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Archive for June 25th, 2012

It’s been over two years since the NAMA CEO Brendan McDonagh told an Oireachtas committee that NAMA may eventually have to bulldoze constructed property, and this afternoon, the Agency has made its first demolition announcement – 12 apartments in a single apartment block on the Gleann Riada estate off the Strokestown Road in Ballyminion  Longford are destined for the wrecking-ball, it seems. NAMA says that the site is currently being prepared for demolition which is scheduled to take three weeks.

The Gleann Riada estate was built by Northern Irish developer Alastair Jackson and his company Eassda Ireland Limited, formerly known as Keygo Properties Limited. Alastair has since been declared bankrupt in the UK and his companies have agreed a €4m tax settlement with the Revenue Commissioners.

It is only the one apartment block that is affected by NAMA’s announcement this afternoon, and there are 90 other properties – all houses – on the estate  which are not affected. The 12 apartments are in one block, and NAMA says “none of which have been sold and which have fallen into disrepair”. Lisney has been the property receiver. NAMA claims that its decision to bulldoze is driven by a need to make the estate safe for other residents.

NAMA says that it is “involved with a relatively small number of so-called Ghost Estates (about 10%) and our priority in those where we do have an interest is first-and-foremost to make them safe for residents.  Where it is uneconomic to finish-out an estate or a part of an estate or if the Local Authority deems it to be structurally unsafe we will invest our resources in demolishing the relevant structure and ensure that it is made safe for other residents.  This will benefit residents of those estates and make the estate safe from a Health and Safety perspective”

A list of questions was submitted to NAMA including details of the apartments and their state of disrepair, sales and marketing efforts made and the cost of the demolition work which NAMA says it is funding. If there is a response, it will be posted as an update.

Allsop Space is selling another partly finished estate in Kerry in its auction next week; last month it sold an incomplete estate in Ballyjamesduff,countyCavan.

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Psst! Fancy a 20%-plus per annum return on your cash? It’s for an investment in Irish commercial property which has already fallen 65% from peak. As long as commercial property hasn’t fallen below today’s prices in five years time, then you will double your money. If commercial property increases by 10% over the next five years compared with today, even including inflation, then your return will increase to nearly 30% per annum. The scheme is underwritten by NAMA. Interested? Then too bad because NAMA only wants to hear from “strong and reputable counterparties”, but if you are a US “privately-held real estate investment advisor” run by the former head of Blackstone, then NAMA will welcome you with open arms, as indeed it recently did when it sold One Warrington Place – now confirmed on the Northwood website –  for around €27m.

 

Ever since NAMA introduced its so-called “staple finance” initiative last year, where it converts part of the sale price of its commercial property into a cheap loan, the property community has been calculating exactly what financial impact the availability of such financing has on the Irish commercial property market.

“Staple financing” or vendor financing works like this : NAMA sells you a commercial property, an office block for example, for €100m. You put up €30m in cash and the remaining €70m is converted into a loan for five years on which you pay 3.5% per annum. The office block you buy is yielding 8.5%, in other words it generates €8.5m in rent each year. So you collect your €8.5m and you pay NAMA 3.5% on €70m or €2.45m per year. That will leave you with a “profit” annually of €6.05m. That’s over €30m in profit in five years, or in other words, you double your money. Of course at the end of five years, you’ll have to find the remaining €70m to pay NAMA, but as long as prices haven’t declined by reference to today, then you should be able to (a) sell the property and cash out, having doubled your money or (b) refinance the €70m loan with another lender.

Of course, this is not a guaranteed return. Irish commercial property has so far fallen 65% from peak, and it might fall further. But factoring in inflation, what is the betting that property in five years time is worth more than it is worth today?

If property increases by 10% over the next five years, then your return will increase to 27% per annum. Why so much of an increase? Because you are only putting up 30% of the purchase price, but the increase in property prices applies to 100% of the property, so you disproportionately benefit from any increase. Of course the same is true for declines.

But the question for NAMA is why is the Agency selling property which is yielding more than NAMA’s cost of funding – about 1% to which NAMA adds a margin of 2.5% when lending to purchasers. In the above example, if NAMA held onto the property for five years, then NAMA would generate €42.5m in rent and only pay €1.5m in interest on €30m worth of bonds which are used to finance NAMA. What NAMA is doing is gifting away profits to someone else. Of course, if Irish commercial property continues to decline over the next five years, then NAMA will have lost out by holding on to the property, but does NAMA not believe its own press when it says that Irish commercial property prices are stabilizing?

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This morning has seen the publication of the Central Statistics Office (CSO) residential property price indices for Ireland for May 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 (May 2011)
  • the start of this year (end December 2011)
  • last month (April 2012)
  • this month (May 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: sadly the CSO is still unable to provide up-to-date information on the total market, including cash-transactions, because apparently, the Revenue Commissioners have failed to provide the information to the CSO. There is increasing concern that although the CSO captures most 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 earlier this year 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. The CSO continues to hope that it can introduce supplementary property price statistics over the summer which will show the overall size of the market including cash transactions, which will give a solid basis for assessing the cash/mortgage elements in the market.

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 prices as sound and comparable to prices captured by the CSO series, then these would be the average prices today:

Nationally, €157,601 (last month €157,360, peak €313,998)

In Dublin, €187,147 (last month €186,827, peak €431,016)

Outside Dublin, €143,356 (last month €143,148, 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 nationally have risen for the first time since September 2007 – yes there have been a few flat months, but this is the first month since the boom that prices have actually increased, albeit by just 0.2% in one month. The increases were both in Dublin and outside Dublin but for houses only – apartments still fell both in Dublin and nationally during the month.

Are prices still falling? No, based on May’s results where prices nationally rose by 0.2% following a decline of 1.1% in April 2012, it was flat in March 2012 which followed a 2.2% decline in February 2012, 1.9% monthly decline in January 2012, 1.7% decline in December 2011, 1.5% decline in November  2011, 2.2% decline in October 2011, 1.5% decline in September 2011 and 1.6% decline in August 2011.

How far off the peak are we? Nationally 49.8% (52.3% in real terms as inflation has increased by 5.2% between February 2007 and May 2012). Interestingly, as revealed here,Northern Ireland is some 46.3% from peak in nominal terms and 54.0% 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 30.2% from November, 2009.  The latest results from the CSO bring the index to 816 (22.6%) meaning that NAMA will need see a blended average increase of 22.6% 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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It’s been a month since we voted 60%:40% to give the Government permission to ratify the Fiscal Compact. The main basis on which the Fiscal Compact was sold to the nation was that it provided an “insurance policy” in the guise of the €700bn European Stability Mechanism (ESM) when our first bailout concludes at the end of 2013. The ESM doesn’t exist yet, and is not due to come into being until next Sunday 1st July, 2012. Minister Finance Michael Noonan is ready with his €250m cheque for Ireland’s first instalment in our initial contribution of €1.25bn to the €80bn capital of the ESM, but alas he faces at least two challenges which may prevent him handing over his cheque. In Ireland, Donegal South-West Independent TD, Thomas Pringle (pictured above) has been pursuing a case in Dublin’s High Court. The case was being heard last week and is understood to be ongoing – the latest update in the mainstream media was from Mary Carolan in last Thursday’s Irish Times, and Deputy Pringle sets out the background and updates to his case on his website here.

The case centres on whether or not a referendum is needed for the ESM treaty, as distinct from the Fiscal Compact which we voted on last month. The ESM binds Ireland to substantial funding commitments of up to €11bn, should the full €700bn be called up in future, and for this and other reasons Deputy Pringle thinks the nation should have its say on this funding.

The Government disagrees and is fighting the case. It was understood that the Government had given an informal commitment that it would not ratify the ESM treaty until the case was disposed of in the courts. Whether or not that commitment was given, it is now understood that an injunction will be sought this week forcing the Government to withhold ratification until the legal proceedings are concluded.

So Minister Noonan might have to wait a few weeks more before handing over his cheque, and he may have to tear it up. All of this might be rendered moot by goings-on in Germany. The ESM just needs 90% of its initial funding to operate and Ireland’s 2% contribution is not significant, but Germany’s 27% is.

And in Germany, it seems there are similar concerns to Deputy Pringle’s, which last week prompted a request by its courts to refer the ESM treaty to Germany’s special constitutional courts. The request was made to the German president, and he looks set to accede to that request, which would at the very least, delay Germany’s full embrace of the ESM for three weeks, taking it past the 1st July scheduled launch date. Ironically for Ireland, by the time we get to the end of 2013, the ESM cupboard may be bare if Spain and Italy get there first. So what was supposed to have been an “insurance policy” to which we are scheduled to contribute €1.25bn in initial capital, could conceivably turn out to be, instead, a scheme whereby an insolvent country pays over billions to other countries and can’t even access funding itself.

There is a blogpost on here which provides some background to Deputy Pringle’s challenge. If an injunction is indeed sought, and subsequently granted, it may presage the return of the Government to step 1 where another referendum is contemplated, and where the “insurance policy” and a “yes” vote improving Ireland’s negotiating position on bank debt, are unlikely to win over the nation a second time.

UPDATE: 6th July, 2012. In the event it seems that the Irish government held to its informal commitment not to ratify the ESM until the court handed down its judgment, which is understood will now happen at 10.30am on Monday next, 9th July 2012. It seems likely that the judgment will be appealed regardless of which side it favours, and should the Irish government win, an injunction may still be sought by Deputy Pringle.

UPDATE: 27th July, 2012. The Supreme Court hearing in Dublin has now concluded, at least for the time being. There are three matters to be decided by the courts, and in order of when we expect decisions, those three matters are (1) will the Court grant an injunction stopping the Irish government from ratifying the ESM Treaty until the European Court of Justice has ruled on what are now two sets of matters before it (2) will the Court uphold Deputy Pringle’s contention that the ESM Treaty is at odds with the Irish constitution and a decision on this is understood to be expected in September 2012 and (3) will the ECJ rule in Deputy Pringle’s favour on either the matters referred to it yesterday by the Supreme Court or the matter referred to it by the High Court, and a decision from the ECJ is understood to be expected by the end of this year. For the time being therefore, the Irish government is understood to be standing by its commitment not to ratify, but as soon as (1) and (2) are delivered, and assuming they are in the Government’s favour, ratification is expected then. Deputy Pringle has posted an update to his website, and the present outcome at the Supreme Court has been reported today by the Irish Times and by RTE.

UPDATE: 1st August, 2012. The ESM treaty will be ratified by the Government today following yesterday’s judgments by the Supreme Court which ruled that the treaty was in fact compatible with the Irish constitution – the judgment is here. The Court also refused Deputy Pringle’s application for an injunction preventing the ratification of the treaty pending the full consideration of the issues by the European Court of Justice – the Court’s judgment on the injunction is here. So a defeat for Deputy Pringle but many will regard him as courageous in taking this stand, and in essence he is right that this treaty may expose Ireland to many billions of euros of financial liability, though the courts seem satisfied that the Oireachtas will still have a final say on sums owing or paid. Minister for Finance, Michael Noonan has previously indicated that the Government will start handing over its contribution to the ESM fund, two weeks after the treaty is ratified which will mean that €250m is paid over, on 15th August 2012.

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