Although there is divided opinion amongst this blog’s audience on the performance of NAMA’s most senior property man, John Mulcahy, the view on here, for what it is worth, of John’s performance is positive. John may be approaching normal retirement age, but in a country where the Minister for Finance is touching 70 and one of the Public Interest Directors at Permanent TSB is touching 75, NAMA’s Head of Asset Management and Board member might be considered a mere spring chicken. He has a whole lifetime of property experience under his belt, and his performance in a London court last year in the Paddy McKillen case was nothing short of sublime – he knows his job.
On the other hand, he may well be criticized for failing to anticipate the continuing decline in Irish property prices from 2009 onwards. Remember then-finance minister, the late Brian Lenihan’s assertion we were close to the bottom? That was widely believed to be based on conversations with, and input from, our friend John. And although it wouldn’t have helped the overall cost of the bank bailout to the State, if NAMA had changed its valuation date from 30th November 2009 when it became clear prices were still declining, then NAMA wouldn’t be starting its asset management life with a massive handicap in having overpaid for its loans.
There is one other specific position adopted by John which is baffling on here. John says that the maximum you can recover on any loan is the par value of the loan. The position on here is that is rubbish.
Take the Maybourne loans which NAMA sold to the Barclay brothers’ Maybourne Finance Limited in September 2011. It is believed that NAMA received the par value of the loans, about €800m and that NAMA made a small profit on the transaction because NAMA had bought the loans at a small discount from the banks. NAMA was happy and claimed that €800m was the maximum it could have achieved – that may be correct given the publicized alternative offers but the principle that no-one would pay more than the par-value of the loans is not sound. A special purchaser like the Barclay brothers who are using the loans as a plank in their not-so-secret plans to take control of the Maybourne hotels, might have paid a premium for the loans on top of their par-value. NAMA has never convincingly addressed that argument.
And today, we pose a related question to NAMA. Derek Quinlan is a NAMA Top 10 developer who is understood to owe the Agency more than his assets are worth, and in the McKillen court case last year, it emerged the Barclay brothers were providing substantial sums to fund Derek. We don’t know Derek Quinlan’s precise financial position, so the proposition that he is insolvent is based on sources such as this issue of the British satirical magazine, Private Eye – not available online without subscription – which the Sunday Independent reviews today.
Why not bankrupt Derek Quinlan who nominally owns 36% of Maybourne?
If that were to happen, it would trigger the disposal of Derek’s shares and the most likely buyers would be Paddy McKillen or the Barclay brothers – both special purchasers. Paddy says he stands ready to buy any Maybourne shares that become available and given Paddy already owns 36% of the group, if he obtained his pro-rata share of Derek’s 36% then Paddy would end up with 56% of the group with the Barclays owning the remaining 44%, on the likely assumption that they too, would take up any shares that became available. Paddy would have de facto control, or would at least be in the driving seat.
So how much would the Barclays pay NAMA not to bankrupt Derek today? Given the enterprise value of the Maybourne group of well over €1bn, would Derek’s non-bankruptcy be worth €50m? €100m? The question might be flipped and posed in a different way, how much would it be worth to Paddy McKillen for NAMA to bankrupt Derek.
This is all very cut-throat stuff, and it is questionable if NAMA has the steel in its soul to pursue such a plan. NAMA itself has come under intense pressure from the Barclays in the past, and the revelation last year by a Barclays’ man of the message from a NAMA employee to the Barclays about another offer certainly embarrassed the Agency. But NAMA has also clashed with Paddy McKillen in Ireland’s courts and came off with a draw that was really a win for the Belfast developer and businessman. But NAMA should remember that bankrupting Derek Quinlan might only have time-limited benefits and the Barclays may dream up other machinations which might render moot, Derek’s bankruptcy.
[The next round in the marathon legal battle between Paddy McKillen and the Barclay brothers kicks off in London’s appeal court on Monday week, 4th February 2013. Paddy comprehensively lost his case at the London High Court last year when he tried to get a declaration that NAMA’s sale of loans to the Barclays was unlawful, as were the actions of the Barclay brothers. Paddy faces a €25m legal bill from that failed action, but is understood to have paid some of that bill. If Paddy were to win at the appeal court, then some of those costs could disappear. Paddy has recently met his full allocation of a rights issue forced on the Maybourne group by the Barclays, and just on Friday last, the scrappy Paddy launched legal action against Maybourne Finance Limited in Dublin’s High Court – it is believed to be a libel action]
NAMA Wine Lake 
Private Eye is available in shops – try Easons, Donnybrook Fair, newsagents in Merrion Centre, Dublin 4 etc
@Dontyaluvem, oops, small omission – Private Eye is not available *online* without subscription.
http://private-eye.co.uk/
It is indeed available in some Irish stores including Easons.
No one would have paid a premium for the maybourne loan. It looks likely that the Barclay brothers will not end up in the driving seat despite purchasing it. Even if purchasing the loan did give the Barclay brothers an edge they would have known that while they were a special purchaser, they were the only purchaser happy to take the loan at par
@DCB, if the market value of the Maybourne loans was par, then a special purchaser might be expected to be prepared to pay a premium over par. Whether or not that was feasible in the Maybourne case, ultimately, is debatable. But NAMA doesn’t even accept the principle that a premium over par might be achievable in special circumstances. It is that position towards the principle which is criticised above.
Apologies for asking this as it is pretty irrelevant to the issue under discussion here but does anyone have an online subscription to Private Eye as I thought only a paper version was available
@Dontyaluvem, right, having read the Private Eye story (at the back City news), there really isn’t much in it beyond what the Sindo reported and quoted from yesterday. A couple of things extra though
Private Eye say that DQ “reportedly” spent Christmas in Switzerland skiing and it hopes – with tongue firmly in cheek – that Irish taxpayers don’t come across any snaps of the happy holidays.
The Private Eye mistakenly claims that Paddy McKillen is appealing NAMA’s sale of loans to Maybourne – he’s not and that strand seems to have hit a dead end, at least as far as the British courts are concerned.
Beyond that, the Sindo quotes pretty much everything else. They had better watch out or they’ll have Marian Finucane dismissing them as mere reviewers of other publications!
He has a whole lifetime of property experience under his belt, and his performance in a London court last year in the Paddy McKillen case was nothing short of sublime – he knows his job.”
I was curious in 1998/9 when David McWilliams told him there was a massive property bubble in Ireland–what John Mulcahy do?
@The Nailer, do you have a source or link to the exchange between John and David in 1998/9?
But for nearly a decade afterwards, John and his former company, Jones Lang LaSalle probably did very well out of a property market which rocketed. John’s company was adviser to the seller of the Irish Glass Bottle site in 2006 for €412m, for example.
Remember though that valuers are generally not expected to have crystal balls to foretell future property values. They value according to current market transactions and prices. What John apparently did in 2009 was to predict that we were at the bottom based on yields that were in high single digits. Under normal economic conditions, if there’s an 8% yield available, then investors will pile into the asset, lift asset prices and the yield will come down to “normal” levels. That didn’t happen in Ireland’s case because our economic problems, together with vast oversupply, kept prices declining. So you might forgive a property person in 2009 for their predictions based on usually reliable approaches.
@NWL
@The Nailer, looked at that, nothing on there about an exchange between David McWilliams and John Mulcahy in 1998. But it really doesn’t matter, we know there were voices, even if they were weak, foretelling a property crash for some time, and in 2007 and 2008 it happened. There were also voices suggesting any downturn would be “soft” and that the fundamentals of high immigration, young, educated, flexible workforce yada-yada would cushion any downturn.
So, can’t see anything there to specifically relate to John Mulcahy and even if there was, it was still nearly a decade after 1998 that it all went horribly wrong.
@The Nailer, you’re confusing valuers with fortune tellers. Valuers simply – and sometimes people are amazed at how simple it is – look at what similar property is selling for on the market at present, and they frame their valuation around that. Fortune tellers will tell you a property will be worth €x in five years, you’ll find them in tents at the Ballinasloe Horse Fair, they’re great entertainment.
But they can value into the future, what they are refusing to do is price the risk. It’s the entire point of finance I would have thought.
A problem here is that emotion enters when property is spoken about so any attempt to reach a reasonable number is utterly impossible.
For instance do you believe in the current economic conditions rents on housing reflects anything even approaching the true figure.
Further, yield only matters if it reflects conditions and holds a relationship with similar in other markets. Not a whole hell of a point in investing in Dublin with yield at 8% if in Paris you get 5%. It simply isn’t reflecting risk.
@VH
“But they can value into the future”
How?
And can you point us to one of the “they” because if they could accurately predict future values, the whole investment world would stampede a path to their door.
You’re confusing a valuer with one of these
By overpaying,some politicans are now predicting a further 15 Billion loss from NAMA,JM hobbled the organization.
Bonuses…..ah go way out of that…no chance now.Resulting in medociore or below average staff,low morale,high level defections to private practice…sound familiar ?
JM is so busy he was late for his date with his employers ….but he never really bought into that,it was quite disrespectful,would not happen in the states…late for a senate hearing…a warrant would be issued.
Yet he has all the time in the world to “speak” or did he speak…who knows,who can tell…no records were kept from last weeks invite only boondangle.
What we do know is he was most definitely not at work,conferences like the one he attended are for wan**rs…waste of time.Load of backslapping,grinning idiots plotting REIT’s behind closed doors…drooling over the potential fees to be made-if NAMA feels some weird obligation to Bill Nowlan,to attend these Galway Tent like events,send a junior and try keep some notes of whats said,if that’s not asking too much.The DofF managed it …CBRE also..
Dereck not BK yet…JM….oh that’s easy try the Glass Bottle Site….late at night I often wonder is there any correlation btw. the “saved” and who were John’s biggest clients back in the day….ah of course you guys don’t do conflicts of interest simply does not exist in Ireland.
” And although it wouldn’t have helped the overall cost of the bank bailout to the State, if NAMA had changed its valuation date”
Considering we didn’t even get all of the equity in BOI this pretty much has to be wrong.
In addition, if people like this guy had not been listened to the whole course of how we dealt with the banking crisis could have been different.
When rents were at 3% this guy said there was no bubble – then during the bust he starts saying rents are high enough to get people even though at that stage it was obvious that a bubble had blown up and prices were reverting to their long run trend.
It AMAZES me that this guy was asked about future prices at the time despite the fact that he had just been revealed as not knowing anything about how to go about that very task. Further I think he based his predictions, not on the size of the divergence from long run trend, but on historical recovery periods. This was plainly and obviously the wrong lesson to take from the data the right lesson of course being that the bigger the bubble the bigger the bust.
And to defend him on the basis that he is good at telling current prices and that’s his job misses the point because he held himself out as someone who was in the prediction game.
Further if this guy is not the guy NAMA have in to predict future price, who is? It seems clear that NAMA need to take a view on future prices – the speed at which they dispose of assets implicitly does take a view in any event.
I fear NAMA wine lake is getting a bit soft on NAMA officials !
@NWL
Just because prediction is difficult doesn’t mean the task can be avoided or that there are not some people who are better at it then others – I mean, this is obvious stuff.
@Christy, it’s obvious is it? Really?
Back in 2006, I came across house valuations in London and the best in the business were predicting a downturn. After all, the OECD and others had warned about a British property bubble also. So the best in the business were predicting a downturn. And guess what happened? The banks paid out over GBP 10bn in bonuses in December 2006 and the bankers went out and bought prime property which drove up prices, and price increases rippled across London. It was only in Autumn 2007 that things went pearshaped, and that was partly on the back of US subprime and fears about interbank funding, not because of a London property bubble. And how did the UK government respond to the crisis? They pumped in just under GBP 400bn of newly printed sterling into their economy which has given inflation of nearly 20% since 2007 and London house prices are pretty much the same, if not a bit more than they were in 2006. Across the UK as a whole prices are down 11% from the peak in 2007, though regions like Northern Ireland which are down 55% are offset by more modest declines and some regional increases elsewhere. All of that should have been “obvious”, should it?
I have to agree with you though, that if the NAMA valuations were correct that we would have got a bigger stake in Bank of Ireland. And given we paid BoI €6bn for €10bn of loans, we might have paid 30% less, which would have given us a €1.8bn greater stake in Bank of Ireland than we actually did receive. That’s a fair point. It doesn’t apply to Anglo, INBS, EBS or AIB because we own them 100% or 99.8% in AIB/EBS’s case. And PTSB was not a NAMA Participating Institution. But you make a fair point about Bank of Ireland.
@VH, “Not a whole hell of a point in investing in Dublin with yield at 8% if in Paris you get 5%. It simply isn’t reflecting risk.”
You may have lost me. I would have thought that those returns are skewed towards favouring Paris – France not being too investor friendly at present, with heavy taxation on any profits generated….. I believe that on a “like for like” basis, it was advantage Ireland here. Is that what you are saying?
As you imply, the distortion in the Irish yields or cap rates relates to the fact that most property in Ireland is still retains historic rental levels. That’s why we have higher than normal yields. The sales that have taken place do not reflect current market rental levels. When we see the sale of an office building in the CBD let at today’s market rents we will know the true current market yield.
What I’m getting at is what are they calling the base investment. Normally it would be a Gov Bond. So if the yield on an Irish bond is French/German bond +++ points over. And the yield on a property investment is say 3.5% above that, reflecting the degree of risk. But relatively light risk in general. What isn’t happening is the balancing relationship where the price is falling to increase the yield to price ratio reflecting market risk. The very opposite is occurring where the yield is propping the price. They are internalizing the calculation in exactly the same way that got us into this situation.
As to Dublin versus Paris, which would you say is riskier. And would you get the return to reflect the risk. I don’t think you would.
@NWL
There was two key predictions to be made
One – was there a bubble?
Two, once the bubble popped- how deep would it go?
For some reason a guy who got both of these things completely wrong – and on teh basis of clearly flawed methodology – is still in a position where he is used as an expert on property prices – its preposterous. Its “yes, minister” stuff
In relation to obvious – what i meant was that it was obvious that there was no reason to believe that historical recovery periods were going to be an accurate guide to how long prices would fall this time around. It was the size of the bubble that would determine how far prices would fall. When i say obvious i’m not saying anything more than the approach he took was obviously wrong because it equated this crash to other crashes and said this on would last as long – but that is a great example of someone who actually uses his experience badly and learns the wrong lessons.
I think you’re being way too forgiving here – this guy was a champion of teh bubble and cost the State billions of euro by giving obviously flawed advice to teh state – and far form being sidelined as a result he has placed in an imnportant position where his ability to predict property prices will be a key skill
I’m not saying exact predictions. But you can reasonably do a few scenarios with optimistic, normal and dismal outcomes taking today’s value. Every T-bill and Bond sold makes such a prediction, pricing in as much as they can plus a bit to keep the kids fed. The big issue here is that they start with the optimistic, then the buoyant, onward to the Hindenburg.
Remember those rising tides we used to have lifting all boats. Gobdaws didn’t think about squalls did they.
The answer to the question in your headline is that the Barclays stand to lose hundreds of millions if NAMA decides to bankrupt Quinlan. Mulcahy was not so smart – don’t forget NAMA also sold the Barclays Quinlan’s loans against his Maybourne shares at a very low valuation. Those shares are worth tens of millions more today. Not such a smart move by Mulcahy as he allowed the Barclays to buy the loans at a steal from NAMA and Quinlan’s admitted plan for a bumper side-deal to progress. This was all at the expense of the taxpayer as Quinlan continues to live his very lavish lifestyle courtesy of the Barclays.
It looks increasinly unlikely that the Barclays plan will succeed now – but if it did then McKillen’s ability to repay the rest of his IBRC loans in full would have been severely damaged – and the cost to the taxpayer – probably hundreds of millions. Keep up the good fight Paddy and I think IBRC has won out here in the competence stakes by making the right move not to play along with the Barclays scheme.
The appeal will be interesting to watch next week. It is a pity that the media here did not focus on the interactions between NAMA and the Barclays that was discussed in-depth during the High Court hearing in London but not reported on by Irish media and of no real interest to UK and international media.
Sam, not sure you know what you’re talking about here. NAMA sold the debt which was secured over Quinlan’s shares in Maybourne for an enterprise value of well over £1bn. Given this was for a third of Quinlan’s shares, i.e. 12% of the total share equity, on a distressed asset with senior debt of £660m it looks like to me that the NAMA team screwed the Barclays.
As for you stating “It looks increasingly unlikely that the Barclays plan will succeed now”, is in reality Paddy appealing the decision where the High Court judge dismissed his case in every way and described his evidence as ‘fanciful’ (lay terms a liar), makes you sound like a buffoon.
@NWL
I have previously queried your attitude towards net rental yields as guide to property valuation. You have consistently indicated that net rental yields in your view is not necessarily a great guide as to where a property should be valued – I disagree vehemently.
In fact it ’s the only long term method that has stood the test of time throughout the past 40 years or so and should be the ONLY method that any sane buyer should ever consider before considering entering any property market. In terms of property it never really was location, location, location but in fact it should only ever read rental yield, rental yield, rental yield.
The problem with most people’s view on this is that their investment time horizon period is always too short – property is a long term game and as a result metrics should be analysed over the long term. In the case of the RoI the Credit Suisse Research Team in conjunction with the London Business School have produced detailed long term return metrics for most asset classes for the past 100+ years on a country by country basis for a number of years and is the minimum required reading for any investor. In Irelands case the returns on risky asset classes (equities, corporate bonds and property generally) suggest nominal returns of about +3% above the equivalent ‘risk free’ returns is the long run expectation and mean reversion will tend to drive median returns to these levels over the longer term. Given the additional illiquidity risk associated with property investments, returns above the long run metrics are required as compensation – the long run requirement for property is an additional 1%-1.5% above the 3%. These numbers suggest that over the longer term property returns (nominal) should be in the region of about 7.5% to 8.5% Gross using a long term average ‘risk free’ return.
Whilst you have often suggested yields a ‘simplistic’ methodology – I beg to differ – the estimate of income for a property investor as the numerator in the calculation can culminate in a vast amount of potential drivers pushing or pulling the number lower or higher depending on local supply, loan demand, wage rates, interest rates, sentiment etc. etc. etc. Hardly simplistic stuff when trying to factor in returns over a 10 to 20 year timescale. So I suggest that you rethink your analysis in relation to this issue.
Insofar as Ireland is concerned the IMF was raising red flags (through Alan Aherne BTW) in relation to residential property prices back in 2001 as the long run yield analysis was suggesting returns below the run levels normally exhibited in the marketplace. Sadly as we now know to our cost those in a position to do something about the situation at that time failed to act.
Since about the middle of 2005 to the end of 2007 residential returns in Ireland we at or below (in the case of D4 and D6 housing massively below) equivalent risk free returns. This was plain stupid – not by the borrowers but by the banks because banks ultimately price the property because they always have the opportunity to say no to any deal where they are required to complete any transaction. In Ireland’s case banks were involved since the early 1960s up until the middle of 2008 in about 95% to 98% of all residential property transactions. In simple terms they ought to have known better and forcing novice property consumers into any sort of the bankruptcy arrangement when this mis pricing scandal sits and stares at us ever day of the week to me is every bit as galling as repaying bondholders who lent money to banks who should have known better and lost.
I have suggested here before that we have had and continue to have a mis diagnosis of the problem. We have a valuation issue, nothing more nothing less. Until we get our heads around that problem the economy goes nowhere. Banks mispriced property and as a consequence mis sold the mortgages attaching. It’s that simple. We right size ALL mortgages to the correct property prices using a yield based approach as a valuation tool and write off the differences comparing current mortgages to these yield based valuations. In order for banks to take this hit banks need to step outside the current Basel III capital requirements and live with a lower core capital ratio.
This is achievable but current Regulatory regimes are preventing such action. We can debate and argue until the cows come home however until such time as measures such as this is implemented we go lower in all aspects of economic life. The economy is simply not producing enough or pricing wages and salaries to levels that can service the vast majority of mortgages in the country – the monthly stats are completely understating the scale of the problem, the banks, the general public and the Regulator all know it only too well.
@YoB, I doubt if anything said here will change your view but a property yield is simplistically rent divided by property value. If rents are stable then if yields increase, that should encourage more investors to pile into property which will force up property prices and should drive yields down. And if yields decrease, then people should sell property so as to free up their cash to invest in something else, and the supply of property to the market should increase which should drive down prices and lead to an increase in yields. In other words, there should be equilibrium in a stable economy.
But when the economy and rents are completely unstable – and a 50% decline from peak so far confirms that – then yields don’t mean a great deal. A 15% yield right now is not prompting a stampede into Irish property, because rents are likely to fall as Upward Only Rent Review leases expire or are renegotiated down. Also build costs are also a factor in property prices, and development land has declined 90%.
So yields presently mean little. When we get back to stability in the economy and the property market then yes, a 7% yield might mean something again. The view on here is that we are still more than a year away from that.
@yields back in the day as a acquisition analyst,all “nighters” were pulled preparing ‘Argus’ runs,incredibly complex excel spreadsheets,etc.
Different scenarios utilized….often to be asked at committee by ‘the smartest guy’ in the room…hmm that’s all very well but what’s the price per square foot then….
Ten years is normally the maximum for modelling or projections,unless some ‘event’ shortly after..say large tenant expiring and most likely to vacate-3yrs is ‘normal’ for a lot of companies specifically anyone utilizing ‘private equity’ money.
Its an extremely ‘simple’ metric but an excellent way to compare similar deals-widely used too.
Came across a presentation by CBRE on recent Irish transactions and a compassion btw. peak yields and those prevailing today-good presentation now if only we could find NAMA’s from the same conference-no it was ‘oral’.. a continuation of NAMA’s ‘oral only’ fixation.
Click to access marie_hunt_-_the_irish_property_market_in_transition.pdf
@NWL
What you say is largely uncontestable the question is however does a 15% yield (if such a thing were available in the current market) represent good long term value taking into consideration both numerator (rents) and denominator (price) moves. My argument is that based on long run trends the answer is undoubtedly yes albeit it may take some time for value to emerge. Historical returns and mean reversion would suggest that over time yields will revert to c7% meaning prices will more than double from your notional 15% return from here.
The point being is that during periods where the supply demand dynamic was largely in equilibrium (1970s,80s and 90s) house prices still traded close to their long run yield trend when viewed over the longer term. What happened in the period from about 2001 to date was that the supply demand dynamic was not in equilibrium in that supply was outstripping demand by significant numbers and this was reflected in the rental price in that on average rents continued to track CPI +/-1% over the period (when looked at over this entire period)- something that it has tended to do for some time. House pricing however in the period under review went badly out of kilter meaning yields collapsed to levels less than 1% net in D4 and D6 in 2006/2007. My basic point being is that this phenomenon of yields moving so far away from long run trends was almost completely and utterly driven by the action of the banks – they control the denominator in the yield analysis as they control the prices and they had it (and always will have it ) within their ability to call a halt to this mis pricing. They failed to do so. They continued to mis price and mis sell and now, despite seeing quite clearly what they were doing was massively risky, seek to recoup the entire 100% of their errand ways. Wrong, wrong, wrong on every level and yet the Govt through the PIB with a veto to the banks in effect supports such actions.
It seems that not only are some banks TBTF but some developers, with extensive links to some of the best know people in Ireland and almost Pharaoh like status, are also TBTF.
Derek Quinlan has all the hallmarks of someone who knows where the bodies are buried. By not bankrupting him, they are essentially taking sides against Paddy McKillen, neither are they doing much to dispel the idea that NAMA is not impartial and there is nothing “sublime” about loosing us tens of billions, but then, with NAMA I always think there money and has nothing to do with us as it is their own private monopoly game. That’s of course until we have to pay back their losses with interest.