Irish bank-controlled hotels; follow-up

This is a brief follow-up blogpost following the revelation on here that more than one in six Irish hotel rooms is controlled by a bank – via a receiver or liquidator or has itself acknowledged bank support as critical to its survival. There are some minor corrections and a few additions to the list of bank controlled hotels – and “thank you” to the blog’s audience for their contributions, both publicly via comments and privately. The total rooms under bank control has risen to just over 10,000 meaning more than one sixth are subject to bank control; NAMA and NAMA bank’s control falls slightly to 53.9%. The numbers captured are likely to underestimate the true level of bank control. The data below and additional receivership information is available in a google docs spreadsheet here.

There has also been some comment from the Competition Authority, NAMA and the Irish Hotel Federation (IHF). In respect of suggestions that bank-controlled hotels are setting their prices at levels which unfairly undercut traditional rivals, the Competition Authority says “the Competition Authority received a number of complaints in relation to this some time ago, back in 2010.  We looked into it at the time and found no issue under the Competition Act, specifically, we found no breach of section 4 or section 5 of the Act”. The IHF says it “is currently working with the Government and financial institutions to address the issue of overhanging debt in the hotels sector. We expect to have an update from these discussions in the last quarter of this year” NAMA hasn’t specifically commented but its past position on hotels has been “there are more than 900 hotels in Ireland. NAMA has loans linked to just 121 operating hotels – 13% of the total – and will only support a hotel if its business is viable and based on a sustainable long-term business plan. We have had interaction with the Competition Authority to show them that our debtors and receivers are not engaged in any market distortive practices.”

A report published by Ireland’s biggest commercial property company, CB Richard Ellis, earlier this week painted a hotel sector which is recovering, with average room prices up by 6.2% to €89.26 in the past 12 months – compared with general Irish CPI inflation of less than 2% – and revenue per room up by 6.7% to €70.67 over the same period. CBRE also confirms that more hotels are coming onto the market, courtesy of banks including NAMA and receivers. However, it should still be noted that in the recent Comptroller and Auditor General’s report that NAMA’s strategy overall for Irish hotels is “hold”, presumably to the second half of this decade.

To go back to where we started, prices in Irish hotels are so good today that they might only just meet operating costs and you may never find such value again. And no, this is not a paid-for advertorial by the Irish hotel sector, the observation of the prominence of bank controlled hotels in Ireland, and disposal strategies and pricing are all genuine.

UPDATE: 6th July, 2012. The data above has been updated to remove one hotel which now leaves 9,958 hotel rooms, or one sixth of the 2009 Bacon Report total number of hotel rooms in the State, with 54.2% under the control of NAMA or NAMA banks.

UPDATE: 19th July, 2012. Independent TD, Michael Healy-Rae from the beautiful Kingdom of Kerry, has tackled Minister for Finance Michael Noonan about NAMA’s impact on the hotel sector – this during what is the High Season for the Irish hotel industry in respect of weddings/tourism, a Season which is reported by RTE to have gotten off to a disappointing start, particularly at hotels outside Dublin. We learn that NAMA controls 121 hotels through its developers and receivers in “Ireland” – presumably that is the Republic of Ireland because the 900 hotels cited by Minister Noonan in the same reply is for the Republic only. NAMA has closed four hotels and NAMA continues to mouth the defence that its impact on the sector is over-stated. With more than one in six hotel rooms under bank control in the State, and NAMA and NAMA banks in control of over half that identified total, NAMA isn’t exactly a bit player. The NAMA defence has been subtly modified however and the defence is now “it will not advance funding to hotels that are not commercially viable as there would be no foreseeable return on such funding” – previous NAMA has talked about not funding loss-making hotels.

So if Hotel A is losing €1m per annum, it is loss-making but if Hotel A is losing €1m per annum and owes NAMA a €100m loan and the hotel is only worth €40m, it might still be in NAMA’s interest to keep the hotel operating in the hope that the worth of €40m will increase at more than €1m per annum – thereby offsetting the €1m loss – which would then mean it would be “commercially viable” to fund a loss-making hotel. Subtle difference. The complete exchange is here.

 “Deputy Michael Healy-Rae: asked his views on the strain being put on long established hotelier by National Asset Management Agency operated hotels who are able to offer unrealistically low prices; his plans to review the long term viability of these hotels that are operating at a loss; and if he will make a statement on the matter. [34507/12]

Deputy Michael Healy-Rae: the number of hotels here that are operated by the National Asset Management Agency; and if he will make a statement on the matter. [34508/12]

Deputy Michael Healy-Rae: the number of hotels under the control of the National Asset Management Agency that have closed down recently; and if he will make a statement on the matter. [34509/12]

Deputy Michael Healy-Rae: his views on the fact that long established hoteliers in the hospitality sector are being put under severe strain by the National Asset Management Agency operated hotels who are able to offer unrealistically low prices in many cases; if he will review the long term viability or not of operating these hotels at a loss; and if he will make a statement on the matter. [34550/12]

Minister for Finance Michael Noonan: I propose to take Questions Nos. 80 to 83, inclusive, together.

NAMA advises that it does not own or operate hotels. NAMA’s role in relation to the properties securing its loans is that of a secured lender. Other than properties that have been enforced, all of which are listed on NAMA’s website and which are managed by the appointed receivers/administrators, properties including hotels continue to be managed by their existing owners or their professional managers/agents. NAMA, in line with its legislative remit, takes a very close interest in their efficient management and sale with the view to maximum loan repayment in order to protect the position of the taxpayer.

NAMA advises that its debtors and receivers control 121 hotels in Ireland, of which 117 are fully operating; four hotels recently ceased trading. There are over 900 operating hotels in Ireland and, accordingly, NAMA has exposure to only 13% of the sector. Its potential impact on the overall viability of the sector is overstated. The Deputy may wish to note that NAMA have advised that while the Competition Authority received complaints about NAMA’s impact on the hotel sector, the Authority decided not to pursue these complaints after engaging with NAMA.

NAMA further advises that as a secured lender it will not advance funding to hotels that are not commercially viable as there would be no foreseeable return on such funding and, therefore, it would run contrary to NAMA’s statutory commercial remit.”

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BTW Cairns 20-lot auction a sell-out success

Tomorrow in Dublin’s Shelbourne Hotel, we’ll get to see the lay of the land for residential, commercial and development property in the Republic of Ireland with the latest Allsop Space auction. Allsop Space has blazed a trail in Irish property auctioning since coming on the scene in April 2011 and with 90%-plus success rates with very large lot auctions, is number one by a country mile in the Republic. But across the Border in Northern Ireland, BTW Cairns notched up a 100% perfect performance last week with all 20 of the Lots available sold, with an additional Lot sold before the auction itself. Here are the results:

Overall, there was a 100% success rate and GBP 1.7m (€2.2m) was raised from the sale of 20 Lots. The achieved prices were 36% above the maximum reserves – the “maximum reserve” being the price above which the winning bidder is guaranteed to get the property, a concept introduced by Allsop Space last year. About 500 punters/gawkers attended the auction, and yields achieved were at the high end, between 8-15%. The Northern Irish residential property market has collapsed by more than the Republic’s in real terms, and based on results of this auction, a recovery may be some way off.

Meanwhile final preparations are being made for tomorrow’s Allsop Space auction. Of the 90 Lots in the original catalogue, six have been withdrawn meaning that 84 will come under the hammer tomorrow. There have been 120,000 visits to the online catalogue including 45,000 when the catalogue first went online a month ago. Some 1,500 people have attended viewings and Allsop Space say they have received telephone bidding registration forms with deposit cheques from locations as far afield as Ethiopia, Japan and Australia. Robert Hoban, the Allsop Space Director of Auctions said today “The mix of properties in this particular catalogue seems to have struck a chord as there has been a strong reaction, particularly to the bigger Lots. A number of the properties have already been on the Private Treaty market unsuccessfully, hopefully strengthening the case for auction as the most transparent and popular way for properties to be purchased.” There is a preview of this auction available here, and there will be coverage of the proceedings and results.

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NAMA scrutinised by the public accounts committee

[The transcript of the hearing is now available here]

The NAMA CEO and chairman, the owlish Brendan McDonagh and hawkish Frank Daly, appeared before the Oireachtas Committee of Public Accounts today to answer questions following the publication of a special report by the Comptroller and Auditor General in May 2012. The opening statement from Brendan is available here, the transcript of the hearing should be available early next week and will be linked to here.

I’m afraid I have just dipped in and out of the hearing which was broadcast live, and there doesn’t appear to be much new for the audience on here. I see the fact that NAMA is liaising with the Gardai over non-disclosure of assets by one developer is making headlines, but that was covered in depth on here a month ago.

The opening comments from Brendan do contain some new information

“The report has been interpreted by some commentators as implying that we paid more for the loans than we ought to have done. I reject this categorically. The report refers to the State Aid component of the NAMA Scheme which was €4.96 billion by reference to the first five tranches and which proved ultimately to be €5.6 billion for all tranches. The report points out that NAMA, under the Act, had discretion to pay a price for loans which was less than their long-term economic value. The reality is that the State Aid is a function of the discount rate used: the EU-approved discount averaged just over 5% whereas, in an open market, buyers would have discounted the loans at a rate of about 15%.”

Brendan might want to acquaint himself with the meaning of the word “categorically” because he seems to be conceding himself that NAMA paid more than the assets were worth. I am not aware of any commentator suggesting NAMA used a methodology other than was agreed with the European Commission for the acquisition of loans. But the state aid – confirmed now at €5.6bn following due diligence on all €32bn of loan acquisitions – represents the difference between what NAMA paid for the loans and what the loans were worth on the open market.

After the recent additional capital injection of €1.3bn into Irish Life and Permanent which brings to €4bn the amount given to that organization, we have now injected €64.1bn directly into the banks and we learn today that NAMA has given them €5.6bn of state aid, so to date, the bank bailout has cost us €69.7bn. That excludes any additional losses that will be made by NAMA and any additional capital requirements though on the other side it excludes the bank guarantee fees paid by the banks, and the residual value of our shareholdings in the banks.

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What is NAMA’s purpose again?

Cast your minds back to 2009 when the NAMA Act came into law; the Act set out the reasons for  the creation of NAMA under section 2 (a) we can see that the first purpose of NAMA is

“to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State”

So you might have thought that this objective would always be to the fore of NAMA’s thinking, especially when it comes to big value transactions. And they don’t come much bigger than the €2bn redemption of NAMA senior debt last week – remember this is debt on which NAMA is paying interest at the 6 month Euribor rate, currently 0.9% per annum though the rate is set for NAMA every six months (29^th February and 30^th August) and NAMA is in fact currently paying 1.27% per annum. Still, it’s dirt-cheap.

And with NAMA sitting on €5bn and its bonds not due for redemption until 2020, you might have thought that NAMA might have found a better use for €2bn of its cash than redeeming its bonds. But at least surely NAMA considered the matter before committing to one of its biggest financial transactions to date…

Not so, it seems. On Tuesday this week, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance, Michael Noonan about the consideration given by NAMA to its primary objective, and it seems there was none. This is the full exchange:

“Deputy Pearse Doherty:To ask the Minister for Finance the consideration the National Asset Management Agency gave to its over-riding objective of addressing the serious threat to the economy caused by the banking and property crisis, before taking the decision to redeem €2bn of its senior debt, announced on 27 June, 2012..

Minister for Finance, Michael Noonan: One of the primary objectives of NAMA is the repayment of the cost of the loans acquired from the Participating Institutions and the cost of the working and development capital expenditure on the assets attached to the loans.

I am advised by NAMA that through its activities, including a phased and orderly asset disposal programme and investment in residential and commercial projects underlying its loans, it is well advanced in terms of meeting this overriding objective. The recent repayment of €2 billion of its senior debt, which brings the total redeemed to date to some €3.25 billion, is further evidence of this and the Agency has advised that it is firmly on course to meet its first major milestone of repaying €7.5 billion of Senior Bonds by the end of 2013.”

So according to Minister Noonan, NAMA has a number of primary objectives now. You might have thought the primus inter pares was to address the crisis in the Irish economy, but it seems that wasn’t even considered. And indeed it is unclear what objective was considered before NAMA handed over €2bn in cash to redeem its dirt-cheap bonds. And remember that €3bn of NAMA cash was temporarily deployed to pay the Anglo promissory note that fell due in March 2012 – read the Direction given to NAMA by Minister Noonan at the time, and you will see that NAMA has quite a wide latitude in how it uses its cash.

As for the serious threat to the economy – record 14.9% unemployment, emigration understood to be at a high level (though almost criminally this is not counted accurately on a regular basis), a double-dip recession and a generally moribund domestic economy. Serious threat, what serious threat?

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