We normally say that a company “went bankrupt,” implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.
American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.
These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.
Part of the answer is practical. Defaulting (even in so-called non-recourse states) is still a lot of trouble, and to most people it’s scary. In addition, homeowners are slow to recognize how much the value of their homes has dropped, and have inflated expectations of how much it will rise in the future. The biggest hurdle, though, is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”
Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.
Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. ♦
ILLUSTRATION: Christoph Niemann
Wednesday, December 21, 2011
American Airlines, Bankruptcy, and the Housing Bubble : The New Yorker>>> It's different in America!
WANTED: Irish estate agents. No, it’s not Irish property buyers out seeking revenge, but a recruitment agency which is holding a roadshow in Dublin in January aimed at finding agents to work in the London property market.
Property recruitment specialist Deverell Smith Recruitment has found jobs for more than 30 Irish agents in 2011 alone, including placing “a dozen into top-tier brands in Mayfair, Chelsea, Kensington, earning five to six times what they could in Dublin”, says managing director Andrew Deverell Smith.
The agency is, apparently, the first port of call for international firms such as Knight Frank, Savills and Hamptons when they’re looking for property employees.
So on the weekend of January 14th and 15th, two consultants from the agency will come to Dublin to interview prospective candidates, who should make contact now to get an appointment.
Why London? “It’s where the demand is, where money can be made,” says Deverell Smith.
What they’re looking for, he says, is all kinds of agents “who’ve been successful, have great CVs, references and commitment”. He adds, “Irish charm goes a long way.”
Having qualifications is good “and we’ve placed a lot of graduates, but when push comes to shove, experience and character and charisma is what counts. We’re looking for people with experience, credibility, drive and a commitment to relocating.”
If on top of having the above, an agent can speak (in this order) Russian, Chinese, Hindi, Italian or Greek, it could give them an edge.
The rewards can be high: agents typically charge vendors 2 per cent of the sale price. “If you sell a property worth £5 million , that’s £100,000 ,” says Deverell Smith.
Interviews in January will be “an informal half-hour chat”.
By Siobhan Creaton
Friday December 16 2011
BANK of Ireland has taken control of three prestigious buildings in Dublin's Merrion Square owned by a Celtic Tiger couple who amassed a €1bn global property empire.
Solicitor Brian O'Donnell and his wife Mary Pat own 61 and 62 Merrion Square, two five-storey period buildings, and an adjoining property at Fitzwilliam Lane. The three properties, which are interconnected and are rented out as offices, are up for sale.
The O'Donnells put them on the market as part of their efforts to repay Bank of Ireland €71.5m, which the High Court has ruled that they owe. The properties were valued at €30m in 2005.
Speaking to the Irish Independent this week, Mr O'Donnell said he was "stunned" by the bank's lack of communication with him and his wife.
He said the couple were "seeking a solution" to their massive financial challenges but the bank was aggressively pursuing the debt.
This newspaper has learned that the bank appointed Tom Kavanagh of Kavanagh Fennell as receiver to the three Dublin offices recently. Mr O'Donnell is said to have learned of his appointment from the couple's tenants after Mr Kavanagh had arrived to tell them that the complex was in receivership.
Mr Kavanagh did not return calls last night.
The O'Donnells also own 84 Ailesbury Road, another prestigious property that is expected to be put up for sale by the bank.
The O'Donnells believe that Bank of Ireland's relentless pursuit of them is designed to scare other lawyers, doctors and professionals who owe it money.
The bank is expected to move to repossess their luxury home, now that it has secured judgments for €71.5m. Under an agreement that the bank says has been breached, it can move to take their palatial Killiney home, 'Gorse Hill' on the Vico Road, in the coming months.
The 9,000sq.ft property overlooks the sea and has a swimming pool, tennis court, stables, gym and sauna. The couple purchased the 1.25 acre site in 1997 and extensively developed it.
- Siobhan Creaton
By JEROME REILLY
Sunday December 18 2011
A GOVERNMENT quango set up to investigate rogue estate agents has not carried out a single investigation despite costing the taxpayer more than €4m, not including lavish new offices.
The National Property Services (Regulation) Authority (NPSRA), which has nine staff including a chief executive designate, was set up in 2006 and was a child of the Celtic Tiger.
Its job is to investigate and punish errant estate agents, property management companies and auctioneers who break the rules, but legislation granting it those powers was not passed by the Dail until last month.
The authority's first job will be preparation of a property register, giving all details of residential sales in 2010 and 2011. But the delay in passing the legislation means millions of euro has already been wasted.
The NPSRA's budget for this year totalled €738,000, which does not include the cost of accommodation -- rent, service charges, maintenance -- which is paid for by the OPW, which is locked into a controversial upward-only rent review agreement on the building.
The agency has been headquartered at the Abbey Mall premises in Navan rented to the OPW.
A number of other state bodies are housed in the building on a 20-year, upward-only rent agreement which began in January 2008 -- on which a further €9,781,120 will be paid out by the time the lease is up.
A spokeswoman at the Department of Justice told the Sunday Independent: "The functions of the authority will include the investigation of complaints against licensees (ie auctioneers, estate agents and property management agents) and the imposition of sanctions in respect of improper conduct. It will also carry out investigations on its own volition."
The spokeswoman said that in advance of it becoming a statutory body, the authority has been "very active in putting in place a solid foundation for the organisation".
"This is to enable the authority to hit the ground running when the bill becomes law," she said.
The NPSRA website says that it will have the power to issue sanctions against estate agents, auctioneers etc, up to and including the revocation of a licence, and may also impose fines of up to €250,000.
A director designate was appointed in June 2006 and nine staff appointed.
The office was allocated a budget of €700,000 for 2007, €930,000 for 2008, €657,000 for 2009, €738,000 for 2010 and €738,000 for this year.
- JEROME REILLY
Wednesday, December 14, 2011
We are currently offering a site at Queen St, Clonmel. It is a Landmark Town Centre site, formerly a Chadwicks store and yard which was sold for development in 2004. We are guiding €750,000 with final expressions of interest by 20th Dec next. The property comprises 0.67HA(1.66acres) with c.2,800sq m (30,000sq ft) covered space. It is Zoned objective C “to provide for commercial development and related uses.”
€uro50 opened in Clonmel’s Ormonde Centre today. It is their second store in Ireland, following opening in the Ilac centre last month.
They occupy 8,000sq ft retail plus 3,500sq ft storage. They join DV8 and 6th Sense in the Ormonde Centre, which is a town centre redevelopment of the former Tesco store, on Gladstone St, beside the main town car-park (and opposite our office!).
About 200 people queued for the 10am opening and the crowd built rapidly thereafter.
Following a successful year of letting at the centre, we have just 7,000sq ft left of the original 30,000sq ft, with lots of interest in the remainder.
Don’t forget to call us for any information...:)
Thursday, December 8, 2011
- Stamp Duty – Reduction from 6% to 2% for commercial property effective midnight 6th.
- No change to current Stamp Duty regime for residential property.
- Consanguinity relief on transfers of non-residential properties to be retained for intra-family transfers to end-2014. Abolished after 1 January 2015.
- Capital Gains Tax incentive for property purchased between midnight 6th December 2011 and the end of 2013;
- Gains relieved from CGT provided property purchased during this period is held for at least 7 years.
Mortgage Interest Relief
- Increase in the rate of mortgage interest relief to 30 per cent for first time buyers who took out their first mortgage in the period from 2004 to 2008;
- First Time Buyers who buy a home in 2012 will get mortgage interest relief at a rate of 25 per cent
- Non First Time Buyers who buy a home in 2012 will benefit from Mortgage Interest relief at 15 per cent
- Mortgage interest relief will no longer be available to house purchasers who purchase after the end of 2012 and will be fully abolished from 2018;
Legacy Property Tax Reliefs
- Effective from 1 January 2012 a property relief surcharge of 5 per cent will be imposed on investors with an annual gross income over €100,000. This will apply on the amount of income sheltered by property reliefs in a given year.
- Investors in Accelerated Capital Allowance schemes will no longer be able to use any capital allowance beyond the tax life of the particular scheme where that tax life ends after 1 January 2015. Where the tax life of a scheme has ended before 1 January 2015, no carry forward of allowances into 2015 will be allowed.
- The current rate of 25% is being increased to 30%. This increase applies in respect of gifts or inheritances taken after 6 December 2011;
- The current Group A (parent to child) tax-free threshold is being reduced from €332,084 to €250,000 . This reduction applies in respect of gifts or inheritances taken after 6 December 2011.
- A household charge of €100 is being introduced in 2012;
- This is an interim measure pending design and implementation of a full property tax, which will apply in 2014.
- increase in headline rate of CGT has increased from 25% to 30%
- The Minister has decided not to proceed with proposed changes to legislation affecting commercial property leases entered into prior to 28th February 2010, in terms of interfering with upward only rent reviews.
- NAMA has a policy guidance for dealing with tenants’ difficulties arising from upward only rent reviews.
- NAMA may approve rent reductions where it can be shown that rents are in excess of the current market levels and continued viability of the business is threatened. Number of conditions to be satisfied.
- Provision for the appointment of an independent valuation of market rent where necessary.
- Minister to establish an Advisory Group (“The Group”) to advise on NAMA’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets;
- Government established a group to consider necessary actions.
- A formal announcement on the next steps is expected shortly.
Tuesday, December 6, 2011
MORE than 130,000 property investors could face a massive blow in the forthcoming Budget as proposed plans to overhaul the €510m rent supplement scheme could see rents crash.
Joan Burton, Minister for Social Protection, is seeking to cut the €510m annual rental-supplement bill paid by her department as part of the forecast €700m cut to the benefits budget.
Some 95,700 people in the country are in receipt of the rent supplement payment -- which ranges from €500 per month for a family with three children in Leitrim up to €1,100 per month for a similar family in south Dublin.
The number of people receiving the benefit has jumped 60 per cent since 2005, when the total bill was €369m.
It is understood that Ms Burton's department is looking at using its massive buying power to bring down the rents charged by landlords, as well as changing the limits and conditions associated with the benefit.
However, the supplement is believed to massively distort the private rental market as the sheer volume of payments has kept monthly rents artificially high. Rents this year have remained reasonably steady -- rising 0.1 per cent in the third quarter of the year. Private rents fells sharply in 2009 but have been reasonably constant since then.
Cutting the ceiling on rental payments could see monthly rents crash dramatically, according to property analysts. This will cause increased pressure on the middle classes who invested in rental properties during the boom years.
Falling rents, the second-homes tax and crushing negative equity add up to a major problem for owners of apartments. Government figures show that 99,000 people own a second property with a further 35,000 owning three or more properties .
Latest Central Bank figures show that close to 100,000 mortgages are either in arrears or have been restructured by banks -- that's more than one in 12 home loans.
A major fall in rental prices is likely to see investors face more problems in paying loans on rental properties, which may lead to a spike in arrears and an increase in repossessions by banks.
- Nick Webb
by Sunday Business Post 4.12.11
Lloyds plans €1bn Irish sell-off
4 December 2011 by Gavin Daly
British bank Lloyds plans to put €1 billion-worth of Irish property into receivership as it accelerates the closure of the loan book of the former Bank of Scotland (Ireland).
The plan will affect hundreds of properties, including hotels, shops, office blocks and residential developments.
It is understood that the bank will ramp up its receivership activity early in the new year.
Lloyds stuck a deal earlier this year with Irish firm Green Property to manage at least €1 billion worth of Irish loans. However, it has emerged that Lloyds plans to put the companies behind the loans into receivership first, and allow the receivers to decide whether or not to use Green's asset management services.
Some properties are likely to be sold during the seven-year deal with Green, although the bank has not ruled out creating a property fund that could be sold on in one or more pieces. The bank has described the plan as "a medium-to-long-term solution for the Irish property market, where the challenges are significant".
Bank of Scotland (Ireland) banked dozens of hotel developments during the boom years.
It was the lender to Ashford Castle, which was last week put into receivership with the agreement of the hotel's owner, developer Gerry Barrett.
Ireland’s newest discount chain, who recently opened its first store in the heart of Dublin to snaking queues – will open in The Ormonde Centre, Gladstone St, Clonmel next week.
Fit-out is proceeding at a rapid pace, with the ceiling completed, the floor almost. Racking is going in tomorrow, then stock will be put in over the weekend.
The store consists of an 8,000sq ft unit, facing directly onto the main Town Car-Park. €uro 50 joins DV8 and 6th Sense who are already trading very successfully in this town centre location.
The retail chain is part of the 99p Stores Group, which has 150 branches in its portfolio.
Faisal Lalani, Managing Director of €uro 50 Stores, says:
“We are committed to using Irish suppliers throughout our expansion programme and hope to provide new opportunities for Irish suppliers through our existing UK store network".
“We will have more than 4,000 different product lines, many of which will change weekly, so there is always something new every time customers visit.”
The new ‘€uro 50 Stores’ chain sees items at €1.50 or less.
The new stores will see departments from babywear to biscuits ; cosmetics to chilled products ; minerals, sweets and crisps ; hot drinks to DIY; food to fashion ; greeting cards to gifts ; pet-care to party-wear and stationery. The stores will also stock hundreds of themed products like Halloween and Christmas lines.
More than 70% of products will be well known leading household brands such as Colgate, Disney, Johnson’s, Nivea, Palmolive, Pringles and Radox.
This is another great vote of confidence in Clonmel’s town centre, following on the recent opening of Holland & Barratt on the same street.
Monday, November 28, 2011
THE State spent €1.8m buying three acres of land two years ago even though the building planned for the site was already in doubt. The land in Thomastown, Co Kilkenny is now worth around €40,000.
The site was earmarked for the new Health and Safety Authority (HSA) headquarters as far back as 2003.
But decentralisation plans were already in doubt when it was eventually bought in 2009. They have since been scrapped.
Auctioneers believe there is only a "very slim chance" that the State will now be able to sell the land. It is now likely that it will be rezoned back to agricultural use so it can be rented out to a farmer.
The Irish Independent contacted the Department of Public Expenditure and Reform on Wednesday. But it did not provide any answers on why the sale went through in 2009.
An advance party of 27 staff had moved to an "interim office" in Kilkenny city in 2008 while they awaited transfer following the completion of the headquarters. The bill for renting this office costs €79,000 per annum. It remains to be seen if the civil servants will stay in the rental accommodation.
Labour councillor in the area Michael O'Brien said it was clear in 2008 that the decentralisation "dream" was over.
At the time, he asked the Government to "cut the waffle".
However, the purchase of the three acres of land near Grennan College went ahead.
Other sites purchased for decentralisation projects include a 2.1-acre site in Drogheda at a cost of €12.4m; a three-acre site in Dungarvan for €2.1m; 2.1 acres in Edenderry for €1.5m; 5.3 acres in Mullingar for €8.25m; and three acres in Waterford for €8m.
- Eimear Ni Bhraonain
Landowners targeted for unpaid tax
27 November 2011 by Gavin Daly
The Revenue Commissioners have set their sights on landowners who got hefty payments, sometimes running to tens of millions of euro, from the state under compulsory purchase orders (CPO) during the boom years.
Hundreds of millions of euro were paid out to landowners in recent years when their land was bought under CPOs to build motorways and other infrastructure projects. The tax authority has now started auditing people who received CPO payments to see if they have paid capital gains tax, which is charged at 25 per cent.
According to internal Revenue documents, 50 audits have been completed so far. Just seven out of the 50 resulted in a 'nil yield' to the taxman, suggesting that the majority of those audited made some settlement.
Revenue has started its investigations in the east and south-east region, which covers counties Carlow, Kilkenny, Kildare, Laois, Meath, Tipperary, Waterford, Wexford and Wicklow. Revenue has written to the roads managers in all counties in the region, seeking details of all CPO payments they have made in recent years.
The majority of the country's main motorways pass through those counties. They included the recently-built M3 between Dublin and Meath, the M7 between Dublin and Limerick, the M8 to Cork, and the M9, which serves Waterford.
It emerged earlier this year that Laois County Council paid €54.9 million to 135 landowners along the final section of the M7. The landowners received 2006 prices for their land because the CPO legislation states that the price to be paid is based on land values when a local authority first moves to take possession of the land
THE State's toxic debt agency NAMA has lost a second director in little over two months. Former Bank of Ireland executive Michael Connolly resigned from the agency last night.
In a statement, NAMA chairman Frank Daly thanked Mr Connolly for his service on the board "during an exceptionally busy and challenging period".
Mr Connolly was in charge of NAMA's committee -- which oversees lending by the bad bank and signs off on any deals to roll over loans to developers. Mr Connelly stepped down just two years into a five-year term. He could not be reached for comment last night.
It is the second board level resignation from NAMA after Peter Stewart resigned in October. It is also the second board level resignation since London-based senior banker Michael Geoghegan undertook a wide ranging review of the agency.
The opportunity to fill the slots, combined with the Geoghegan review, may well provide Finance Minister Michael Noonan with a unique opportunity to put his own stamp on the agency. Appointments to the board are at the discretion of the minister.
- Donal O'Donovan
The commercial property market is full of contrasts. On one hand, the occupational end of things is doing quite well, with the levels of take-up reasonably good when compared with 2009 and 2010. On the other, the investment market is at a complete standstill pending the government's decision as to whether it will ban upwards-only rent reviews in existing leases.
Focusing on the occupational markets, the retail, office and industrial sectors all performed relatively well, particularly in prime areas. Vacancy is falling across all sectors in prime locations and, in general, take-up of accommodation is similar to pre-2005 average levels.
Commercial rents peaked in the latter half of 2007 and now seem to be at the bottom of the cycle. Lisney's rental indices show that, on average, commercial rents are down approximately 48 per cent, with office rents down by as much as 55 per cent.
In the office sector, take-up in the first nine months of the year was almost 131,000 square metres, surpassing the level achieved in 2010 as a whole (125,000 square metres). We estimate a year-end figure of over 160,000 square metres, which is in line with the 15-year average, excluding the boom period of 2006 to 2008.
The largest deals during the year include Google's purchase of Montevetro building on Barrow Street, and lettings to Paddy Power in Belfield and Bank of Ireland in Burlington Plaza.
Unsurprisingly, Grade C buildings (obsolete or nearing obsolescence) are only securing a small proportion of market activity. In the first nine months of the year, such accommodation only accounted for 4.2 per cent of all take-up. With rents for better quality buildings so low, occupiers are now able to secure good quality, well-located buildings on excellent terms.
This will lead to some issues towards the end of 2012 when very little Grade A (new and never occupied) stock will remain available. With only 11,100 square metres of new space completed so far this year, the vacancy rate continues to fall, and is likely to maintain this trend given that there are no new schemes planned for completion in the short term. However, vacancy is still at historically high levels, with the overall Dublin market at 21.2 per cent, but with certain suburban areas over twice this figure.
Moving to the industrial market, overall activity levels are similar to 2010, which is good news as it points towards steady demand. We estimate a take-up of between 140,000 and 170,000 square metres this year, depending on whether or not a number of large deals are completed by year-end.
Since the summer months, we have seen an increase in the number of smaller transactions of less than 1,000 square metres. The reason for this seems to be that some small businesses now have a bit more clarity on how their business will perform over the coming year, and are therefore willing to enter into very flexible leases to reflect this.
With the larger transactions, demand is being driven by logistics operators connected with the food and medical sectors, but this demand is not to the same degree as was seen in 2010.
Over the 12 months to the end of September, available industrial accommodation decreased by 2.6 per cent. This figure would have been greater but for a large number of premises coming to the market through receivers. Overall, the vacancy rate for industrial property in Dublin now stands at a rate of about 17 per cent but, as with the office market, there are wide variations across geographical areas.
In the retail market, trading remains tough. Central Statistics Office statistics illustrate that the volume and value of retail sales are still falling, down 21 and 26 per cent, respectively, since mid-2007, while consumer sentiment remains low.
Rents in this sector have fallen by an average of 40 to 50 per cent from the peak of the market, and for the past two to three years, new international retailers to the Irish market have been taking advantage of this and signing deals on flexible terms. Their interest is focused on prime high streets and in prime shopping centres, and examples include Hollister, Republic, Name It, Forever 21 and Abercrombie & Fitch.
A number of transactions were completed on Grafton Street during the year, indicating that the street's decline may have been arrested. Such deals include lettings to Disney and Skechers, and a sale to Brereton Jewellers.
Another notable development during the year was the first round of rent reviews in Dundrum Town Centre, where arbitrators awarded Zone A rental increases of about 50 per cent on initial rents. However, it must be remembered that many of these rents date from two to three years prior to the centre opening.
Single price and supermarket discount retailers are making up a large proportion of market activity as a result of expansion plans by a number of operators, such as 99p Stores (trading as Euro 50 Stores) and Poundland (as Dealz). In the supermarket sector, Iceland is expanding into a number of areas around the country.
Also in the supermarket sector, the Musgrave Group has reached an agreement to purchase Superquinn, which will push its market share ahead of Dunnes (at 22.9 per cent) and just slightly behind Tesco (27.9 per cent).
Availability on prime high streets and in core suburban shopping centres is reducing. While it is difficult to track exact vacancy levels, we have sought to monitor prime retail units in the Dublin market where no trading is taking place, ie a 'shutter count', and found that at the end of quarter three, unoccupied units on prime high streets and in prime shopping centres ranged between 1.6 and 5.4 per cent of the total number of units.
Moving on to the investment market, following some improvements towards the end of 2010, yields began to move out again during the year. When combined with some further falls in rents (albeit minor falls compared to previous years), capital values fell further. The IPD indices show that values are down by just over 63 per cent since the peak of the market in 2007.
The retrospective rent review proposal is having a major impact on the market, and will continue to do so until the government makes its mind up. In fact, it is the single biggest issue that has faced the investment market in a generation. We were promised draft legislation after the summer Dáil recess, however at the time of writing this has still not materialised.
At this stage, whether you are for or against the legislation is almost irrelevant - what is important is that something is done immediately, as the government's inaction is creating such uncertainty that the investment market is effectively dead.
During the early part of the year, a number of transactions that were agreed in 2010 fell through because of the proposals, the most notable of these being the sale of the Liffey Valley shopping centre. As the year progressed, potential purchasers sat on the sidelines waiting for the government to make a decision.
For the year to date, there have only been five significant investment transactions, totalling about €174 million, of which 77 per cent relate to special purchaser deals, ie Google and Penneys acquiring the accommodation they already held under a lease (Gordon House, Gasworks House and Chapel House).
In reality, investment turnover is only about €39 million, which is shockingly low. Even given the poor state of the property market, this is an exceptionally low level. Even in 1996 (before the property boom), investment turnover was €250 million, 44 per cent more than the €174 million experienced this year (and 543 per cent more than the €39 million figure). There were 30 more individual transactions completed in 1996.
Looking towards 2012, there are a number of positives to focus on.
Ireland has regained some ground in terms of competitiveness and certain occupiers are now making the decision to commit to Ireland - Google is a prime example of this. In the office sector, we estimate that there are combined occupier requirements of more than 100,000 square metres in the Dublin market, which is excellent news for take-up next year. Most of these companies have a preference for the city centre.
If you consider the prime city locations of Dublin 2 and 4, there are only 78,500 square metres of Grade A space available, and it is understood that much of this is under active negotiation. For larger occupiers requiring 5,000 square metres or more of brand new accommodation in this area, there are currently only five buildings to choose from.
It is likely that this scarcity issue will come to a head towards the end of next year, but the economics of the market are not sufficiently readjusted to make speculative development feasible yet - it may take up to two years for any significant growth to resume.
With industrial property, larger stock is again becoming limited, particularly accommodation greater than 10,000 square metres in the Dublin south-west region. In addition, Ireland is becoming a key location for data centre developments, with a number of high profile operators choosing to locate in Dublin.
During the year, companies such as Data Reality Trust, Amazon and Google secured sites for data centre schemes. With energy and labour costs continually improving, and if the correct investment is made in Ireland's bandwidth infrastructure, the country could become a leading international centre for data providers.
The drop in prime vacancy rates, coupled with an increase in the number of international retailers seeking representation in Ireland, gives cause for some optimism in the retail market. Nevertheless, it is likely that retailers will continue to adopt a cautious approach, with many becoming increasingly innovative and flexible in a bid to drive turnover and margins.
While rents now seem to be relatively stable - at or close to the bottom of the cycle - if the proposed changes to the historic rent review structure are implemented, we may well see yields settle at or about 100 basis points higher than historic levels.
The 20-year average prime retail yield is 5 per cent, and the office yield is 6.25 per cent. Yields settling closer to 6 per cent and 7.25 per cent will have major implications for Irish banks, Nama and pension funds, as it translates into a further 20 per cent reduction in capital values.
All things considered, commercial property performed reasonably well during the year, with perhaps the lack of any real investment transactions being the major disappointment. Hopefully, 2012 will witness further improvements, with renewed overseas interest from both occupiers and investors.
As is probably little surprise to most, house prices fell significantly again in 2011, the fifth year in a row that prices were lower at the end of the year than at the start.
According to Central Statistics Office figures, prices will fall by about 15 per cent in 2011, compared to 10 per cent in 2010 and 20 per cent in 2009. The average house price was down 44 per cent from the peak by late 2011, while the average apartment price was down 57 per cent.
Prices in Dublin have fallen the most - detailed regional information from the property website Daft.ie shows that while asking prices in some rural counties are down by 40 per cent from the peak, those in Dublin are down by more than 50 per cent on average. If the typical buyer is securing a discount of about 10 per cent of asking price, this means that prices have fallen by 55 per cent in the capital.
At first glance, it might make sense that prices in Dublin are falling by more than they are elsewhere. After all, isn't that where prices went craziest during the boom years? But 2011 also saw the first of the fire-sales of residential properties, principally by British auctioneer Allsop.
These fire-sales give us valuable data-points about what the 'sell-it-tomorrow' price of property around the country is currently, and they are telling us that property values are down by about 65 per cent in Dublin, but by up to 75 per cent elsewhere in the country.
So, are prices in Dublin falling by more or less? The answer lies in what economists call liquidity, the ease with which a seller can find a buyer. In markets such as Dublin, there are still some transactions taking place, so a seller is getting some signals from the market.
With lending down over 90 per cent though, there are very few transactions happening in most parts of the country outside the main cities. This means that sellers in provincial markets find it very difficult to gauge conditions when they go out to sell and are thus, given the sums of money involved, cautious on cutting prices.
So Dubliners should not necessarily regard current trends that suggest prices for their homes have fallen by more as a negative sign, or that Dublin will be punished more for its boom-time sins. Instead, they should see it as a positive sign: if everywhere has to fall by, say, 60 per cent, then Dublin is closer to bottoming out.
But just how far do prices have to fall from the peak? There are the "gravity fundamentalists", those who believe that what goes up must come down, in house prices as in everything else. And, in large part, they are right.
House prices in Ireland in 1995, just as the Celtic tiger started, were no higher than in 1975, when records started, once general inflation is stripped out. So by their logic, the average house price will have to fall from €360,000 to about €100,000 before the market bottoms out, or a 70 per cent fall from the peak.
Stagnant house prices in Ireland over those two decades was nothing to do with a stagnant Irish economy. It's probably one of the strongest findings in relation to house prices internationally: once you take account of inflation, house prices don't go up.
For example, over the last 50 years, house prices in the US have increased ahead of inflation by less than half a per cent a year.
It even stretches to a centuries-long perspective: a study of one canal in Amsterdam found that house prices increased by less than 0.1 per cent above inflation between their construction in the 1600s and today. Housing may be very good at fighting inflation and storing value, but it's a terrible investment if you're looking for capital gains.
However, gravity is not the only force at work in property markets. If we want to understand where prices will settle, we need to take account of the huge changes in the Irish economy since 1995. In particular, the typical household has more earners and - believe it or not - each earner takes home a higher disposable income now.
Given that healthy housing markets are almost entirely based on mortgage finance, in turn reflecting a household's disposable income, this matters.
Assuming the underlying multiple of household income hasn't changed since the 1990s, this suggests that house prices need to fall about 60 per cent from their peak.
The income multiple is not the be-all-and-end-all, however. It doesn't reflect migration and the balance between supply and demand, for example. Nor does it reflect the fact that Ireland moved from its own currency to the euro.
To do that, we need to look at interest rates and at the ratio of rents to house prices.
Assuming the troubled euro survives (with Ireland still in it), this means that the average interest rate on a mortgage should be different to what we had under the punt.
The rate might not be the 4 per cent that fuelled the headiest days of the bubble, but it should be less than the 8 per cent average seen in the 1990s. If it's above 4 per cent, but below 8 per cent, you won't go too far wrong in assuming that Irish mortgage borrowers will enjoy an average interest of 6 per cent over the lifetime of their mortgages.
The other piece of the puzzle is rents. Rents reflect disposable income, but also incorporate everything from migration and oversupply to the value of local amenities. Ultimately, the value of a property is determined by its rental value.
This is why what happens in the rental market should be of interest not just for tenants and for landlords, but also for owner occupiers.
Since early 2010, rents have effectively stabilised, particularly in the cities, suggesting some underlying value for accommodation, assuming rent supplement is not distorting the market.
So if we know the level of rents and prevailing interest rates, where will house prices settle? The relationship between house prices and rents is not a straightforward one, but it's easiest to see it thus: annual rent relative to the house price is the equivalent of the interest rate on a savings account.
If someone offered you a 5 per cent annual return on savings, you'd take it in this environment. But if that 5 per cent was on property, which carries greater risk, would you take it? Currently, those buying at the fire-sales are holding out for a 10 per cent return.
This presents first-time buyers with an easy rule of thumb if they want to mimic those fire-sale purchasers: to come up with their offer, they need only find out the annual rental bill of the property and multiply it by ten. It would also, however, mean a 75 per cent fall in property prices from the peak.
Fire-sale prices are cash prices, and a sustained 10 per cent yield on property here would draw in international investors pretty quickly, pushing up prices: rental yields in most European countries are closer to 5 per cent.
Based on what happened in Ireland before the bubble, a market with normal channels of credit should see the yield settle about 6.75 per cent. If the rent-house price relationship does indeed go back to normal, and rents stabilise where they are now, this would suggest that the average house price should be about €150,000, or a fall of 60 per cent from the peak.
The key phrase is "normal channels of credit". As long as there is effectively no mortgage lending in Ireland - lending was down almost 95 per cent by mid-2011 - house prices will not stabilise where they "should" be. They will overshoot down towards the cash-only price we are seeing at the fire-sale auctions. And overshooting is very worrying for two reasons.
The first is the mortgage arrears problem. Contrary to the government's actions so far, variable interest rates of 4-5 per cent don't cause arrears: negative equity and unemployment cause arrears.
And government policy in this area, bullying the banks about interest rates, is not even neutral, it is actually making the problem of arrears worse. Diktats that prevent banks returning to sustainable lending at sustainable interest rates mean they lend less, which pushes prices even lower, making negative equity - and arrears - worse, not better.
The second problem with the lack of any functioning mortgage market is that overshooting on the way down dramatically increases the risk of a new bubble in future. It may seem contrarian to the point of comedy to be worrying about the next bubble already, but the danger is real.
House price expectations are adaptive: this means that people take what happened over the last five years, expect that to happen over the next five and base their decisions on that.
This behaviour is at the core of how buying frenzies and bubbles happen. So falling below a 'natural level' of house prices in Ireland of, say, €150,000 to a credit-constrained price of €130,000 and then rebounding back up is not the same at all as reaching that natural level and staying there.
Ultimately, we must remember that recovery in the property market is about transactions, not about prices. If credit returns at all in 2012, we may see activity return and prices level off in Dublin and the other cities. But credit won't return until banks are told as part of their stress-test check-ups that while they have to deleverage, new lending is a separate category.
If that doesn't happen, prices will continue to fall into 2012 and beyond. Even worse, they may overshoot, making the arrears problem worse and even risking another bubble.
Proposed scheme aims to revive property market
27 November 2011 by Richard Curran
Two Dublin businessmen have come up with a proposal for a scheme to encourage more house purchases without costing the state any money. Basil Good, joint owner of Isaacs Hotel and Property Group, and former Dublin City Centre Business Association chairman Paddy Monaghan, believe their proposal is better than the one put forward by the National Asset Management Agency (Nama) last week.
Nama announced plans to sell 5,000 houses as part of a scheme where the agency will guarantee the purchaser against the value of their house falling by up to 20 per cent over five years.
According to Monaghan, his scheme would actually bring in revenue for the exchequer.
Under his proposed Irish Residential Value Protection Scheme (IRPS), where a house is bought for €200,000, the insured risk would be 20 per cent over three years, equal to €40,000.
The government would guarantee up to €16,000. The seller would put €14,800 on deposit with his bank for three years, which would be called on if the house value fell.
This money would be refunded in full plus interest after three years if not called on.
The bank would have to put €5,200 into the scheme if the house value fell.
The purchaser would pay €111 per month for up to three years into a bank account to cover his/her share of the loss if called on, equal to €4,000. This would be fully refunded if not needed after three years.
Monaghan argued that there is a financial incentive and benefit for all four parties to carry out the transaction, despite all four of them sharing some of the potential risk.
"The banks would see more mortgage business and it would help stop house prices from falling, which affects the value of loans they already have," he said. He argued that, while vendors were taking a risk with up to €14,800, they had a better chance of getting a sale through under the scheme.
Monaghan argues that his proposal was better than Nama's because the state was only carrying 40 per cent of the downside risk, instead of all of it under the Nama scheme. He also argued that this scheme could be available for all houses, new and secondhand.
Monaghan and Good have put the proposal to a variety of industry groups, and to environment minister Phil Hogan and finance minister Michael Noonan.
Negative equity protection may simply distort house market - The Irish Times >>>This will lead to a further drop in prices as private vendors drop prices NOW to compete!
SHOULD THEY or shouldn’t they? The National Asset Management Agency seems determined to press ahead with its scheme to start selling residential properties with negative equity protection. The first 750 are due to go on sale in the new year and, if things go well, then up to 5,000 properties could be put on the market.
Under the proposal, the agency will absorb any fall in value of the property for five years after the sale up to a maximum of 20 per cent of the sale value. A mortgage based on the full sale price will be arranged through a bank, but will be adjusted after five years based on the market price of the property.
It’s a simple scheme and would seem to be a creative response to the fear holding back a normalisation of the market. It also chimes well with the notion of Nama trying to marry its commercial mandate with some sort of wider social brief.
The Government, however, or parts of it at least, is not convinced of its merits. In particular, the Department of the Environment and former minister of State with responsibility for housing Willie Penrose. They are reported to oppose the scheme on the basis that it represents an intervention in the market and may put a false floor on prices.
This new-found respect for the omnipotence of market forces is understandable given the events of the last decade, but arguably a bit simplistic. The property market at the moment is probably every bit as dysfunctional as it was in 2007, but this time fear has displaced greed.
The case for intervention at this stage on the way down – with prices off by 50 per cent –can be made in much the same way as the case for intervention on the way up long before 2007.
The other point to bear in mind based on recent experience is that if prices really have much further to fall, then the release of 750 properties backed by some sort of negative equity protection scheme will not make much difference.
This, however, leads on to what is the more interesting point: what happens to the market and prices if every seller is forced to offer negative equity protection.
It is not really clear if this point has been thought through, but it seems pretty obvious that if you are trying to sell a property on the same street as Nama and they are offering negative equity protection then you have not really got a hope.
If you want to sell your house you will have to offer something similar and there is at least one similar negative equity product on the market through a specialist financial services company – but to date take-up has been low.
What would be a game changer would be if the three banks that are earmarked to operate the negative equity protection scheme for Nama – Bank of Ireland, AIB and Permanent TSB – were to voluntarily offer the same product or a variant of it to private sellers at reasonable cost. This assumes they are interested in lending in the residential market in the first place. Which is another issue.
It would be even more interesting if the Competition Authority decided to get involved and force them to do so. Which it should do because, viewed from the narrow competition policy perspective, Nama is – with their assistance – abusing both its massive financial fire-power and its market dominance.
The normal competitive oversight of the banking sector has, of course, been set aside under the extraordinary powers the Minister for Finance has taken on to sort out the mess that is the banks. And presumably the authority can be told to back off, should it have the temerity to enter the debate. But as the Government discovered in the recent stand-off with the banks over passing on European Central Bank interest rate cuts, lack of competition can compound problems even in a banking industry as badly broken as the Irish one.
It is an interesting paradox. If you introduce a level playing field in which every vendor must be able to offer negative equity protection – at a reasonable cost to themselves – in order to be able to compete with Nama, then such deals will quickly become the norm.
What have you done then? Have you orchestrated massive – and in theory pointless – intervention in the property market or come up with a radical solution to a market paralysed by fear?
LANDLORDS WILL be prevented from putting properties up for rent if they fail to meet energy efficiency standards, Minister for Energy Pat Rabbitte has said.
Publishing the national Affordable Energy Strategy yesterday, Mr Rabbitte said he also intended to review fuel allowance schemes to prioritise “colder homes”. However, he said the schemes would not be changed in the upcoming budget.
Some €2 billion had been paid by the State in fuel supports in the last 10 years, while less than €200 million had been spent in bringing houses up to energy efficiency standards. Around 20 per cent of households are experiencing energy poverty but social welfare fuel payments had been “largely ineffective” in tackling the problem, Mr Rabbitte said.
“To be perfectly honest, with some of the money you may as well be throwing it into the furnace because it’s going up the chimney.”
He said the Department of Energy planned to work with energy suppliers, community groups and local authorities to identify areas at risk of energy poverty.
Households would be offered benefit entitlement assessments and advice on energy-efficiency measures. Economies of scale could be achieved through group home upgrade schemes being adopted.
Grants for retrofitting measures will be replaced by a pay-as-you-save scheme where the cost of the installation is factored into regular energy bills.
The extent to which some landlords had allowed the energy standards of properties to deteriorate was “one of the ugly faces of the boom”, Mr Rabbitte said.
“Some landlords care little for energy standards because they’re not the ones paying the heating bills.”
In future landlords would not be able to rent properties without building energy rating (BER) certificates, and by 2020 regulation would remove properties with a rating of E, F and G from the rental market.
The Society of St Vincent de Paul said there were “serious gaps” in the strategy, few firm commitments and a failure to mention the domestic oil sector.
“There is precious little regarding specifics or timescales in terms of future measures in the strategy. Specific and time-bound actions need to be named in order to adequately tackle energy poverty for those we assist in a humane and timely manner,” said John-Mark McCafferty, head of social policy and justice at the society.
Once the Landlord is in a position to be realistic with rental levels, there are numerous businesses looking to improve their location or increase the size of their trading area. We are receiving lots of enquiries from start-ups also. If costs can be controlled and a good service/product being offered, then business is possible and viable, even in this challenging environment.
These lettings have all taken place in the last fortnight.
Best of luck to all!
Wednesday, November 23, 2011
Irish banks’ asset quality will likely weaken further as mortgage arrears rise and a bottoming out in house prices hasn’t yet occurred, according to credit ratings agency Moody’s.
“We have been highlighting for a couple of years now that we expect mortgage arrears to rise substantially. That now has started to come through,” said Ross Abercromby, a London-based
analyst with Moody’s. “From a capital position, we think the banks have the capital but without doubt asset quality is likely to continue to deteriorate for a while. There doesn’t seem to be any floor yet in house prices.”
While Irish banks have enough capital under Moody’s “current stress scenario,” things could change given “everything going on in the euro area,” Abercromby said.
The banks, which remain highly reliant on central bank funding, are unlikely to regain access to the public debt markets before the sovereign, said Abercromby.
“We can’t really see that happening until the deleveraging process has very much worked its way through,” said Abercromby in a phone interview today. “We think it’d be difficult before
the government’s back in the debt market again.”
In the meantime, banks may continue to be able to issue small amounts of secured debt in private placements. With bank deleveraging plans set to run through 2013 and the government
aiming to be in the market by then “if everything went according to plan, then probably around that time” banks may be able to re-enter the public debt markets, he said.
Moody’s said in a report issued today that the outlook for Ireland’s banking system remains negative citing the banks’ weak funding and liquidity profiles, a very challenging operating environment and the rating agency’s view that profitability will remain weak.
“The substantial weakening in the funding and liquidity profiles of the banking sector is a key driver of the negative banking system outlook,” Moody’s said. “The banks continue to rely on short-term central bank funding from the European Central Bank and in some cases from the Central Bank of Ireland.”
Moody’s said that through its support for the troubled banking sector in recent years, the
government has significantly weakened its own credit profile.
“The banks now have to deal with the implications of this as the government aims to reduce its debt burden and restore its financial flexibility,” it said in a statement.
“In our opinion, the substantial reduction in the government's net spending between 2011-2015 is likely to place considerable pressure on the country's recovery prospects. This will have a significant impact on banks' profitability and is leading to a weakening of already poor asset quality,” it said.
The banks' credit exposures to Irish sovereign debt and to government-guaranteed debt issued by the National Asset Management Agency also contributes to the negative outlook on asset quality, it said.
“However, Moody's views the raising of substantial capital in 2011, mainly from the Irish government, as credit positive. The four domestic banks that are supported by the government now have the capital resources to cope with loan losses anticipated by Moody's stress-case scenario,” it said.
AN ANNOUNCEMENT on the future of Government plans to end upward-only commercial rent reviews in existing leases is to be made “shortly”.
Upward-only rent reviews were banned by the last government and legislation to effectively remove such clauses from existing leases is being examined by the Attorney General. The proposal would mean tenants who have an existing lease and who can demonstrate their rent is higher than the market dictates can appeal to their landlord and ultimately the courts to have a new rent set.
Minister for Justice Alan Shatter has previously indicated he would introduce the required changes as part of the Landlord and Tenant (Business Leases Rent Review) Bill 2011, the heads of which were published this year. Further details of the legislation are due to be published by the end of this month.
Asked about the timetable for the introduction of the changes, a spokesman for Mr Shatter said yesterday the Minister would “make an announcement shortly” on the Government’s intentions.
The comment follows a meeting between members of Retail Excellence Ireland (REI), which represents the State’s retailers, and officials of the Department of the Taoiseach. At the meeting, a number of issues such as VAT and the rent-review legislation were raised in the context of the forthcoming budget. It is understood officials were unable to give a fixed date for the introduction of the necessary legislation to end upward-only rent reviews.
David Fitzsimons of Retail Excellence, who attended the meeting, said it was not understood the legislation had been shelved.
“That would be an incorrect interpretation of what happened,” he said. “We understand the Attorney General is looking at some difficulties and there is a very large legislative programme, but we were not told it had been dropped.”
Mr Shatter’s press spokesman said he was not in a position to expand on the issue other than to say the Minister would make an announcement “shortly”.
Mr Shatter has told the Dáil the legislation was forwarded to the Attorney General “for further examination and development, having regard to the complexities attendant on dealing with existing leases”.
He had received representations from property interests “including the Society of Chartered Surveyors, Jones Lang LaSalle, DKM Economic Consultants, Retail Ireland, Retail Excellence Ireland and the Irish Association of Investment Managers”.
While the differential in prices will rise, sagging cross-Border trade could be hit by weakening euro
COULD A two percentage point VAT hike in the next Irish budget really propel more shoppers through the doors of retailers in Northern Ireland?
Major high street stores and supermarkets will certainly be hoping for more than a VAT hike south of the Border to boost their takings if latest industry research is anything to go by.
New figures from the British Retail Consortium show there has been a major slump across the board in the number of shoppers crossing thresholds. Jane Bevis, from the Northern Ireland Retail Consortium, says the number of people going into local stores dropped sharply in the three months to October.
Overall, Northern Ireland suffered a 5.5 per cent drop year on year in footfall between August and October. Not only did the number of shoppers drop sharply but there was also a major increase in the number of empty retail premises, Bevis says.
“Obviously trading is tough; Northern Ireland recorded one of the highest vacancy rates in the UK of 12.9 per cent, which is very significant.
“There is evidence that cross-Border trade has fallen off a bit this year. Major retailers and supermarkets have invested heavily in shopping locations close to the Border and obviously they would like to see an uptake in the numbers again.
“I think a VAT rise could cause a major leakage problem for the Irish Government particularly around Border locations,” Bevis says.
She believes that it is not just the large British multiples that might benefit from a rise in VAT rates in the Republic.
“Smaller retailers and shops also enjoy an associated benefit from any increase in footfall – the more shoppers going into shops the greater the benefit for the whole economy.”
But not everyone is convinced. Northern Bank chief economist Angela McGowan acknowledged the proposed VAT rate rise to 23 per cent – as opposed to the current 20 per cent in the North – will “widen the consumption tax” but she said cross-Border trade is heavily influenced by exchange rate movements.
“Although the euro has fallen only very slightly against the pound during of the ongoing sovereign debt crisis, any further weakness in the euro could easily erode the VAT incentive for people in the Republic to shop north of the Border,” McGowan warns. She believes the current economic backdrop is radically different to 2008 and 2009 when the cross-Border shopping boom was at its height.
“The exchange rate is not quite as favourable. The North’s inflation rate is significantly higher and there remains a significant differential in the VAT rate for the tourism sector – the level of VAT tourism in the North is much higher than the new 9 per cent rate for tourism products in the Republic.
“The last differential serves to remove the incentive for southerners to take a weekend shopping break in the North,” McGowan says.
According to Northern Bank, the North’s retail sector has been one of the hardest-hit local sectors in the economic slowdown. In its latest quarterly sectoral forecast report this week, it estimates there will be growth of just 1 per cent next year and possibly 2.3 per cent for 2013.
It also warns that the odds of the North slipping into recession have increased – to 20 per cent – and that risk could rise depending on how the euro crisis plays out.
The tightrope the economy currently walks is never more evident than in Newry, once regularly glancing over its shoulder at the Celtic Tiger and still the capital of cross-Border shopping. The city is successfully nurturing local exporting successes, such as Norbrook Laboratories and First Derivatives while trying to tend to casualties from the construction crash.
Conor Patterson, president of the Newry Chamber of Commerce and Trade, said the city “like the rest of Northern Ireland, Britain, Ireland and Europe” is trying to find a way out of the economic fog.
“We are not focusing on VAT rates or the like in Newry just now. Times are tough in Newry – it has been a tough 11 months so far and, like the rest of Northern Ireland, we are just battling to hold on to business.
“We have some great manufacturing and local tradeable services companies who are very successful exporters so in one sense it is a mixed bag for us.
“We’re focusing on Newry standing on its own merits – whether or not there is a VAT rise in the South.”
PROPERTY PRICES continued to decline last month, showing the biggest monthly fall in more than two years.
New data from the Central Statistics Office revealed the average price for residential property declined by 2.2 per cent in October, and dropped by an average of 15.1 per cent over the year.
The pace of decline has accelerated from September, when a fall of 14.3 per cent was recorded.
Home prices in Dublin have been more severely affected, falling by 3.1 per cent last month and 17.5 per cent over the year. House prices in the capital dipped by 3.2 per cent in the month, while apartment prices were 2.3 per cent lower. Over the year, house prices declined 17.1 per cent, while apartments were 21.2 per cent lower compared with the same period in 2010.
The rest of the country saw an overall fall in residential property prices of 2 per cent in October, and 13.8 per cent over the year.
Property prices have now fallen 45 per cent since their peak in early 2007. A recent survey of economists by Reuters predicted that house prices would continue to decline for some time, with a 6 per cent fall in 2012.
“Even allowing for the new initiative by Nama to offer a limited amount of mortgages with protection against price falls, as well as lower interest rates from the European Central Bank, the short-term risks to house prices remain to the downside in our view,” Bloxham economist Alan McQuaid said yesterday. He predicted a fall of about 14 per cent for 2011, with a 9 per cent decline next year before prices start to pick up in 2013.
“Dublin house prices are likely to lead the recovery when it does come given that the capital has the biggest concentration of people. But, the reality is that Ireland’s banks, recently faced with a fresh €24 billion bill to bolster their balance sheets, are currently focused on raising capital and selling assets rather than expanding their mortgage books,” he said.
PROPERTY TRANSACTIONS in China’s largest cities have fallen to dangerously low levels.
According to documents obtained earlier this year by the Financial Times, the China Banking Regulatory Commission (CBRC) ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in “stress tests” aimed at determining the health of the Chinese financial system. While Beijing has been trying to rein in sky-high property prices, a China property slump would have a big ripple effect on the global economy. Construction of property accounted for more than 13 per cent of China’s economy last year.
In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China’s 15 biggest cities, according to government data. Nationwide, transactions dropped 11.6 per cent, up from a 7 per cent fall in September.
The fall-off in transactions has affected developers’ cash flows and, in some cases, their ability to repay bank loans.
Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the International Monetary Fund this month as one of the Chinese financial sector’s biggest risks.
The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said they did not take into account the impact fewer deals and lower property prices would have on bank collateral.
The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the EU, where regulators underestimated the potential impact of a sovereign debt crisis. – (Copyright The Financial Times Limited 2011)
THE NATIONAL Asset Management Agency is planning to press ahead with controversial plans to put 750 homes on the market early next year as part of a negative equity protection scheme.
The agency does not need Government approval to proceed, but says it “wants to bring all relevant stakeholders into the process”.
Informed sources say Nama is finalising plans on how the scheme will operate with special mortgages available through three banks, AIB, Bank of Ireland and Permanent TSB.
While it is piloting the sale of 750 homes, the agency has signalled that it would like to sell up to 5,000 homes. The plan created controversy after former minister for housing Willie Penrose expressed concern it was contrary to Government policy and could artificially inflate the property market before it hits the bottom.
The scheme works by waiving 20 per cent of the purchase price of a home if its value continues to fall over the next five years.
For example, if a couple bought a home from the banks via Nama for €200,000, the agency would defer payment of up to 20 per cent – or €40,000 in this instance – of the property’s current value.
The couple would only have to make this payment in five years’ time if the value of the property stays the same or increases. However, if the property is worth less than €200,000, Nama will waive up to €40,000 and repayments would be altered accordingly.
In recent weeks, Mr Penrose wrote to Minister for Finance Michael Noonan warning that providing incentives to buy houses would run counter to Government policies. The housing policy launched earlier this year identified tax incentives for housing as a driver behind the bubble.
While Nama is preparing to launch the scheme early next year, informed sources within Government say it has yet to be signed off. Mr Noonan said the details were being “reviewed” and he would respond to Nama. He noted the scheme had been approved by Nama’s board.
The scheme has attracted criticism. OECD economist Christopher Andre told a conference recently that providing incentives had proved to be “counter-productive” in other countries.
Nama, for its part, insists the scheme is a short-term measure and will not interfere with the market. Officials point out that the move would bring in more taxes. If 5,000 houses or apartments were sold for €200,000 each, this could raise €135 million for the exchequer through VAT receipts.
The most the State could lose, according to Nama, is about €65 million. This is the difference between the amount raised in VAT from the sales and the €200 million which might be waived.
The Construction Industry Federation says it provides a template that could be adopted