Archive for July, 2012

Many observers have been puzzled by the €235m tax credit which NAMA showed for the first time yesterday in its Annual Report. Not only was such a credit omitted from the provisional 2011 accounts, but the booking of the credit at this stage presupposes that NAMA makes profits in the future – which it may, though with a deteriorating loan book and asset values declining in its primary market, that is not assured by any means – and there have been suggestions that NAMA is incorrect to book such a credit as it is not subject to corporation tax. The effect of the €235m tax credit was to bolster the marginal pre-tax profit of €11m to the €247m reported across most media – I say a “marginal” pre-tax profit because any accountant worth their salt can tweak provisions and estimates and in the context of a €30bn business, finding €11m extra of profit or a €11m reduction in losses or provisions shouldn’t be a gargantuan challenge. This blogpost examines the tax credit in more detail.

Firstly although section 214 of the NAMA Act states that NAMA is not subject to corporate or income taxes, that provision appears not to apply to NAMA group companies. This one sentence section 214 might benefit from further investigation as presumably NAMA is subject to taxes in other jurisdictions, and it is not clear why NAMA group companies would not benefit from this provision.

In the 2010 annual report, there was a tax charge of €375,000 – when rounded to the nearest €m it becomes zero and that is why it was not immediately obvious in the NAMA press release of key financial data yesterday – and, according to Note 11 of the 2010 final accounts “the tax charge arises on the profits earned by NAMAIL. A total amount of €0.34m was paid to the Revenue Commissioners in the period which relates to 12.5% of the profits arising in NAMAIL. No other tax charges arose in other NAMA Group entities and the Agency is exempt from Irish income tax, corporation tax and capital gains tax.”

In 2010, there was a tax charge also in the provisional accounts of €380,000 so the charge of €375,000 in the final accounts for 2010 didn’t come as a surprise. In 2011 however, there was no provision whatsoever for tax and yet in the final accounts, there was a whopping big €235m credit.

NAMA has thus far run up a stonking big loss and when it comes to the taxation of companies, they can carry forward a loss from one year to offset against profits in a future year. So simplistically speaking, if Company A makes a loss of €1,000 in 2010 and a profit of €1,500 in 2011, then in principle Company A can offset the €1,000 loss from 2010 against the 2011 profit, and only pay corporation tax on the cumulative profit of €500. So Company A in 2010 won’t pay any tax in that year, but will Company A estimate the future benefit of the loss it has made in that year? If Company A is confident it will make future profits then it may book a “tax credit”, but you would have to ask why? If 2010 was its first year of operation, then it wouldn’t get paid a refund of tax from the Revenue Commissioners. The only reason you would publish a tax credit, it seems, is optics.

NAMA says it is confident of generating profits in future years so that the “tax credit” it has recognised in 2011 can really be used to offset any tax liability.

The view on here is the “tax credit” was recognised now purely for optical reasons, and that given the precarious condition of NAMA’s main market, Ireland, it flies in the face of the accounting concept of prudence to recognise the “tax credit” in these circumstances.

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Vincent Browne: Frank, how can you say you are absolutely confident? Surely, what you mean is that you hope, and the hope would be based on, that there would be a hope that there would be a recovery in property prices.

Frank Daly: That’s not hope Vincent. That is taking the same way any other business, the same way the State, the same way anybody will look at the economy, look at the assets it has, look at its projected cash flows, and do that on a very objective basis. That’s not hope.

VB: It is based on taking a guess on what property prices will be, and most of the guesses have been wrong. Property prices have gone down and down and down, year after year, and you’re saying now “aah, sure let’s hope things will turn round and everything will be fine”

FD: I think if you take a look at recent indices for property prices, and I acknowledge that there are no perfect indices but I certainly think that the level of decline has begun to bottom out. Now what I think you are glossing over is that there is another seven or eight years to go in NAMA, and in that seven years in aggregate, property prices recover by something like seven, eight, nine, 10% which is not an unreasonable proposal, remember recently the Central Bank indicated that property prices may have actually fallen below their economic level.

VB: And they were wrong, again, yet again.

FD: And the month before last, the CSO indices showed that prices were beginning to rise in Dublin for example.

VB: And the most recent indications are that they’re beginning to fall.

FD: You’re never going to get a V-shaped recovery in that.

VB: Never mind a V-shaped recovery. Even if you get a straight-line recovery, that’s an improvement on what is happening in the property market at present. To say that you are absolutely confident that you’ll get back more than what you paid for these assets, is like, misuse of words if you don’t mind me saying, Frank. What you mean is that you hope.

FD: No it’s not misuse of words. For you to say that I’m hoping is misuse of words. What I am saying is-

VB: “you’re not hoping”?

FD: What I’m saying is that based on our projections, our analysis, we are confident. And that’s an objective view of projections, figures, macros and not all our own. Looking at others.

After the launch of the NAMA 2011 Annual Report yesterday, veteran journalist Vincent Browne interviewed the NAMA chairman Frank Daly, at the NAMA HQ in Dublin – the interview forms part of last night’s Tonight with Vincent Browne available here. The hard-working people at thebroadsheet.ie have prepared a partial transcript of the 30-minute interview which is available here. The extract from the interview reproduced above is additional to the Broadsheet extract.

We learn that NAMA can be confident in its projections for the property market because … it has macros. For the spreadsheet-literate amongst you who have had the dubious privilege of coding macros on Excel, you are now probably rolling around on the floor laughing. Macros are little more than formulaic calculations and if we could design macros to accurately predict property prices, we’d all be billionaires.

The regular audience on here won’t really have learned anything new from the interview, which is not to say that Vincent didn’t try to push certain issues. But at this stage, the NAMA chairman could probably swat away most questioning in his sleep.

But whilst we didn’t learn very much, the interview has amusement value. For those of you wondering what NAMA spent €825,000 on in 2011 when it booked this sum for “lease improvements” in its accounts, you probably get an answer from this interview – they spent it on potted plants! Poor old Vincent and Frank look as if they’re in a jungle!

They may also have spent it on teensy-weensy nursery school chairs for their developers to sit in when they come in to negotiate deals with the Agency – psychological intimidation some might say. Vincent Browne was given such a nursery chair last night.

What is insidious was NAMA’s claim that property markets just need improve by 6-10% over the next eight years for NAMA to break even. This is rubbish. NAMA is running up costs at €200m per annum and needs pay interest of €500m on its bonds. NAMA generates about €400m per annum on its loans from debtors. So NAMA needs see an increase in property values of at least €300m per annum just to cover its costs. And the view on here is NAMA needs see an increase of closer to 24% (see NWL index above) AND cover its ongoing costs, before it will break even.

Elsewhere Frank says that the rate of decline in the property market is bottoming out! Note, he is not saying that declines are bottoming out, just the rate of decline is bottoming out. And in response to accusations that NAMA is a gravy train for professionals and that the Agency is supporting Croesusian levels of income for the professional classes, the hawkish Frank says “I hope they will say that we have beaten them down on fees over the past couple of years” Feeling reassured.

The programme also contains reaction to the NAMA Annual Report from Dr Constantin Gurdgiev and Gavin Sheridan at thestory.ie who has an ongoing freedom of information case against NAMA presently being heard at the High Court.

[Images above are screengrabs from Tonight with Vincent Browne broadcast on 25th July, 2012]

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The 2011 Annual Report produced by NAMA yesterday really shouldn’t have been very surprising to us. After all, we had the unaudited accounts for 2011 at the end of May 2012, and you might just have expected the odd tweaking of figures in the final report – after all, other than the impairment provision, that was our experience in 2010. But there were three major differences yesterday(illustrated in the table above which shows the audited and provisional results for 2011 and 2010) – the €467m increase in the impairment provision, the €235m tax credit and the third is the focus of this blogpost, the €200m of additional profit booked.

Now the impairment provision published in the unaudited accounts at the end of May 2012, was indeed “provisional” and NAMA made it clear that the €810m impairment provision then reported would be subject to scrutiny from the Comptroller and Auditor General – the CAG is responsible for auditing NAMA’s accounts. And we know in the previous year’s accounts for 2010 that the CAG increased the impairment provision from €1bn in the provisional accounts to €1.485bn in the final audited accounts, so we knew that for 2011 when we saw the provisional accounts in May that the impairment provision could change, and change substantially. No great surprise there.

What is regarded as suspicious on here is the €235m tax credit, which will shortly be the subject of its own separate blogpost. This blogpost focuses on the additional €200m other income which was “found” between the provisional accounts and the final accounts published yesterday, and I use the air quotes in “found” because normally when you produce the provisional accounts three months after year end – NAMA produced its Q4,2011 provisional accounts on 31st March 2012 and they were published at the end of May – you have a very good fix on income. Take a look at the previous year, 2010 and you will see how little change there was between the provisional and audited accounts.

So where did the extra €200m of income come from?

NAMA was asked earlier today, and there is as yet no response.

The Annual Report doesn’t offer any clue. The income reported just happens to be €200m more than in the provisional accounts. It is a fact that the Paddy McKillen case against NAMA – where Paddy was claiming NAMA’s sale of the €800m Maybourne loans to the Barclay brothers was unlawful – was seemingly settled in June 2012, when Paddy lost his appeal in London, and it might be that NAMA had refrained from booking any profit on this sale until the matter was settled. But having said that, NAMA apparently paid close to the book value for these loans, so it would be surprising if there was €200m of profit available there. Also, the NAMA accounts were signed off on 27th June 2012 – that is the date of the NAMA CEO and chairman’s signature on the accounts – and we only learned of Paddy’s defeat in Britain’s appeal court on the morning of 27th June, 2012. So if the late recognition of profits on the sale of the Maybourne loans has contributed to the enhanced profit at NAMA, then the Agency was cutting it very fine indeed!

If it weren’t for the fact that the NAMA accounts are audited by the Comptroller and Auditor General which hopefully hasn’t been the victim of “regulatory capture” by having 10 staff permanently on site at the NAMA HQ, then there might be suggestions of shenanigans at NAMA motivated by a desire to show positive results at the Agency. Or more precisely, some massaging of provisions including provisional profit on some sales which has not yet been recognised by NAMA.

Still, with an accountant’s cap on, and in light of the relatively minor changes in the previous year’s reporting of provisional and final audited results, it looks odd.

UPDATE: 26th July, 2012. Thanks to commenter Ahura M below who points out that NAMA has provided a reconciliation between its provisional impairment reported at the end of May 2012 and the audited impairment, and this shows that NAMA, when it was preparing its provisional accounts, deducted a gain on the disposal of loans/property of E243m, and that NAMA has now reclassified this. So, one mystery solved!

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His legacy in Ireland might be buried beneath receiverships and personal judgments, but it seems that the former Baron of Ballsbridge, Sean Dunne and his wife, Gayle, are still in the game. The US property website Zillow is reporting that a property associated with the Dunnes has sold for USD 5.5m (€4.5m). It should be made clear that Sean has previously denied involvement with the property at 38 Bush Avenue, Belle Haven, Greenwich, Connecticut CT 06830 but it does seem that the property was owned by a trust associated with the Dunnes. Here is a video of the Dunnes being door-stepped at the property under construction in 2011 – they’re clearly not happy with being filmed by a local journalist.

The property was bought for USD 2m in 2010, according to Zillow and underwent extensive remodelling – the neighbours claimed the Dunnes’ “remodelling” was so substantial that they were really demolishing the existing house and building a totally new home. Neighbourly planning disputes ensued but eventually, the demolition and re-build proceeded.

The property had been offered for sale by Sothebys for USD 6.4m, so the USD 5.5m price might represent a slight disappointment, but set against a USD 2m purchase price and even accounting for a new build, the owners – the trust and the beneficiaries of the trust – should be walking away with a profit.

Last year, the Irish Independent reported the Dunnes, or rather a trust operated by a lawyer who is also connected to 38 Bush Avenue, had purchased another property in Connecticut – 42 Bote Road, Stanwich, Connecticut, CT 06830, and indeed, there was speculation the Dunnes had been associated with the purchase of a third property

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Alongside the launch of the 2011 NAMA Annual Report today, the Agency has this afternoon  published its management accounts and report for the three months ending 31st March, 2012.

There will be a review of the report and accounts over the next day, but a quick skim of the accounts and report shows the following:

1. Performing loans as a proportion of total NAMA loans are now 19% down from 20% at Q4, 2011 and remember these include loan restructures. By reference to original loan values, the estimation on here is that only 15% of NAMA loans are performing, down from 18% in Q4, 2011.

2. Profit before impairments for Q1, 2012 total €133m. Impairments are likely to have wiped this out, but impairments are only calculated once at year at the year end.

3. Legal fees were just €23,000 during Q1, 2012 and costs overall seem remarkably subdued with just €25m of costs versus a full year budget of €193m.

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You should have some sympathy for the 214 staff at NAMA. If property prices had risen by 10% in Ireland in 2011, chances are the Agency would be reporting a €1-2bn profit in its annual report today. But property prices declined 10-20% last year, so NAMA is today reporting a profit before tax of €11m – yes eleven million euros – a profit after- tax of €247m and a profit after tax and dividends of €242m.

Truth be told, NAMA’s profitability is less affected by the effort of the 214 staff, than by the change in property prices which to a large extent is outside the control of NAMA. And the word on the street, even amongst NAMA detractors, is that the staff are hard-working and that the NAMA CEO Brendan McDonagh has built up a decent team from scratch. And for that, and for turning in a profit today, they deserve a pat on the back.

But in truth, today’s results are awful. Given that we had the unaudited accounts for 2011 at the start of May 2012, you mightn’t have expected too many surprises today but there were a few. Impairments for 2011 stand at €1.3bn compared with an estimate of €0.8bn in the provisional unaudited accounts. NAMA “found” extra profit of €0.2bn someplace – it’s not clear – since the start of May and also magicked up an “income tax credit” of €235m. Read notes 12 and 26 to the accounts and you will see that the income tax credit, which comes from the Irish state is dependent on NAMA making profits in future. That is not guaranteed at all, and NAMA is running up annual costs of €700m in interest  and operating costs at present and it seems on here that it will very shortly be unable to cover its expenses if the percentage of performing loans decline. NAMA is still cash-rich because it has sold one quarter of its portfolio and only repaid one tenth of the bonds it used to acquire that portfolio, but that cash mountain will be levelled as the Agency moves in 2013. And from 2014, the Agency may need a handout.

Unless the property market picks up.

And by “picks up”, I mean prices stabilise and possibly increase, and buyers have access to funding. NAMA is seeking to address the latter point with its €2bn of staple financing, but it seems on here that the Agency is sailing very close to anti-competitive winds, but even if NAMA makes €2bn available to the buyers of its commercial property, those buyers will still only pay what they think the property is worth, and will have an eye on future price trends. And the immediate outlook is challenging with commercial and residential still appearing to be some way off the bottom.

Last year when NAMA published its annual report at the end of July 2011, it also published its management accounts for the first quarter. This year, it hasn’t and the word on the street is that the portion of NAMA’s loans that is performing has continued to deteriorate and the Agency may now have reached the point where its expenses are not covered by accounting income.

It is again worth noting that there is very little information on the calculation of NAMA’s impairment charge, and the suspicion remains that NAMA is assuming a recovery in prices to November 2009 levels.

Lastly at this point, it is remarkable that NAMA’s “fair value” of its loans is €25.045m whereas the value shown in the accounts, the “carrying value” is €25.607m. NAMA’s fair values are just 2% less than carrying values whereas our banks are 14-27% less.

There will be a detailed blogpost on the 2011 annual report over the next day.

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A couple of weeks ago, Sinn Fein’s finance spokesperson Pearse Doherty asked Minister for Finance Michael Noonan for the analysis of NAMA’s property by county in Ireland, after two TDs had successfully had questions answered which showed the values for Wicklow and Meath. Sinn Fein was fobbed off with the commitment that NAMA would produce the analysis in its Annual Report, and thus today, we find out how much NAMA has in each county in Ireland.

The values shown above are the November 2009 values, and these are likely to have decreased further since then. Commercial property has declined by an average of 24% since November 2009 according to Jones Lang LaSalle and residential property nationally is down 31% since then according to the CSO. Development property is probably down 20% but no-one produces an index for this property segment.

Having said that, it is surprising that there is very little in NAMA from Leitrim, Cavan, Monaghan and Longford – each with just €5-20m of assets – areas of the country famous for tax-incentive led ghost estates and over-development. Just as surprising perhaps is the relatively high value of assets in Louth (€350m) and Waterford (€175m).

The list excludes NAMA’s assets in Dublin and Cork and shows the split of approximately €5bn of Irish assets by reference to November 2009 values. Deputy Doherty in fact asked for the split amongst the 32 counties on the island, but NAMA seems to have confined its analysis to the Republic only.

UPDATE: 25th July, 2012. The Northern Ireland analysis is in fact in the report and is as follows:

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[The annual report is now available here]

NAMA is publishing its 2011 Annual Report today. The profit and loss account and balance sheet shouldn’t be much changed from the unaudited 2011 accounts published at the start of May 2012.

But they are.

The impairment provision for 2011 has increased by a staggering €467m from €800m to €1,267m. NAMA has decided that it can book a “tax credit” of €235m, something not apparently contemplated when the unaudited accounts were published, and NAMA seems to have “found” profit elsewhere of €185m. We wait for the publication of the report to look for further clues.

Overall NAMA is declaring an audited profit before the tax credit of €12m, and after tax of €247m. That compares with €200m in the unaudited accounts for both headings. Given that it is the State that is on the hook for the tax credit, you might say the more accurate reflection of performance in this instance is the pre tax profit.

There is a press conference with the duo at the top of NAMA, and Minister for Finance Michael Noonan presently ongoing at NAMA HQ in Dublin, and the full annual report is expected here shortly.

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This morning at 11.30am, there is a press conference scheduled at the NAMA HQ in Dublin to launch the 2011 Annual Report – previewed here. The NAMA CEO Brendan McDonagh and the NAMA chairman Frank Daly will present the report, just as they did last year. They will however be joined on this occasion by the Minister for Finance, Michael Noonan, and the optics of the Minister’s presence should not be overlooked – in the past year, NAMA has been brought firmly within the political compass, and that is something about which we should be worried. It is not just bankers, developers, audit firms, law firms and the media that have failed this country, but history shows politicians share much of the blame, and you should be concerned as politicians encroach upon what was supposed to be an independent asset management company which could pursue its own decisions in support of the objectives given to it in the NAMA Act.

But let’s review the past year

(1) And let’s start our review with the review of NAMA by the former HSBC boss who was criticised in last week’s US Senate report on money laundering. It seems that it was Minister Noonan who commissioned the review in September 2011. The NAMA Act provides for an overarching review of the Agency but that is not scheduled until 2013. This was a special review, and demonstrated to NAMA that the Minister now had the whip hand.

(2) NAMA advisory board, the Minister decided to create an advisory board with Michael Geoghegan, Northern Ireland quango king Denis Rooney and NAMA’s own Frank Daly. The role of the board is to advise on remuneration and appointments and NAMA strategy, but it is obviously a half-way house for the Minister to impose his will on NAMA.

(3) NAMA departures and appointments, two NAMA directors have resigned in the past year and only one has been replaced with the appointment by Minister Noonan of John Mulcahy, less than 12 hours after the deadline for applications had closed. The other vacancy has not yet been filled by Minister Noonan whose responsibility it is for NAMA board appointments, despite the resignations taking place in October and November last year.

(4) Anglo promissory note, NAMA was directed to hand over €3bn of cash to zombie bank IBRC in March 2012 on foot of a formal Direction from Minister Noonan. Some thought this act represented a crossing of the Rubicon in political interference in NAMA, as the transaction had little to do with what NAMA was intended for, when it was conceived in 2009.

(5) Change to Troika agreement for debt repayment, Minister Noonan removed any flexibility in NAMA’s repayment of debt by the end of 2013, when he unilaterally agreed with the Troika in May 2012 that NAMA would repay €7.5bn of its senior debt by the end of 2013. This was previously an internal target in NAMA which would have been flexible. That flexibility has been removed, and for what?

(6) Ministerial interference, we learned earlier this year that Ministers had gotten involved in NAMA decisions on commercial property in Dublin. From Minister Richard Bruton’s intervention – he says it was with the IDA – on the BSkyB letting at Burlington Plaza to Minister Phil Hogan’s intervention at Google, it now seems it is open season on ministers contacting NAMA, directly or indirectly, so as to influence decisions.

(7) Senators and TDs contacting NAMA, remember when TDs and indeed ministers had conniptions in deciding whether or not they could contact NAMA without breaking NAMA’s anti-lobbying rules? There’s no such anxiety now, with NAMA providing TDs and Senators with a dedicated phone number and email address, oir@nama.ie

(8) Budget 2013 and Upward Only Rent Reviews, this was the greatest possible budget for NAMA. Although NAMA rejects the notion it lobbied government to abandon plans to reform UORR laws, and merely drew the government’s attention to the catastrophic effect the reforms might have on NAMA’s asset values, the Agency did “get its way” when the plans were formally dumped last December. With the reduction in commercial stamp duty, the capital gains tax incentivisations and reliefs on motgage interest, this was a Fantasy Budget which NAMA might have written itself.

(9) Relationship management, in January 2012, NAMA recruited what it called a “Relationship Manager”, Martin Phelan formerly the communication director at the Construction Industry Federation. Martin is now “Head of Relationship Management” at NAMA and there have been recent advertisement(s) for Relationship Officer(s). When asked last week in the Dail for the budget, headcount and purposes of this department in NAMA, Minister Noonan would merely say “The function of relationship management, which relates to the Agency’s engagement with members of the Oireachtas and other key stakeholders” and he refused to provide budget or headcount on Data Protection grounds.

(10) And finally, let’s not forget that Minister Noonan’s very own Director of Elections in his Limerick constituency in 2011 was none other than Brian McEnery of Howarth Bastow Charleton, accountants and insolvency practitioners who also happens to be on the NAMA board, though it should be said his appointment predates Minister Noonan’s ascension into office.

Yes, a year on, NAMA is a far more politicised Agency and that will be further evidenced by Minister Noonan’s presence at the press launch of the Annual Report this morning. You won’t see the other “third party independent investors” who own 51% of NAMA, but you will see the long shadow from Merrion Street. As NAMA board member and former IMFer, Steven Seelig remarked in a working paper he did at the IMF in 2004, political interference in asset management companies generally doesn’t end well.

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We now have the main indices for Irish residential and commercial property prices and rents for the first six months of 2012, and it might be helpful to take stock of trends and the outlook for the remainder of the year. The predictions on here for 2012 were published at the end of December here, and are shown below – marked “original” – along with the actual results for 2011, declines from peak to the end of 2011, the mid-year 2012 actual outturn and revised forecast for the full year 2012.

It now seems on here that the decline in residential property will be less than originally predicted and the revised prediction is a 10-15% decline – the late introduction of the House Price Database and the absence of any detail yet on the new property tax and lower interest rates are contributory reasons for the reduction in the forecast from a 15-20% decline.

The severe reductions in rent assistance by the Department of Social Protection in January 2012 are the main reason for revising residential rent and the revised prediction is a 0-5% decline. The original prediction based on the 2011 trend was a 0-5% increase.

Despite the giveaway budget last December 2012, commercial property has performed worse than expected and the revised prediction is a 5-10% decline. Scarcity of credit and poor European and Irish economies have contributed to the revision from the original 0-5% decline.

The commercial rents prediction remains unchanged at a 0-5% decline. Despite claims of prime rents stabilising, there is an acute oversupply of non-prime property, and this property is being offloaded onto the market dragging rents down.

Main developments in January-June 2012

Europe is still in crisis, for a small exporting nation, we depend on a healthy Europe to support our economic advance. Forecasts of economic growth in the EuroZone and in the UK have been cut, and as I write this today, both Spain and Italy are on the brink of seeking bailouts which are beyond the capacity of the European bailout fund, which is facing a challenge in Ireland’s Supreme Court today and may also be de-railed by German constitutional court challenges, decisions on which are expected at the start of September 2012. For the first six months of this year, Europe has lurched hopelessly from one crisis to the next, with the core problem of sovereign, personal, corporate and banking debt still not being addressed.

Economic forecasts are worse, the Department of Finance forecast for GDP and GNP at the start of this year was 1.3% and 1%, the official forecast for GDP is now 0.7% and although there was no Department of Finance forecast in the April 2012 Stability Propgramme Update, the consensus is that we will have modestly negative GNP this year. GDP and GNP both declined in the first quarter of 2012 by 1.1% and 1.3% respectively. Unemployment is now at a record in this crisis of 14.9% and the job announcement “spectaculars” have been more than offset by the drip-drip erosion of employment. Construction and retail have suffered in particular, though there have been some bright spots, with Exchequer targets being met, service sector activity growing, exports up in the first quarter and consumer confidence showing signs of stabilisation.

Rent assistance reductions that were announced in January 2012 were more severe than expected on here. The average reduction was 13% with the highest at 29%.

Interest rates are trending downwards – against expectations on here – the ECB has reduced its main interest rate by 0.25% from 1% to 0.75% which means that nearly half Ireland’s mortgage borrowers have benefited from immediate reductions to their tracker rates, whilst variable rates have also trended downwards. Having crossed the 1% Rubicon in July, the ECB may again cut rates during the remainder of this year.

Credit availability is more restricted, although we’re still awaiting the mortgage figures for the second quarter of 2012, the results for quarter one were dreadful. Finance for commercial property isn’t any better with Bank of Ireland, and to a lesser extent Barclays being the only lenders of note into the sector. NAMA has committed €2bn for staple finance which might help (NAMA’s) commercial property prospects going forward.


Expected developments in July-December 2012

Property tax, although hard data is suspiciously hard to come by from Phil Hogan’s Department of Environment , Community and Local Government, it seems that 40-50% of households still haven’t paid the €100 household charge, even four months after the 31st March 2012 deadline. We can quibble about the level of compliance, but it seems that there has been massive resistance to the new charge. We know that the so-called expert report on the shape of a new property tax to take effect from the start of 2013, has been recently delivered to Cabinet, but we don’t yet have any detail, though there is much anxiety amongst home owners that they may face an average annual charge in 2013 of hundreds of euro if not €1,000. Given the requirement under the Troika memorandum to raise over €1bn in new taxes in 2013 and with options on income tax and social welfare rates apparently taken off the table, with VAT and excise taxes already at elevated levels, it is likely that any average new property tax be in the €300-700 range. Increasing the cost of home ownership should logically mean a reduction in home values.

House Price Database (register), Tom Lynch, the CEO at the Property Services Regulatory Authority says that we will have hard sales price data from September 2012, and we may even get data going back to 2010. In a buyers market, the new register should have the effect of beating down prices because buyers with the upper hand will automatically seek the lowest price based on similar property sales.

Europe, this is the wildcard because on one hand, if the EuroZone decides to abandon the 2% annual inflation target and print more money, then we might see inflation rising which will mean property prices increase. On the other hand, the EuroZone crisis may intensify, undermining growth and leading to further asset depreciation. Or the status quo of a slow brownout may continue. A wildcard.

More NAMA supply, NAMA’s residential property portfolio of 13,000 Irish homes worth about €2.5bn is not market-moving but it is still significant and at some point these homes will need come on the market if NAMA is to have its loans repaid, NAMA may rent rather than sell for the time being however. NAMA’s commercial portfolio, worth about €6bn is significant in a market which was worth less than €0.5bn in 2011. Over supply of vacant commercial property is still a major problem generally, though there are noted shortages in some locations for some types of property. NAMA might prefer to rent rather than sell, but the degree of oversupply is such that we can expect some NAMA property to come onto the market for sale.

Budget 2013, last year’s budget was the most commercial property-friendly budget in (my) living memory, with stamp duty slashed from 6% to 2%, with the abandonment of Upward Only Rent Review reform and capital gains tax incentives. Alas, the experience of the first six months demonstrates that more is needed to get the commercial property market moving. NAMA has a market-moving portfolio of commercial property-related loans and we might assume that Minister Noonan will give NAMA a willing ear for any proposed changes to the tax/regulatory environment. You can probably expect an extension of incentives for residential property also, though of course these will not be announced in advance lest they lead to a deferral of existing purchases.

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