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Archive for June 11th, 2012

Where: Shelbourne Hotel, St Stephen’s Green,Dublin city
When: 6th July, 2012 with the first Lot auctioned at 11am
What: 90 Lots with total maximum reserves of €8.5m, mix of commercial, residential and development properties spread across the country

Even if it’s not at the mania-level of April 2011, there is still a good deal of anticipation for the seventh Allsop Space auction scheduled to be held in Dublin on 6th July. The catalogue has been published this evening and is available here.

Complete Lot details appear not to have been uploaded yet, preview on here will be in the morning.

Allsop, the British auctioneering giant and its Irish domestic partner, property company Space have quickly become the dominant auctioneering force in Irish property. They revolutionised the process with maximum reserves – prices above which the winning bidder is guaranteed to get the Lot– video broadcasting and live results. The efficiency and transparency of the auctions have been widely appreciated. And over the course of six auctions, they have sold nearly 450 properties for a total of nearly €70m.

UPDATE: 12th June, 2012. The auction details are now online. There’s another unfinished estate, this time in Kerry with 14 houses on three acres with a maximum reserve of €50,000. There doesn’t appear to be any apartment on offer at Liam Carroll’s Castleforbes Square development in Dublin 1 – a first for an Allsop Space auction where a seemingly endless stream of apartments have featured in each of the six previous auctions. Star of the show in terms of price is 26 Merrion Square – pictured below –  a 8,000 sq ft office building in prime central Dublin with a maximum reserve of €1m. It has recently been used as a language school and has 6 car parking spaces to the rear. A Bank of Ireland branch a hundred metres away with similar accommodation, on the corner of St Stephen’s Green and Merrion Row recently sold for €7m. Maximum reserves continue to offer the prospect of attractive yields, 15-20% is not uncommon. There’s a modern two-bedroom apartment in Leitrim with a reserve of €25,000 and a two-bedroom apartment with sea views in Donegal with a reserve of €17,500.There’s a seven-bedroom 5,000 sq ft house on 11 acres in Mullingar with a reserve of €125,000. Overall, there is a wide range on offer and reserves show no obvious sign of recovering prices.


26 Merrion Square, 8000 sq ft office building with a maximum reserve of €1m

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In the UK, the general perception of Ireland’s bailout is that it is coming from the Troika of the EU/ECB/IMF and that our programme is only of academic interest. Alas for the UK, as part of our bailout, the UK is providing a GBP 3.227bn (€4.0bn) bilateral loan so there might be cause for more interest in how the money is being spent and the prospects of getting it repaid.

The UKbilateral loan is examined in some detail here. Originally it was to have the same punitive interest rates as the EU bailout, but following the EU Summit in July 2011 which saw our interest rate from the EFSF slashed, theUK also decided to cut their rates and provide the funds at more-or-less cost.

And this morning, the Financial Secretary to the Treasury, Mark Hoban MP, told the UK parliament that the UK was cutting the interest rate on the bilateral loan in line with the loan agreement, following declines in the UK’s own borrowing rates, which are at record lows. The bilateral agreement provides for the rate to be adjusted every six months in light of average UK borrowing rates for the previous six months. In addition to the UK’s own costs, they still charge us a 0.18% “handling fee” – equates to €7m per annum once the full €4.0bn is drawn down – to date we have only received €1.4bn.

No details were provided by Mark Hoban on the old rate and the new rate, but the UK10-yr bond appears to have been trading at around 2% for the past six months compared to around 2.5% for the previous six months. Ireland’s loans are for a period of 7.5 years. The UK 10-yr yield this morning was 1.67%

Unfortunately for Ireland, we must repay the bilateral loan to the UK in sterling which has been strengthening against the euro in the past year, so the interest rate reduction announced today is likely be offset by us having to pay back more in euros.

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So far Ireland has spent €67.8bn bailing out the banks, comprising €62.8bn in cash and promissory notes directly injected into the banks, and a further €5bn gifted to the banks by NAMA in state-aid and for which we are now on the hook if property prices don’t recover. In a country whose GDP was €156bn in 2011, this represents 43% of GDP. I wonder how the Spanish would feel if they were told now that this was the type of debt they will need shoulder to rescue their banks, rather than the tiddly 10% of GDP implied by the €100bn bailout announced over the weekend? But as bad as Ireland’s bailout costs are so far, they could be set to grow even more. We know about the extra €4bn which the deputy governor the Central Bank of Ireland announced a fortnight ago, which will be required in a couple of years to bolster capital levels. But what about future losses at the banks?

The 2011 annual reports for Bank of Ireland, AIB/EBS and Irish Life reveal the scale of losses that will be in store if our economy doesn’t turn around and grow. Each of these three financial institutions published two valuations for their loan-books – a “carrying value” which is what is reported in the accounts and represents the book value of the loans less a convoluted provision for impairments and a “fair value” which represents what the loans are worth today if they were called in and the underlying asset was used to pay off the loan. Here is the summary of the loan books in 2011 which show that the overall difference between “carrying value” and “fair value” for these three institutions is an almighty €38bn which if it materialised would wipe out the entire capital base and need nearly €20bn in additional capital to boot, just to keep banks solvent. To give them adequate capital buffers might involve a further €20bn. So €40bn, all told on top of the €72bn current and projected cost.

 

And take a look at the loan books the previous year in 2010.

 

There has been a major deterioration in the “fair value” and the gap between the “carrying value” and the “fair value” which is what you would expect when the economy is still in recession, where residential property fell by 16%-plus in the past year and commercial property fell by 10%-plus, and where unemployment is now at a current-crisis record of 14.8%. But will fortunes swing around and will we grow to such an extent that the “carrying values” can be realised for these banks’ loans.

Who knows, but we do project anaemic growth in 2012 and 2013. We do expect unemployment to remain above 11% during the next three years. We will be introducing new personal insolvency legislation which should provide a practical means for those in impossible financial situations to find some closure. What about property prices? It seems on here the consensus is that prices will drop another 20% on residential to bring the total decline from 50% to 60% – 20% of 50% is 10% and 50% plus 10% is 60%. Commercial property is still declining despite the bumper giveaway budget in December 2011, and in general there is still vast oversupply. Personal loans are likely to come under pressure with planned budget adjustments of €8.6bn between 2013-2015 which will average €5,000 per household in 2015 alone, after €4,000 in 2014 and €2,000 in 2013.

Is there a cap on what this State will spend on bailing out its banks? Is it 50% of GDP as we are presently approaching or 100% of GDP, or in absolute terms is it €72bn or €100bn or what? The Spanish have just loaded 10% of GDP onto their national debt to deal with the banks. Would they accept anything like the burden this country has shouldered and which may significantly increase?

Weren’t the 2011 stress tests supposed to put an end to this drip-drip of bad news on the banks, which has entailed a journey from “cheapest bailout in the world” to what is beginning to look like “most expensive bank bailout in the world”? Yes, the stress tests were supposed to draw a line under the banks and their prospective losses, but the trouble is the economy is continuing to list, and our export markets are all looking shaky. We haven’t yet reached the depths in property prices projected in the stress tests, but we are on the eve of getting personal insolvency legislation which may crystallise losses for the banks as people use new arrangements. Last year’s stress tests may need to be revisited in a few months.

Lastly, neither IBRC nor NAMA provides “fair values” in their accounts for its loans at present. So we could expect the above figures, which are in themselves nightmarish, to grow further if these two other 100% state-owned institutions were to be included.

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