UK commercial property suffers second large monthly decline

Today sees the publication of the June 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 0.5% in June 2012, which along with the decline of 0.5% in May 2012 is the biggest monthly fall since at least November 2009 – and this follows monthly declines of 0.3% in each of April, March and February 2012 and preceding that, several months of almost flat performance. Prices reached a peak in the UK in June 2007 and fell steadily until August 2009 when a rally started. Prices then increased by 15% in the year to August 2010 but since then prices are actually down by 0.2% and in the last 12 months prices have decreased by 1.9%. Overall since NAMA’s Valuation Date of 30^th November, 2009 prices have increased by 9.1%. Commercial prices in the UK are now 35.5% off their peak in June 2007. The NWL index  falls to 805 which means that NAMA needs to see a blended increase of 24.3% 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 with the country suffering a double dip recession after a shock- though modest – 0.2% contraction in GDP in Q1, 2012. The UK has a so-called Office for Budget Responsibility (OBR) which is independent of Government and produces its own economic forecasts and commentary on fiscal policy. The latest report from the OBR was published on 21^st March, 2012 and it forecasts GDP growth from 2012-2015 at 0.8%, 2%, 2.7% and 3%, deficit of 8.3%,5.8%,5.9%,4.3%, debt:GDP of 72%,75%,76%,76%, unemployment rate of 8.7%, 8.6%, 8.0%, 7.2%, house prices of -0.4%,0.1%,2.5%,4.5% and inflation of 2.8%,1.9%,1.9%,2%. Last month, S&P of its top Triple A credit rating with “stable outlook”. Both Fitch and Moody’s have put the UK on a negative credit watch

Monetary policy is overseen by the independent Bank of England and the  current Bank of England rate is 0.5% and has been since February 2009. In the past month, another round of quantitative easing has been announced which means that GBP 350bn has been printed and pumped into the GBP 1.5tn UK economy.

About half of NAMA’s 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 year’s Olympics. Beyond London and the English south east, there is evidence of prices waning amidst sluggish economic growth and stunted lending. NAMA’s strategy for UK assets was revealed in the recently published Comptroller and Auditor General’s report. NAMA expects to dispose of half of its UK assets by 2013, and 40% extra by 2015 and just 10% by 2020. So by 2015, NAMA will have largely exited the UK market.

This morning, the commercial property portal Costar reported that an un-named Irish investor and NAMA were putting a 80,000 sq ft retail/office block in Holborn, central London on the market for GBP 50.5bn (€64.2bn) – the building was bought in 2007 for GBP42m. The property is apparently owned by NAMA Top 10 developer Joe O’Reilly’s Castlethorn – GVA was involved in the redevelopment of the building.

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Reliance on central bank funding by Irish banks increases in June 2012; first increase since December 2011

Figures released by the Central Bank of Ireland (CBI) today show that in the month of June 2012, the reliance by Irish banks on central bank funding rose by €1bn or just under 1% – the first increase since December 2011. Lending by central banks to Irish banks comprises lending directly from the ECB and lending from the CBI. In total overall lending has increased by €1bn from €126.0bn in May 2012 to €127.0bn in June 2012.

Lending directly from the ECB increased marginally by €0.1bn in the month of June 2012 – from €84.5bn in May 2012 to €84.6bn. Lending from the CBI to Irish banks, which is mostly known as “Emergency Liquidity Assistance” or ELA rose by €0.9bn, from €41.5bn to €42.4bn.

What does this mean for Irish banking and the wider economy? If our banks are to return to some degree of normality, they will rely more on deposits from customers and lending from other banks. So today’s figures indicate – though don’t absolutely prove – that deposits and inter-bank lending are decreasing which suggests a deterioration in confidence and bad news. However the increase in the month of €1bn is quite small and when the turmoil in Europe is considered, it would still appear that the trend overall in Irish banks appears to have been positive for the past 12 months, with deposits stabilising and growing slightly whilst reliance on the ECB has declined. This is positive news, particularly given the jitters in other EuroZone countries, such as Spain, Greece and Italy.

It is worth pointing out that ECB direct lending to Irish banks today stands at €84.6bn. This compares with a €3tn ECB balance sheet, and indicates that Irish financing arrangements are now proportional to our economy, and that the ECB is no longer providing “unprecedented” support to Irish banks.

We will get deposit information on Irish banks for June 2012, at the end of July. Deposit analysis for Irish banks for June 2012 is available here.

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Does Irish Life and Permanent need an additional bailout?

Two weeks ago, Irish Life and Permanent (ILP) received €1.3bn from the Irish state which brings to €4bn the cumulative bailout to that institution which we 99% own. It is a colossal sum of money, though it is dwarfed by the €69.7bn total bailout including the €5.6bn of state aid paid by NAMA.

But €4bn for ILP, is that it?

That’s what the stress test undertaken by BlackRock, Barclays Capital, the Boston Consulting Group and the Central Bank of Ireland at the start of last year, indicated, that is, that ILP would need €4bn of a bailout under an adverse scenario. But take a look at the ILP balance sheet extracted from its 2011 Annual Report.

On the liabilities side of the balance sheet, PTSB has two – interbank debt and debt securities in issue. When do these fall due and how will they be funded?

In the Dail on Tuesday, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan. Here’s the full exchange

“Deputy Pearse Doherty:  if he will outline known future funding requirements for Irish Life and Permanent in 2012-2015 for its repayment of inter-bank and other debt, and if he will outline the expected source of such funding..

Minister for Finance Michael Noonan: I have been advised by Permanent TSB that the scheduled maturities of its wholesale debt are set out in note 22 of its 2011 annual report. Permanent TSB’s future funding requirements are impacted by these scheduled maturities and the liquidity available over time from market sources, systemic funding and deposit funding. I have been informed by PTSB that, at the present time, it is unlikely that they will be able to issue senior unsecured debt to replace wholesale funding as it matures. PTSB expect to meet maturity needs from the €1.3 billion of liquidity received from the sale of Irish Life, deposit growth and the benefits of restructuring the balance sheet. PTSB will continue to review opportunities for secured debt issuance.”

Hmmm. Take a look at the inter-bank debt

And take a look at the debt securities in issue.

Irish Life and Permanent has a major funding cliff approaching with €2,775m repayable in 2013 and although Minister Noonan didn’t answer the question above, there is €2.7bn owed to banks other than central banks but we don’t know the maturity.

What Minister Noonan does tell us above is “at the present time, it is unlikely that they will be able to issue senior unsecured debt to replace wholesale funding as it matures” Minister Noonan refers to the sale of Irish Life but even this will not be enough to meet the €2.8bn which we know will mature in 2013.

But maybe ILP’s fortunes may turn around?

They may, and despite having a colossal tracker mortgage portfolio, it seems the banking operations were not significantly affected by last week’s ECB rate cut. Deputy Doherty also asked Minister Noonan about the impact of the ECB rate cut last week; this is the full exchange

“Deputy Pearse Doherty: To ask the Minister for Finance following the decision by the European Central Bank on 5 July 2012 to reduce its main interest rate by 0.25%, if he will set out the impact this will have on the tracker mortgage portfolio held by Irish Life and Permanent, and specifically if it may give rise to additional capital needs to be footed by the State..

Minister for Finance Michael Noonan: I have been advised that the reduction in interest income on annual basis from the 0.25% reduction would be in the order of €40 million, which would reduce the net interest income of PTSB by circa €12 million assuming the current level of ECB funding remained in place and the cost of other funding to PTSB remained static. In order to mitigate the impact of the interest income reduction, PTSB will seek to reduce the cost of funding where possible, including a reduction in the price of deposit products.

At the present time, and based on forecasts provided, it is not anticipated that additional capital is required for PTSB. PTSB is currently well capitalized with a core tier 1 ratio at 31 December 2011 of 17.9% (pro-forma for Irish Life sale was 26.4%).”

And what about that same tracker mortgage loanbook. Where are we up to with proposals to move it from ILP? Again, Deputy Doherty:

“Deputy Pearse Doherty: To ask the Minister for Finance to set out the current position with respect to proposals for the tracker mortgage portfolio held by the Irish Life and Permanent group, and specifically if he will confirm if there are proposals to move the portfolio from ILP to another entity; and if he will outline the terms on which such a transfer would be made..

Minister for Finance Michael Noonan : As the Deputy can appreciate, officials from the Irish Authorities are in constant on-going dialogue with all of the covered institutions with a view to considering and implementing structures and solutions which would seek to advance the overall financial system. As and when further measures are agreed/solutions emerge I will inform the Houses as appropriate. The Government’s aim is to arrive at a successful conclusion that is in the interests of Ireland and the EU. As no decision to transfer the tracker mortgage portfolio to any other entity has been taken, I cannot outline the terms which might apply to such a transfer.”

So, does Irish Life and Permanent need an additional bailout? Not for the present it seems, but when it needs repay €2,775m in 2013 and deal with its €2.7bn of non-central bank inter-bank debt, it may. So keep your eyes peeled for an additional €5.5bn bailout request!

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