Bank of Ireland get for this €3.1bn loan? It gets a profit of 1.35% of the loan value. How does it make a 1.35% profit? It uses the sovereign bond to borrow €3.1bn from the ECB at 1% and then lends that back to IBRC at 2.35%. Simples.

But what is confusing some observers is the fact that Bank of Ireland could go out today and buy an Irish sovereign bond which matures in April 2013 at a price at close of business yesterday which would give a return of 3.88%. Indeed given that Bank of Ireland will probably only acquire the bond in June/July 2012, the appropriate comparison might be the Irish sovereign bond which matures in January 2014 and was priced yesterday at 4.75%. And in both cases Bank of Ireland could use the bond to get a loan from the ECB at 1%. In any event, we can all agree that the 2.35% on offer from the Government with the Anglo promissory note funding is less than what is available on the open market today. So why is Bank of Ireland foregoing an open market transaction which could deliver it €120-150m in a year – and Minister Noonan indicates that Bank of Ireland will offer the loan for 364 days – when all Bank of Ireland is getting on the deal is a measly 2.35% of €3.1bn or €72m. In other words, Bank of Ireland is gifting the Government between €48-78m. Why?

Independent TD Stephen Donnelly today asked the Minister for Finance, Michael Noonan this precise question

To ask the Minister for Finance if, in view of the arrangement on the March 2012 promissory note payment, if it is the case that, instead of borrowing the money for this payment from the Troika facility at 3.5%, the Government and State owned corporations will now be borrowing it at 2.35% from Bank of Ireland; if it is the case that Bank of Ireland could buy a comparable bond on the open market at higher rates; if this is the case, the reason Bank of Ireland will buy the bond to cover the promissory note payment; and the economic logic for same

And this was the reply from Minister Noonan

As the deputy is aware on 29th March 2012, I made the following statements on the matter to the Dail:

“The €3.06 billion of Programme funding that would otherwise have been used to make the promissory note payment should potentially allow greater flexibility around when and at what level Ireland returns to the capital markets.”

 It is proposed that IBRC will enter into a repurchase agreement with Bank of Ireland at margin of 135bps above the ECB main refinancing rate which is currently 100bps. The Troika funds continue to be available to the State at the appropriate funding levels. 

 The commercial terms and economic logic for proposed repurchase transaction between IBRC and Bank of Ireland is a matter for the board of directors of the respective banks. I note that the matter is subject to Bank of Irelands independent stockholder approval and I refer the deputy to the statement released by Bank of Ireland on the matter on 29 March 2012. 

 “As the transaction is considered to be a related party transaction under the Listing Rules, it will be subject to independent stockholder approval. A circular containing additional details of the transaction and the date of the proposed Extraordinary General Court will be posted to stockholders once the circular has been approved by the UK Listing Authority and Irish Stock Exchange.

So there’s no justification of Bank of Ireland’s actions from the Minister. It is expected there will be an EGM at Bank of Ireland towards the end of May 2012 to ratify the decision of the Bank of Ireland board. But remember, the Government has a stake in Bank of Ireland these days of just 15% and about a third is owned by US and Canadian investors including the canny Wilbur Ross. The rest is mostly owned by large institutions, smaller-scale shareholders have been mostly wiped out. So regardless of the apparent economic stupidity of the transaction, if the shareholders agree to it, then it must make commercial sense. Minister Noonan was offered the opportunity to explain what appears to be a transaction that doesn’t make economic sense, and he did not offer an explanation.


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“The Deputy asked if NAMA can assure the committee it is undertaking its role properly. Today is part of that role. However, more important, is the role the Comptroller and Auditor General plays in NAMA with a permanent staff in the building who have full access to every paper, decision and e-mail that NAMA sends and he reports back to the Committee of Public Accounts. I understand he will soon publish another special report on NAMA. There will be the normal annual reporting plus special reports, as decided by the Comptroller and Auditor General. That is in his gift and his remit.” NAMA chairman Frank Daly speaking at an Oireachtas committee hearing in March 2012

This morning’s story in the Irish Examiner which detailed the sale of a 450-acre land-bank inCork is sure to raise concerns about the transparency of NAMA’s operation, with a property assembled at a cost of €100m reportedly sold for €7m without the property coming onto the open market. However, if you confront NAMA with your suspicions, you’re likely to be met with indignant befuddlement at the temerity of any questioning. Remember NAMA says that it is the most accountable public body in the State because it produces quarterly reports and accounts, subjects itself to Oireachtas committee hearings every few months, answers a mountain of parliamentary questions and is subject to rigorous auditing, both internal and external. How dare anyone think that this Agency which is disposing of an average of €750m of property at par value a month every month, property comprising loans and real estate which are all unique and where there is a multitude of buyers, NAMA a new entity with new personnel, new teams, new systems operating under a new piece of legislation, how dare anyone suggest there is anything untoward or worthy of questioning with its business. What could POSSIBLY go wrong?


One of the claims that NAMA uses to shield itself from suspicions of malfeasance or incompetence is Ireland’s Comptroller and Auditor General (CAG) which has a permanent team in situ at NAMA’s HQ in Treasury Building in central Dublin. Oddly enough NAMA has retained an external company, Deloitte and Touche to provide “internal audit services” and it is the role of the CAG to conduct the external audit. The CAG also produces special reports on NAMA which is particularly confusing as the only report so far produced on NAMA’s acquisition phase strays clearly into the area of internal audit. On Tuesday this week, Minister for Finance Michael Noonan in reply to a parliamentary question from Independent TD, Stephen Donnelly amplified a little the resourcing and role of the CAG at NAMA. He said that in 2011, the CAG expended the equivalent of nine man-years examining NAMA and that it spent €80,000 engaging the Valuation Office and a law firm to examine aspects of the NAMA valuation and acquisition of loans.

So should we be placated by the presence of the CAG on site at NAMA? Would you be put at ease knowing that the CAG might be examining the Corksale reported today to ensure that the taxpayer’s interests were protected? Sticking an auditor’s hat on, I can’t see how the CAG could effectively oversee NAMA’s disposals unless the auditor had access to expertise on standard practice in the asset management business. Otherwise how would they even know what questions to ask? Auditors typically have standards – written down rules and procedures – against which they check the reality of operations in a company.  NAMA has two codes of practice for the disposal of property, one for loans and one for real estate property. The code for real estate property is the Code of Practice for the Governance of State Agencies 2009 which says

“The disposal of assets of State bodies or the granting of access to property or infrastructure for commercial arrangements e.g. joint ventures with third parties, with an anticipated value at or above a threshold level of €150,000 should be by auction or competitive tendering process, other than in exceptional circumstances (such as a sale to a charitable body). The method used should be both transparent and likely to achieve a fair market-related price. The anticipated value may be determined either by a reserve price recorded in advance in the State body’s records or by a formal sign-off by the Board on the advice of the Chief Financial Officer (CFO) or, if delegated by the Board, sign-off by the CFO or the Board Audit Committee, that, in its view, the anticipated value is likely to be less or greater than €150,000. In determining market value, regard should be had to accounting standards best practice in Ireland.”

Will the CAG or Deloitte and Touche now challenge NAMA as to how the disposal of the land-bank in Cork complied with the code? The property had a value above the threshold of €150,000. The buyer is understood to be a local farmer, so not a charity then. So disposal should have been by “auction or competitive tendering process” and the “method used should be both transparent and likely to achieve a fair market-related price” Will an off-market sale be likely to have met that standard? And will the CAG be happy with the NAMA defence to questioning that the whole thing was “a matter for the professionals retained”?

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This morning has seen the publication of the Central Statistics Office (CSO) residential property price indices for Ireland for March 2012. Here’s the summary showing the indices

  • at their peak (various months in 2007 depending on type of property and location)
  • the NAMA valuation date (November 2009)
  • 12 months ago (March 2011)
  • the start of this year (end December 2011)
  • last month (February 2012)
  • this month (March 2012)

The CSO’s indices are Ireland’s premier indices for mortgage-based residential property transactions. The CSO analyses mortgage transactions at nine financial institutions : Ulster Bank, Allied Irish Banks, Bank of Ireland, ICS Building Society (part of the Bank of Ireland group), the Educational Building Society, Permanent TSB, Belgian-owned KBC, Danish-owned National Irish Bank and Irish Nationwide Building Society. The indices are hedonic in the sense it firstly groups transactions on a like-for-like basis (location, property type, floor area, number of bedrooms, new or old and first-time buyer or not) and then assigns weightings to each group dependent on their value to the total value of all transactions. The indices are averages of three-month rolling transactions.

Cash transactions: there is increasing concern that although the CSO captures data from the mortgage market, it omits cash transactions. The latest figures from the Revenue Commissioners are for 2009 which show that just 6% of transactions (by volume) were in cash. In February 2012 , estate agents DNG claimed that cash made up one third of the market. At the start of January 2012, Sherry FitzGerald said that 29% of its registered buyers were cash buyers, and mortgage expert Karl Deeter said on here that “what Mark Fitzgerald [of Sherry FitzGerald] said at the AIB meeting in December (we were at the same table) is that 30% of purchases were cash – I’d take that as being completions unless this is a case of crossed wires”. In addition, the Sunday Independent reported the former acting-CEO of the Irish Auctioneers and Valuers Institute saying that “I would say a quarter of deals at present are being done in cash”. The Allsop Space auctions won’t be representative of the general market but the latest analysis from them says that almost three quarters of its auction transactions were in cash. The CSO still hopes to have monthly data from the Revenue Commissioners from mid-2012 and it expects that it may subsequently be able to show the market size with its monthly release of the residential index. The perception is that cash transactions will be at keener prices than mortgage transactions because the buyer can move quickly and doesn’t need credit. If that perception is correct then the CSO may be understating – and potentially, understating substantially – the decline in prices. NAMA, which is not an honest broker in this discourse, said recently “the index indicates a decrease of 48% overall but we believe the market has decreased by 57% or 58% on average. The index simply has to catch up because the transactions on the market reflect that.” NAMA in particular seems to believe that prices outsideDublin have fallen significantly further than the CSO index suggests. A recent enquiry to the Property Regulatory Services Authority which will administer the new House Price Database asked about the launch date and the response was that it would be implemented as soon as practicable – sources suggest that will be Q4,2012.

As for the key questions:

How much does property now cost in Ireland? The CSO deliberately doesn’t produce average prices. The former PTSB/ESRI index did, and claimed the average price of a property nationally hit the peak in February 2007 at €313,998, inDublin in April 2007 at €431,016 and outsideDublin in January 2007 at €267,987. If, and it is a big “if”, you were to take PTSB/ESRI figures as sound and comparable to the CSO series, then these would be the average prices today:

Nationally, €159,044 (last month €159,044, peak €313,998)

In Dublin, €185,866 (last month €184,584, peak €431,016)

Outside Dublin, €146,061 (last month €146,893, peak €267,987)

I don’t think the CSO would be happy with this approach but it seems to me that the PTSB/ESRI series as represented by its historical indices closely correlates with the performance of the CSO indices.

What’s surprising about the latest release? Prices were flat nationally for the month of March 2012 and this is only the third time in the last 53 months when prices have remained flat; there have been declines in all other months since the peak in 2007. Apartment prices inDublin were actually up by 2.3% in the month following the 6.3% decline in February 2012. Non-Dublin prices are down 0.6%, perhaps the long-awaited equalizing of declines betweenDublin and elsewhere is beginning.

 Are prices still falling? The index was flat in the month followings a 2.2% dcline in February 2012, 1.9% monthly decline in January 2012 which was also up from the 1.7% decline in December 2011 and 1.5% decline in November  2011 but in the same range as the 2.2% decline in October 2011, the 1.5% decline in September 2011 and the 1.6% decline in August 2011.

How far off the peak are we? Nationally 49.3% (51.8% in real terms as inflation has increased by 5.2% between February 2007 and March 2012). Interestingly, as revealed here,Northern Ireland is some 45.2% from peak in nominal terms and 52.6% off peak in real terms. Are forbearance measures by mortgage lenders, a draconian bankruptcy regime and NAMA’s (in)actions distorting the market? Or are cash transactions which are not captured by the CSO index so significant today that if they were captured, the decline in the Republic would be even greater?

How much further will prices drop? Indeed, will prices continue to drop at all? Who knows, I would say the general consensus is that prices will continue to drop. This is what I believe to be a comprehensive list of forecasts and projections for Irish residential property [house price projections in Ireland are contentious for obvious reasons and the following is understood to be a comprehensive list of projections but please drop me a line if you think there are any omissions].


What does this morning’s news mean for NAMA? The CSO index is used to calculate the NWL Index shown at the top of this page which aims to provide a composite reflection of price movements in NAMA’s key markets since 30th November 2009, the NAMA valuation date. Residential prices are now down 29.6% from November, 2009.  The latest results from the CSO bring the index to 817 (22.3%) meaning that NAMA will need see a blended average increase of 22.3% in its various property markets to break even at a gross profit level.

The CSO index is a monthly residential property price index. Irelanddoes not yet have a publicly available register of actual sale prices, but one is expected in late 2012 following the passing of legislation this – read the latest on the House Price Register here. There are four other residential price surveys, based on advertised asking prices or agent valuations (see below, details here) – Phil Hogan’s Department of the Environment, Community and Local Government produces an index based on mortgage transactions, six months after the period end and not hedonically analysed – it is next to useless.

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“the sale strategy “was a matter for the professionals retained”” NAMA spokesman defending the sale of €100m of land inCork which had reportedly not come onto the open market

In January 2012 the Irish Examiner reported the sale of 125-acres outsideCork city on the N25/Ballincollig Bypass for a price reckoned to equate to €20-30,000 per acre. The apparent fact that the marketing of the property was confined to erecting “for sale” signs on the property raised some eyebrows as there was the possibility that potential buyers who mightn’t have driven along the N25 might have been interested in the property. Some suggested the sale to the University College Cork/Munster Agricultural Society was a “sweetheart deal”. DTZ Sherry FitzGerald marketed the property on behalf of NAMA.

Today the Irish Examiner sets out the details of the sale of another property which it says never came on the open market. The newspaper “has spoken to the previous owners and the land’s tenants, several of whom said they would have had an interest in buying part of the land, but they either could not engage with NAMA, or did not know it was about to be sold” though it should be said that the sale of the property in one lot was a consideration for NAMA. The property in question is reported to be a 450-acre land-bank assembled by NAMA Top 20 developer Castlelands Construction at a cost of €100m and sold to a buyer, believed to be a local farmer, for “about €7m” or €15,000 an acre. Farmland in the State is typically selling for €8-12,000 at present.

This time it is Savills which is the agent for the sale and the Examiner reports “Savills described the bidding as competitive and recommended the sale as the best price possible”

It is not exactly clear what the Examiner means by the property not coming onto the open market. Typically in the trade it means that the agent quietly contacts what it considers might be interested purchasers. The price supposedly paid represents a premium on the going rate of agricultural land, and although the land is greenbelt and un-zoned, there may be some consideration of future development or infrastructure value of the land.

However what stands out from this newspaper report like a flashing red beacon is NAMA’s position on the sale where there appears to be a complete abdication of responsibility by the Agency for getting the best price for the property. NAMA seems to be saying that there was an initial valuation which suggested a price and the price now achieved by Savills was in excess of that price. It is not clear who provided the “initial valuation” – was it Savills themselves or NAMA or someone else? But regardless of who provided the valuation, the common understanding at present in the business is that there are so few transactions of development land that it is difficult to assess what the market value is. If NAMA or its agents had opened the sale up to all, then it would have seen what buyers were willing to pay on the open market which is ultimately the determinant of what a property is worth. But that didn’t happen according to the Examiner. A 450-acre land-bank might have been of interest to buyers from Belfast to Belmullet, from Boston to Berlin but NAMA washes its hands of the matter saying it “was a matter for the professionals retained”. Is there a property owner in this country that would leave the sale of their property 100% in the hands of estate agents? Yes there is and it is NAMA.

The NAMA spokesperson is also quoted as saying “the sales process was independently managed by Savills, on behalf of the debtor, and was designed to obtain the best achievable price for the property” It seems that Fianna Fail’s finance spokesperson Michael McGrath is aware of the sale and the Examiner reports ““he was surprised “a landholding of this size and importance should be sold without being put to the open market”” His party colleague, Senator Mark Daly has tabled a Bill to force NAMA to publish details of all property under its control and all property sold, but that Bill which was initiated in December 2011 probably won’t see the light of day.

NAMA is selling an average of €750m of property a month EVERY month by reference to the original par values of the relevant loans. It is thanks to sources like Tommy Barker at the Irish Examiner today that we get to hear of a fraction of what is being disposed of on our behalf. There is an attempt on here to track all NAMA sales, but it too is likely to be just the tip of the iceberg.

UPDATE: 9th May, 2012. Last week in the Seanad, Senator Mark Daly who introduced a bill to promote transparency in NAMA and IBRC spoke about this sale and complained that buyers were not even aware that the land was for sale.  Fine Gael’s senator Paul Coghlan dismissed any suggestion of impropriety saying “I wish to refer to an entirely different item, which is that yesterday, my friend and colleague, Senator Daly, made a serious and unwarranted charge with regard to NAMA. He spoke of approximately 450 acres of agricultural land, and so zoned, in a part of Cork. I understand he mentioned a figure of €100 million and how it was sold for €7 million.  I am rebutting something that was stated seriously in this Chamber yesterday. I put on record that two independent valuations of approximately €10,000 an acre were carried out by reputable firms in that regard. When NAMA acquired that loan, it reflected the state of the market at that time. It was sold in one lot at a price significantly above what the agency paid for it and consequently, a profit was made for the taxpayer. Savills, which is a highly reputable firm, acted on its behalf. It had checked the market and was in touch with all interested parties. I can only conclude that someone who did not get his or her own way got in touch with Senator Daly about the matter to give vent to his or her upset.”

How Senator Coghlan knew what NAMA paid for the loan is unclear.

UPDATE: 24th May, 2012. Fine Gaell deputy Jerry Buttimer asked Minister for Finance Michael Noonan about the above transaction in the Dail on Tuesday this week and was told that the final agreed sale price to a special purchaser was 40% more than the value advised by two independent professional sources.

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