Whatever might be said about the planning system and property developers, someone has been doing something right
This summer my holidays included a commitment to visit parts of Ireland I had missed in my youth. Apart from filling in gaps of my knowledge of the country, what struck me most forcefully was the growth, prosperity and quality of the towns and villages I passed through. True, it was summer, with trimmed grass and flowers, but our provincial towns and villages have moved from being the poor relation of western Europe to being up there with the best.
There are some awful cases of design and ribbon development (east Galway) and there is the occasional ghost estate but, whatever might be said about the planning system and about developers, somebody has been doing something mostly right; indeed an awful lot of right things have been done. My wife commented on how vibrant and busy rural Ireland was and contrasted it to rural France. We toured the Cognac region some years ago and saw many boarded-up villages and derelict houses.
Back in the office I decided to look at the statistics to see if the growth I saw on my travels was real or imaginary. It was real: the non-Dublin population grew by 16%, or 357,000 people, from 1996 to 2006.
I shudder to think what that growth might have looked like if planning had been based on a laissez-faire arrangement, as in parts of the USA. It would have been ribbon development everywhere, garish advertising hoardings, few of the new bypasses that speed up journey time and, of course huge amounts of pollution, not to mention the visual impact of self-designed houses. Bad and all as planning might be, non-planning would be much worse.
So we have been doing something nearly right, but not perfectly. The 2010 Planning Act will make some improvement by bolting on an "evidence-based system" dimension to the present system, but it will not eliminate the oversupply/ undersupply issue. This is because the planning system was designed fundamentally to control and direct development, not manage its execution. Under our system, initiating development is left to the market, with some small exceptions. Building and selling is left to developers who seek to make a profit by buying land and constructing buildings – and getting their timing right and taking associated risks.
The planning system is not a land management system. The planning authorities could acquire land, zone it, plan it, service it and then pass it on to builders. Such systems exist in other countries such as Holland and Finland. The planning authorities have the power to do this but they don't, for a variety of reasons not least funding. It would also require a new mindset among the planning authorities (and their political masters) whereby they would identify demand five to 10 years before it arose.
In theory it could work. Each planning authority would become the equivalent of the Dublin Docklands Development Authority or Ballymun Regeneration. In addition to its development plan, each would prepare its land acquisition plan. This would be linked to an infrastructure plan which would be linked to a funding plan which in turn would be linked to an environmental plan. Of course all would be driven by the national spatial strategy and transportation plan – green, of course. It could work like oiled clockwork.
Would it be doable? The answer is 'yes but' and the 'but' is that this is Ireland, with a public administration system designed to manage each council area in accordance with the will of the people via their elected councillors, and a funding system run by the department of finance. This system has lots of political agendas with a scarcity of money and of professionals who understand the property market and can think like developers, not civil servants.
But stand back and imagine what would have happened if we had had such a system between 1996 and 2007? Would such a system have reacted to the sudden property needs of the economy to meet a 10% annual growth in economic activity and more or less satisfied that need? Or would the economic tiger have been stillborn because the plans for new offices, factories and houses were stuck in the department of finance or local government awaiting clearance from a minister, like the Poolbeg incinerator and all the new schools that the department of education was supposed to have built this year?
In reality, if we had such a system, the Celtic Tiger would never have happened. The economic growth of that time needed new buildings fast. Foreign direct investment went mainly into speculative buildings. The Googles and Microsofts and the international banks are nearly all in speculative buildings, along with the supply of housing stock for their workers. Without those new buildings that investment would have gone to another country, one that did not tie its property industry up in red tape and prevent it reacting quickly to market demand. Had we had a land management system focused on supply management by local authorities – the only way to stop the over-building that produced the ghost estates – then we would probably not have had a Celtic Tiger. Take your choice: Celtic Tiger or occasional conspicuous oversupply?
So we have a planning system that fundamentally works but has made mistakes and can only indirectly control supply of new buildings. The primary tool available to planners for managing demand is zoning in the development plan, which is a political function. The second tool is the granting or refusal of planning permission. But if a planning authority refuses permission on land that is zoned and serviced on the grounds that the building may not be needed, they risk a big claim for compensation.
The key tool of land zoning as a means of controlling supply continues to be debased by local political interests. To them, the next local election is more important than the risk of a ghost estate. The new act seeks to rebalance the influence of politicians but not remove it.
So we have a choice: accept and try to improve a human and democratic system that more or less works, or move to a land management system which will almost certainly not work in this country.
Could we please escalate the debate about overbuilding to look at the fundamentals of our system (most of which are good) and stop blaming planners for mistakes made by their political masters by overzoning in the wrong places?
Tuesday, September 14, 2010
When will market go back to normal?
Nama has probably already put a floor to the market prices for commercial property
THE ARRIVAL of autumn and the approaching first anniversary of Nama has forced me to change my focus from thinking about the present state of the Irish property market to try and picture what the property market will look like when “normality” returns. What will be the route from here to there?
Normality will be a marketplace where houses, offices and shops let and sell in volume and at prices which no one gets excited about and everyone takes for granted. It will be like the mid-1990s, where deals were being done, but took a little time and effort, and rents and prices were stable, only rising gently with inflation (low). Credit was available, but limited.
It will take time to get there but when this new normality arrives, estate agents will be doing their thing, valuers will be confident of their pricing and bankers will again rely on property as good security for their loans.
Development projects will have started again but only on schemes that are clearly viable and based on current prices and letting levels – no more blue-sky schemes supported by blue-sky prices and bankers.
This normal property market will be a dull place – a dull place that true property professionals feel comfortable to operate in, collecting rents, arranging viewings, organising contracts. No Get-Rich-Quick-Harrys relying on yield compression and ever-rising prices to justify their existence and scoffing at the old hands. Property will not be the subject of chat in the pub or the taxi.
Three things are stopping us getting to this new marketplace. Firstly, we have a semi-dead economy with little new demand for our big stock of vacant buildings. Secondly, there is little or no credit available to enable transactions to happen. No bridging loans, no mortgage loans for housing. Thirdly, confidence is missing. Everyone is afraid of paying too much, of grabbing a falling knife.
All of these contributed to the downward spiral which was acute during 2009 but eased off in the early part of this year. The graph will flatten out and reach a bottom – that bottom will be in different places in different markets and locations.
But the bottom will arrive and it will arrive quietly – it may have arrived in some places.
We will know the bottom has arrived firstly when vendors refuse to sell (or let) at prices that are patently silly and secondly when buyers with funding have the confidence to sign contracts.
What is a silly price? It is hard to define what a silly price is but measures of prices will include replacement cost and recent lettings or sales (however limited), the availability of some credit and/or equity buyers, and also the gut feeling of grey-haired property professionals. But vendors need really to be able to say no to silly offers and not have bankers or other creditors forcing them to accept that price.
There must be some sort of realisation across the board by bankers and receivers/creditors that it is better to hold on to the asset and wait than sell at that “silly” price.
The most important participant in the Irish market is Nama. It has acquired or is acquiring all its assets based on property valuation levels set as of last November. In recognition of the fact that valuation levels at that date were significantly depressed (being about half what they were at the top of the boom),
Nama are paying a small mark-up, averaging about 10 per cent, known as long term economic value.
It is highly unlikely that Nama will sell assets at below its buy-in price and this, in my view, gives us a major yardstick as to what is a possible floor to the market and an indication of what is or is not a silly price. This is not public knowledge but it is not hard to make an educated guess.
Nama is now working through the business plans for its clients and these will provide for sales of the underlying property asset over a period of years. It is highly unlikely that Nama will approve any disposals in these business plans at prices below its buy-in price plus long-term economic value margin.
So Nama in practical terms has probably already put a floor to the market prices for commercial assets. We may be at the floor for Nama-type properties. The same cannot be said for the residential market where prices continue to sag as it is a totally fragmented market with no key player. I will come back to the residential market later.
Two things could upset the floor set by Nama in its marketplace, which is mainly the commercial market: first, disposals by non-Nama banks and their receivers could force down values below those of last November; second, if Nama does not have the patience or the capacity to delay disposals by its clients until the market can absorb those sales at their buy-in prices.
This will be a hard one to call for the Nama board who will want to start getting money back asap. On the other hand, its annual cost of funds is low and the ECB is patient.
With this unofficial floor to the market set by Nama, is now a good time to buy?
With a yield spectrum of 7 per cent-plus on quality Dublin city buildings and reflecting rents that are below replacement cost, I think there is now good value out there for long-term commercial investors.
Putting my money where my mouth is I have personally transferred a chunk of my (depleted) pension fund into quality Irish property both directly by participating in the purchasing of an individual office building and indirectly by acquiring units in unit- linked property funds.
I am advising my risk-tolerant clients to follow suit and some of them are acting on that advice. There is a risk that we may not be quite at the bottom but history shows it is impossible to get timing perfect and one has to take a view. If there is a fall ahead it will not be a big fall and I am quite happy to take that chance with quality Dublin property as time will undoubtedly cure any premature acquisitions.
Turning to the residential market the big issue is that no one is setting any kind of floor – there is no Nama effect. The determination of what is a “silly” price is left to the individual. If he or she wants to sell simply for personal convenience then they may choose to postpone that sale.
But in some cases they may not have any choice but to sell so as to meet other liabilities. Again, if it is a family home there may be some protection but if it is a second home or a holiday home it is likely to be a forced sale with a ripple effect on the rest of the local market.
I would personally be a slow buyer in the residential market unless I was very focused on a particular market segment and could identify value there. The Government should do something to assist confidence in the residential sector such as putting a temporary moratorium on stamp duty to reduce the huge transactional costs associated and encourage individuals to trade up or down. The revenue lost would be small in relation to the positive impact of getting the market moving and the flow through to the overall economy
THE ARRIVAL of autumn and the approaching first anniversary of Nama has forced me to change my focus from thinking about the present state of the Irish property market to try and picture what the property market will look like when “normality” returns. What will be the route from here to there?
Normality will be a marketplace where houses, offices and shops let and sell in volume and at prices which no one gets excited about and everyone takes for granted. It will be like the mid-1990s, where deals were being done, but took a little time and effort, and rents and prices were stable, only rising gently with inflation (low). Credit was available, but limited.
It will take time to get there but when this new normality arrives, estate agents will be doing their thing, valuers will be confident of their pricing and bankers will again rely on property as good security for their loans.
Development projects will have started again but only on schemes that are clearly viable and based on current prices and letting levels – no more blue-sky schemes supported by blue-sky prices and bankers.
This normal property market will be a dull place – a dull place that true property professionals feel comfortable to operate in, collecting rents, arranging viewings, organising contracts. No Get-Rich-Quick-Harrys relying on yield compression and ever-rising prices to justify their existence and scoffing at the old hands. Property will not be the subject of chat in the pub or the taxi.
Three things are stopping us getting to this new marketplace. Firstly, we have a semi-dead economy with little new demand for our big stock of vacant buildings. Secondly, there is little or no credit available to enable transactions to happen. No bridging loans, no mortgage loans for housing. Thirdly, confidence is missing. Everyone is afraid of paying too much, of grabbing a falling knife.
All of these contributed to the downward spiral which was acute during 2009 but eased off in the early part of this year. The graph will flatten out and reach a bottom – that bottom will be in different places in different markets and locations.
But the bottom will arrive and it will arrive quietly – it may have arrived in some places.
We will know the bottom has arrived firstly when vendors refuse to sell (or let) at prices that are patently silly and secondly when buyers with funding have the confidence to sign contracts.
What is a silly price? It is hard to define what a silly price is but measures of prices will include replacement cost and recent lettings or sales (however limited), the availability of some credit and/or equity buyers, and also the gut feeling of grey-haired property professionals. But vendors need really to be able to say no to silly offers and not have bankers or other creditors forcing them to accept that price.
There must be some sort of realisation across the board by bankers and receivers/creditors that it is better to hold on to the asset and wait than sell at that “silly” price.
The most important participant in the Irish market is Nama. It has acquired or is acquiring all its assets based on property valuation levels set as of last November. In recognition of the fact that valuation levels at that date were significantly depressed (being about half what they were at the top of the boom),
Nama are paying a small mark-up, averaging about 10 per cent, known as long term economic value.
It is highly unlikely that Nama will sell assets at below its buy-in price and this, in my view, gives us a major yardstick as to what is a possible floor to the market and an indication of what is or is not a silly price. This is not public knowledge but it is not hard to make an educated guess.
Nama is now working through the business plans for its clients and these will provide for sales of the underlying property asset over a period of years. It is highly unlikely that Nama will approve any disposals in these business plans at prices below its buy-in price plus long-term economic value margin.
So Nama in practical terms has probably already put a floor to the market prices for commercial assets. We may be at the floor for Nama-type properties. The same cannot be said for the residential market where prices continue to sag as it is a totally fragmented market with no key player. I will come back to the residential market later.
Two things could upset the floor set by Nama in its marketplace, which is mainly the commercial market: first, disposals by non-Nama banks and their receivers could force down values below those of last November; second, if Nama does not have the patience or the capacity to delay disposals by its clients until the market can absorb those sales at their buy-in prices.
This will be a hard one to call for the Nama board who will want to start getting money back asap. On the other hand, its annual cost of funds is low and the ECB is patient.
With this unofficial floor to the market set by Nama, is now a good time to buy?
With a yield spectrum of 7 per cent-plus on quality Dublin city buildings and reflecting rents that are below replacement cost, I think there is now good value out there for long-term commercial investors.
Putting my money where my mouth is I have personally transferred a chunk of my (depleted) pension fund into quality Irish property both directly by participating in the purchasing of an individual office building and indirectly by acquiring units in unit- linked property funds.
I am advising my risk-tolerant clients to follow suit and some of them are acting on that advice. There is a risk that we may not be quite at the bottom but history shows it is impossible to get timing perfect and one has to take a view. If there is a fall ahead it will not be a big fall and I am quite happy to take that chance with quality Dublin property as time will undoubtedly cure any premature acquisitions.
Turning to the residential market the big issue is that no one is setting any kind of floor – there is no Nama effect. The determination of what is a “silly” price is left to the individual. If he or she wants to sell simply for personal convenience then they may choose to postpone that sale.
But in some cases they may not have any choice but to sell so as to meet other liabilities. Again, if it is a family home there may be some protection but if it is a second home or a holiday home it is likely to be a forced sale with a ripple effect on the rest of the local market.
I would personally be a slow buyer in the residential market unless I was very focused on a particular market segment and could identify value there. The Government should do something to assist confidence in the residential sector such as putting a temporary moratorium on stamp duty to reduce the huge transactional costs associated and encourage individuals to trade up or down. The revenue lost would be small in relation to the positive impact of getting the market moving and the flow through to the overall economy
Monday, June 21, 2010
It's easy to find the price of everything except property
We urgently need a property price database so buyers and sellers don't have to rely on biased figures supplied by vested interests
If you want to find the price of an air ticket to Timbuktu or anywhere else in the world all you have to do is to Google it and hey presto, you have at least five or six competitive prices. However, if you want to find the sale price of a house in your street last month or last year, it is virtually impossible to get accurate information.
The best you can do is look up Daft.ie or similar websites for current properties for sale or to ask a local auctioneer for a valuation.
The media used to publish auction results and get details of deals from estate agents but this has effectively stopped due to the Data Protection Act, the theory being that the detail of a deal between two parties is private and can only be released with their permission. The result is that we have a very imperfect method of accurately knowing actual transaction prices.
Asking prices are no substitute for knowing what the deal was signed at, particularly in a falling market.
Thus, in Ireland we have full information for the most mundane of transactions such as booking air travel, selecting a restaurant or buying a car but for really serious transactions like buying a house, a farm or a business premises, we have to rely on biased information provided by estate agents acting for vendors or pay for a valuation. Very anti-consumer!
This is in marked contrast to other countries. In the UK, by simply going to the Land Registry website and typing in an address, you can ascertain the sale price of all transactions in that location over the past 10 years. Not only will you have prices but also the size of the unit, number of bedrooms, whether it is terraced or detached and also what properties are for sale in the location and their asking price.
This is information to kill for if you are thinking of buying a house or indeed selling one. It is putting really powerful information into the hands of the consumer.
In the UK, the Land Registration does this by gathering data on individual property sales through questions on house sizes, number of bedrooms and type of premises etc.
In the US, the system is older and not as detailed as in the UK but again the information on all property transactions is available to the public.
So ingrained is the availability of information on transactions in the US system that the valuation profession there operates not by giving a simple personal opinion or market value, as in Ireland, but by listing and then analysing all the recent transactions and then giving a reasoned opinion about the value of a particular property based on this public information. If you were buying a car, or even having a house built, you would get this kind of information but it is simply not available here for the biggest purchase most people make in their lives.
It is not as if the information on transaction prices does not exist in Ireland. Indeed, it has been a legal requirement that the sale price of all property transactions is made available not only to the Revenue but also to the Valuation Office whenever a transaction takes place. The Revenue needs the information for stamp duty and other taxation purposes and the theory is that the Valuation Office requires the information so that it can keep rating valuations up to date – that was the concept anyway back in 1837 when the obligation to give the price originated. One suspects that the Valuation Office information goes into a big box and nothing is done with it. It would be an easy thing to put it on a database and make it accessible through the web.
There are about 500,000 property transactions every year, which could be used to create a most useful database not only for the average punter wanting to buy or sell a house but also for urban planners and population and economic analysis.
It seems crazy that in 2010 we are relying on information for new house completions from the ESB's meter connections. It is equally crazy to be dependant on mortgage firms such as Permanent TSB to know the trend in house prices.
We should know the facts – not shadowy trends which are way out of date and which ignore a significant number of deals not involving mortgages.
The task of compiling a property database should be specifically given by statute to the Land Registry.
The Land Registry has been making huge strides in improving its services. It now has a most impressive data-management system and its services to the legal and allied professions are becoming world-class. It could quite easily extend its services, if it was so empowered, to make the same information public as is available from the UK Land Registry.
The failure to match international standards on property information is blamed on the data commissioner and the provisions of the Data Protection Act. This is just not good enough. This is a system failure of government.
The Data Protection Act was enacted in Ireland as a result of and based on an EU directive. So how come the UK and other European countries which operate under the same EU directive can publish such information?
Either our act goes further than it needs to and should urgently be amended or the data commissioner needs to look at the real world. We need to grasp this nettle and accept that such information be made available in the public interest.
If we aspire to be a world-class economy we need world-class information and a good place to start is with our information on property transactions. Small-minded privacy for no obvious benefit versus public interest?
If you want to find the price of an air ticket to Timbuktu or anywhere else in the world all you have to do is to Google it and hey presto, you have at least five or six competitive prices. However, if you want to find the sale price of a house in your street last month or last year, it is virtually impossible to get accurate information.
The best you can do is look up Daft.ie or similar websites for current properties for sale or to ask a local auctioneer for a valuation.
The media used to publish auction results and get details of deals from estate agents but this has effectively stopped due to the Data Protection Act, the theory being that the detail of a deal between two parties is private and can only be released with their permission. The result is that we have a very imperfect method of accurately knowing actual transaction prices.
Asking prices are no substitute for knowing what the deal was signed at, particularly in a falling market.
Thus, in Ireland we have full information for the most mundane of transactions such as booking air travel, selecting a restaurant or buying a car but for really serious transactions like buying a house, a farm or a business premises, we have to rely on biased information provided by estate agents acting for vendors or pay for a valuation. Very anti-consumer!
This is in marked contrast to other countries. In the UK, by simply going to the Land Registry website and typing in an address, you can ascertain the sale price of all transactions in that location over the past 10 years. Not only will you have prices but also the size of the unit, number of bedrooms, whether it is terraced or detached and also what properties are for sale in the location and their asking price.
This is information to kill for if you are thinking of buying a house or indeed selling one. It is putting really powerful information into the hands of the consumer.
In the UK, the Land Registration does this by gathering data on individual property sales through questions on house sizes, number of bedrooms and type of premises etc.
In the US, the system is older and not as detailed as in the UK but again the information on all property transactions is available to the public.
So ingrained is the availability of information on transactions in the US system that the valuation profession there operates not by giving a simple personal opinion or market value, as in Ireland, but by listing and then analysing all the recent transactions and then giving a reasoned opinion about the value of a particular property based on this public information. If you were buying a car, or even having a house built, you would get this kind of information but it is simply not available here for the biggest purchase most people make in their lives.
It is not as if the information on transaction prices does not exist in Ireland. Indeed, it has been a legal requirement that the sale price of all property transactions is made available not only to the Revenue but also to the Valuation Office whenever a transaction takes place. The Revenue needs the information for stamp duty and other taxation purposes and the theory is that the Valuation Office requires the information so that it can keep rating valuations up to date – that was the concept anyway back in 1837 when the obligation to give the price originated. One suspects that the Valuation Office information goes into a big box and nothing is done with it. It would be an easy thing to put it on a database and make it accessible through the web.
There are about 500,000 property transactions every year, which could be used to create a most useful database not only for the average punter wanting to buy or sell a house but also for urban planners and population and economic analysis.
It seems crazy that in 2010 we are relying on information for new house completions from the ESB's meter connections. It is equally crazy to be dependant on mortgage firms such as Permanent TSB to know the trend in house prices.
We should know the facts – not shadowy trends which are way out of date and which ignore a significant number of deals not involving mortgages.
The task of compiling a property database should be specifically given by statute to the Land Registry.
The Land Registry has been making huge strides in improving its services. It now has a most impressive data-management system and its services to the legal and allied professions are becoming world-class. It could quite easily extend its services, if it was so empowered, to make the same information public as is available from the UK Land Registry.
The failure to match international standards on property information is blamed on the data commissioner and the provisions of the Data Protection Act. This is just not good enough. This is a system failure of government.
The Data Protection Act was enacted in Ireland as a result of and based on an EU directive. So how come the UK and other European countries which operate under the same EU directive can publish such information?
Either our act goes further than it needs to and should urgently be amended or the data commissioner needs to look at the real world. We need to grasp this nettle and accept that such information be made available in the public interest.
If we aspire to be a world-class economy we need world-class information and a good place to start is with our information on property transactions. Small-minded privacy for no obvious benefit versus public interest?
Timing is everything in property investment
Income production rather than capital value potential must become the focus on property investment.
RECENT STATISTICS show that the value of my house, together with most other property, is back to the value it was in 2002 which is just half its 2007 value.
The national average house price today, according to the Permanent TSB/ESRI House Price Index Q1 2010 at €204,830, shows a fall of 34 per cent from its peak value in Q4 2006 (numerically a 33.3 per cent fall equals to a 50 per cent rise).
For Dublin houses, this fall is even greater at nearly 42 per cent from their peak in 2007. Such a fall means that any capital gains made since 2002 have been completely wiped out. As a result, anyone who made a capital gain out of property over the last eight years is offset by someone who has lost an equal amount of money – a zero sum game.
For example, if I had sold my house in 2007 for nearly double the price I paid for it in 2002, I would now be able to buy it back for half that figure.
The same concept applies to all houses, offices blocks, shopping centres, etc, throughout Ireland. So, for the past 10 years property has been a rotten investment of capital and a poor producer of income. Unless, of course, you were lucky enough to buy before 2001 or sell before 2006/7.
This must question the inherent belief that “property is a good long-term investment” which seems an intrinsic part of the Irish psyche.
Have we been fooling ourselves? If we look back at the IPD and TSB statistics for the period before 2000, we can see an interesting argument to say that property might be a good long-term investment – but only if you have to get your timing right. Most investors don’t.
By looking at these statistics, we can see the importance of timing plus the role of income. Had I bought property in any of the years between 1986 and 1996, the capital value would have remained almost static up to 1996 but I would have had a high income yield of close to 7 per cent per annum.
All the focus over the period between 2000 and 2010 on capital gain misses a key factor in property investment which is the income side of the equation. When I started in the property business in the 1960s, property was then regarded as being all about income. Capital gain was only a “kicker” to compensate for inflation. Over the past decade the income side of the equation has been downplayed and regarded only as the means to pay interest on borrowing while capital values (supposedly) grew and grew.
The belief being that the leveraged equity would make millionaires out of investors. Those (few) who sold before 2007 fulfilled this dream – but left the purchaser and his bank (plus the taxpayer) with a hole in the bucket.
So property can be a good form of investment but with a key qualification – you have to get your timing right. So what about the next decade. Will we see values recover back to 2007 levels? In my view the answer is yes – eventually, but not for a very, very, long time – say 10 years give or take. The focus on property must change to its income-producing characteristics rather than its capital value potential. History and its statistics tell us why. Let me look at the period from 1996 to 2000.
In 1996 the economy was recovering from a long period of stagnation. Rents had remained almost static for over 10 years, inflation had been pushing up construction costs and it was not viable to build new commercial buildings as values were below cost.
However, new buildings were scarce and were needed to house the emerging service industry. To overcome this problem, the Government introduced double rent tax allowances for selected sites and in particular the IFSC. This effectively gave a subsidy for property development by making the space cheaper to occupy for tenants and allowing rents to rise to levels which made development projects viable. It was a good idea.
It kick-started the development industry which then flowed out beyond the selected designated sites. The economy boomed and rents doubled in that period. Prime office rent in the central business district of Dublin moved from £14 to £28 per square foot.
The interesting thing about that period is that property yields did not change significantly. The average income yield for an institutional property portfolio for that period was close to 7 per cent. The real rot set in about 2002 when values started to be driven by yield compression and not rental growth. Average office portfolio yields fell to 5.2 per cent by the end of 2002 and down to 3.8 per cent in 2007 which was the zenith of the market. It is back to slightly short of 8 per cent today.
One consequence of this artificial rise in property values linked to the availability of money was the speculative-driven growth in the supply of floor space.
By way of example, the vacancy rate (or supply) of Dublin offices rose from just under 5 per cent in 2000 to 14 per cent in 2006. The current office vacancy rate in Dublin is estimated at 23 per cent.
The vacancy rate in a major international metropolitan area would range from 6 to 8 per cent in normal times. We have enough offices in Dublin to take us well into the next economic recovery.
However, every property bust contains the seeds of the next recovery. Due to the fall in values it is not economically viable to build new commercial buildings. Thus, over time, a shortage of space will emerge and sooner – but probably later – we will have the same thing happen as occurred in the period 1996- 2000, a real growth in values driven by fundamentals.
My belief is that property is a safe buy today because we are at, or close to, the bottom. But remember, property investment is primarily about income and long-term inflation protection. Only the very skilled or the very lucky can achieve quick capital gains. A lot of people recently learned this lesson the hard way but will the punter remember? Investing in property is not a zero sum game provided you focus on the income and also get your timing right..
RECENT STATISTICS show that the value of my house, together with most other property, is back to the value it was in 2002 which is just half its 2007 value.
The national average house price today, according to the Permanent TSB/ESRI House Price Index Q1 2010 at €204,830, shows a fall of 34 per cent from its peak value in Q4 2006 (numerically a 33.3 per cent fall equals to a 50 per cent rise).
For Dublin houses, this fall is even greater at nearly 42 per cent from their peak in 2007. Such a fall means that any capital gains made since 2002 have been completely wiped out. As a result, anyone who made a capital gain out of property over the last eight years is offset by someone who has lost an equal amount of money – a zero sum game.
For example, if I had sold my house in 2007 for nearly double the price I paid for it in 2002, I would now be able to buy it back for half that figure.
The same concept applies to all houses, offices blocks, shopping centres, etc, throughout Ireland. So, for the past 10 years property has been a rotten investment of capital and a poor producer of income. Unless, of course, you were lucky enough to buy before 2001 or sell before 2006/7.
This must question the inherent belief that “property is a good long-term investment” which seems an intrinsic part of the Irish psyche.
Have we been fooling ourselves? If we look back at the IPD and TSB statistics for the period before 2000, we can see an interesting argument to say that property might be a good long-term investment – but only if you have to get your timing right. Most investors don’t.
By looking at these statistics, we can see the importance of timing plus the role of income. Had I bought property in any of the years between 1986 and 1996, the capital value would have remained almost static up to 1996 but I would have had a high income yield of close to 7 per cent per annum.
All the focus over the period between 2000 and 2010 on capital gain misses a key factor in property investment which is the income side of the equation. When I started in the property business in the 1960s, property was then regarded as being all about income. Capital gain was only a “kicker” to compensate for inflation. Over the past decade the income side of the equation has been downplayed and regarded only as the means to pay interest on borrowing while capital values (supposedly) grew and grew.
The belief being that the leveraged equity would make millionaires out of investors. Those (few) who sold before 2007 fulfilled this dream – but left the purchaser and his bank (plus the taxpayer) with a hole in the bucket.
So property can be a good form of investment but with a key qualification – you have to get your timing right. So what about the next decade. Will we see values recover back to 2007 levels? In my view the answer is yes – eventually, but not for a very, very, long time – say 10 years give or take. The focus on property must change to its income-producing characteristics rather than its capital value potential. History and its statistics tell us why. Let me look at the period from 1996 to 2000.
In 1996 the economy was recovering from a long period of stagnation. Rents had remained almost static for over 10 years, inflation had been pushing up construction costs and it was not viable to build new commercial buildings as values were below cost.
However, new buildings were scarce and were needed to house the emerging service industry. To overcome this problem, the Government introduced double rent tax allowances for selected sites and in particular the IFSC. This effectively gave a subsidy for property development by making the space cheaper to occupy for tenants and allowing rents to rise to levels which made development projects viable. It was a good idea.
It kick-started the development industry which then flowed out beyond the selected designated sites. The economy boomed and rents doubled in that period. Prime office rent in the central business district of Dublin moved from £14 to £28 per square foot.
The interesting thing about that period is that property yields did not change significantly. The average income yield for an institutional property portfolio for that period was close to 7 per cent. The real rot set in about 2002 when values started to be driven by yield compression and not rental growth. Average office portfolio yields fell to 5.2 per cent by the end of 2002 and down to 3.8 per cent in 2007 which was the zenith of the market. It is back to slightly short of 8 per cent today.
One consequence of this artificial rise in property values linked to the availability of money was the speculative-driven growth in the supply of floor space.
By way of example, the vacancy rate (or supply) of Dublin offices rose from just under 5 per cent in 2000 to 14 per cent in 2006. The current office vacancy rate in Dublin is estimated at 23 per cent.
The vacancy rate in a major international metropolitan area would range from 6 to 8 per cent in normal times. We have enough offices in Dublin to take us well into the next economic recovery.
However, every property bust contains the seeds of the next recovery. Due to the fall in values it is not economically viable to build new commercial buildings. Thus, over time, a shortage of space will emerge and sooner – but probably later – we will have the same thing happen as occurred in the period 1996- 2000, a real growth in values driven by fundamentals.
My belief is that property is a safe buy today because we are at, or close to, the bottom. But remember, property investment is primarily about income and long-term inflation protection. Only the very skilled or the very lucky can achieve quick capital gains. A lot of people recently learned this lesson the hard way but will the punter remember? Investing in property is not a zero sum game provided you focus on the income and also get your timing right..
Wednesday, April 28, 2010
Docklands planning model produced the goods
The development of Dublin's docklands is testament to how an integrated social, economic and physical development agency with planning scheme capacity works.
The approach to planning in Dublin’s docklands is not flawed but the DDDA would have benefited from a performance review.
IT’S HARD TO see how the Dublin Docklands Development Authority (DDDA) can recover from its predicament.
It has finished up in a very bad place with potentially huge liabilities and not even enough cash to keep up the maintenance of the place. Perhaps it is about to pass away and be forgotten?
However, its immense legacy – and of the Custom House Docks Development Authority before it – cannot be ignored. Anyone who visited Sheriff Street, the North Wall or the Dublin Gas Works on Sir John Rogerson’s Quay in the mid-1990s will tell you how much and how quickly the place has changed.
From being a post-industrial economic wasteland it is now an ultra-modern mixed-use extension to the central business district of Dublin. Some argue that it is the new central business zone with such a concentration of banking, financial services and almost all the main legal firms based there.
Since the DDDA was set up in 1997 there must have been over 929,030sq m (10 million sq ft) of development along the river. The population of the area is up by 6,000 and the number of jobs has increased by 20,000.
The physical legacy of the docklands initiative also includes the riverside campshires, the conversion of the contaminated gas site into Grand Canal Square, the National College of Ireland campus, the soon-to-open National Conference Centre, the O2 arena, the Grand Canal Theatre, the Seán O’Casey Bridge, the Samuel Beckett Bridge, the restored Spencer Dock and the docklands Luas extension.
The DDDA has invested huge resources in educational and other social development programmes and, by the operation of the Docklands Council, kept a close relationship with community and other stakeholders while all this was happening.
The DDDA didn’t do all of this itself: there was a development strategy it managed against a masterplan vision which made the various elements viable.
It may be that you wouldn’t need a DDDA-type of organisation for every large scale regeneration project but the value of having the DDDA is that the vision of the original 1997 masterplan is substantially achieved and, up until the disaster of the Glass Bottle site, the DDDA hadn’t cost the taxpayer a cent.
I’ve read reports that the planning system in the docklands was unfair because it didn’t allow third party appeal. That is a misunderstanding of the planning process. The point of docklands planning was to plan an entire area in a transparent and predictable way. The DDDA had to work up its planning schemes and go through all the advertising, consultation and public meeting processes, including close liaison with Dublin City Council.
After that, the council of the DDDA had to be satisfied that the planning scheme was appropriate in its social, economic and physical proposal before it was put to the minister for approval. That was, in effect, the planning application.
The subsequent Section 25s were only notes to confirm that a building design conformed to the planning scheme and there was no need to waste time going back through all the consultation processes a second time. The quick turnaround of these Section 25s was the key to the rapid development of the docklands. Without it we would only have half a docklands and it may even have been too slow a process to give the level of confidence to achieve even that.
When mistakes are made recriminations will follow. But, even if the DDDA lost its way and blew everything on a high-risk land deal, we should not rush to conclude that the concept of an integrated social, economic and physical development agency with planning scheme capacity – as laid down in the DDDA Act of 1997 – is flawed. It is not, and the output of the docklands project is testament to that.
Perhaps, before 12 years of operations expired, the DDDA might have benefited from a performance review. But let’s not suggest that the model must be wrong because we waited until the engine blew up before checking the oil.
The approach to planning in Dublin’s docklands is not flawed but the DDDA would have benefited from a performance review.
IT’S HARD TO see how the Dublin Docklands Development Authority (DDDA) can recover from its predicament.
It has finished up in a very bad place with potentially huge liabilities and not even enough cash to keep up the maintenance of the place. Perhaps it is about to pass away and be forgotten?
However, its immense legacy – and of the Custom House Docks Development Authority before it – cannot be ignored. Anyone who visited Sheriff Street, the North Wall or the Dublin Gas Works on Sir John Rogerson’s Quay in the mid-1990s will tell you how much and how quickly the place has changed.
From being a post-industrial economic wasteland it is now an ultra-modern mixed-use extension to the central business district of Dublin. Some argue that it is the new central business zone with such a concentration of banking, financial services and almost all the main legal firms based there.
Since the DDDA was set up in 1997 there must have been over 929,030sq m (10 million sq ft) of development along the river. The population of the area is up by 6,000 and the number of jobs has increased by 20,000.
The physical legacy of the docklands initiative also includes the riverside campshires, the conversion of the contaminated gas site into Grand Canal Square, the National College of Ireland campus, the soon-to-open National Conference Centre, the O2 arena, the Grand Canal Theatre, the Seán O’Casey Bridge, the Samuel Beckett Bridge, the restored Spencer Dock and the docklands Luas extension.
The DDDA has invested huge resources in educational and other social development programmes and, by the operation of the Docklands Council, kept a close relationship with community and other stakeholders while all this was happening.
The DDDA didn’t do all of this itself: there was a development strategy it managed against a masterplan vision which made the various elements viable.
It may be that you wouldn’t need a DDDA-type of organisation for every large scale regeneration project but the value of having the DDDA is that the vision of the original 1997 masterplan is substantially achieved and, up until the disaster of the Glass Bottle site, the DDDA hadn’t cost the taxpayer a cent.
I’ve read reports that the planning system in the docklands was unfair because it didn’t allow third party appeal. That is a misunderstanding of the planning process. The point of docklands planning was to plan an entire area in a transparent and predictable way. The DDDA had to work up its planning schemes and go through all the advertising, consultation and public meeting processes, including close liaison with Dublin City Council.
After that, the council of the DDDA had to be satisfied that the planning scheme was appropriate in its social, economic and physical proposal before it was put to the minister for approval. That was, in effect, the planning application.
The subsequent Section 25s were only notes to confirm that a building design conformed to the planning scheme and there was no need to waste time going back through all the consultation processes a second time. The quick turnaround of these Section 25s was the key to the rapid development of the docklands. Without it we would only have half a docklands and it may even have been too slow a process to give the level of confidence to achieve even that.
When mistakes are made recriminations will follow. But, even if the DDDA lost its way and blew everything on a high-risk land deal, we should not rush to conclude that the concept of an integrated social, economic and physical development agency with planning scheme capacity – as laid down in the DDDA Act of 1997 – is flawed. It is not, and the output of the docklands project is testament to that.
Perhaps, before 12 years of operations expired, the DDDA might have benefited from a performance review. But let’s not suggest that the model must be wrong because we waited until the engine blew up before checking the oil.
Tuesday, April 13, 2010
Planning must be for people, not developers
The Irish Planning Institute, of which I am a founder member, is focused on improving the art and science of town planning. Next Thursday and Friday the institute holds its annual conference in Tullamore, with the theme 'Planning for a Smarter Ireland'. It will focus on smart enterprise and the green new deal. It will suggest solutions to 'ghost estates', deal with the development of town centres and discuss smart travel. Planning overseas will be examined, with a case study of the city of Helsinki.
Speakers will include planners, property specialists and the chair of An Bord Pleanála. The conference will be attended by county councillors, county and city administrators, planners, designers and other urban professionals. I will be speaking to my planning peers about the challenge of ghost estates.
You might ask, 'What has planning got to do with property?' The answer is, quite a lot. Planning is the process of orderly management of urban growth and change. The output of good planning is good cities and towns. A quality community with good infrastructure is a good place in which to invest in property, to live and to run businesses. Well-managed towns with good environments are recognised as growth centres by business residents and investors. Property investors have long appreciated that well-planned and well-managed cities attract investment, while those that are badly planned or managed do not. For example, not long ago I invested in the town centre of Bath, England, which I regard as a very safe long-term urban environment, and I am hopeful of a good long-term return.
Back to this week's conference. We now have somewhere between 100,000 and 170,000 surplus housing units in estates which range in location and specification from excellent to awful. Some of the estates are incomplete to one degree or another. The dilemma considered on Wednesday will be: who does what about this situation? Planners? Government? Developers? Bankers? Nama? County councillors?
Our conference will look rationally and without emotion at the property and planning issues. The good news is that the market will – eventually – solve the problem in the majority of situations. The bad news is that the cost of maintaining a unit in good order is about €1,500 each year, or much more if there are infrastructure deficiencies. If these costs are not paid by someone, then both buildings and infrastructure will disintegrate, leading to a risk of slum estates. This situation is very hard on buyers who acquired units at full market prices, and they must be built into the equation.
Many of the developers controlling these estates are insolvent and owe more than they can expect to realise from low-price sales. Their motivation to find a solution may be impaired as a result and we may have to focus on banks, Nama and liquidators. Many professional builders who hope to be in the game in five years may stay involved, but where amateurs are involved as developers, they will just want out.
When liquidators are appointed in insolvency cases, their statutory duty is to realise liquid assets for their banking clients as quickly as possible and to as great an extent as possible. They have no community-focused remit. This results in fire sales and further falls in prices, as witnessed by the recent sale of apartments in Mullingar for about €70,000 – less than 50% of what they cost to build, well below the original pre-sales price and probably less than the original land cost.
Some ghost estates will come into the Nama remit. Those that do may be the lucky ones, because Nama will go about managing its loans and related assets in a structured and responsible way. Nama has a long-term remit and will have funds available in suitable cases to maintain these assets pending market recovery.
One of the past problems of Irish town planning was that it did not encompass the full gamut of stakeholders necessary to build a proper urban environment. Education is planned by the Department of Education, health by the HSE, transport by the RPA, etc. Heretofore there has been poor coordination (and indeed sheer stupidity) as agencies competed at political, regional and administrative levels. Various legislative and administrative steps are currently being taken, including giving teeth to regional planning authorities. These hoped-for solutions are in the Planning Bill currently before the Dáil. Undoubtedly many of these issues will also be debated in Tullamore.
The really hard cases will be those estates that have little or no prospect of long-term demands and are apart from Nama.
Speakers will include planners, property specialists and the chair of An Bord Pleanála. The conference will be attended by county councillors, county and city administrators, planners, designers and other urban professionals. I will be speaking to my planning peers about the challenge of ghost estates.
You might ask, 'What has planning got to do with property?' The answer is, quite a lot. Planning is the process of orderly management of urban growth and change. The output of good planning is good cities and towns. A quality community with good infrastructure is a good place in which to invest in property, to live and to run businesses. Well-managed towns with good environments are recognised as growth centres by business residents and investors. Property investors have long appreciated that well-planned and well-managed cities attract investment, while those that are badly planned or managed do not. For example, not long ago I invested in the town centre of Bath, England, which I regard as a very safe long-term urban environment, and I am hopeful of a good long-term return.
Back to this week's conference. We now have somewhere between 100,000 and 170,000 surplus housing units in estates which range in location and specification from excellent to awful. Some of the estates are incomplete to one degree or another. The dilemma considered on Wednesday will be: who does what about this situation? Planners? Government? Developers? Bankers? Nama? County councillors?
Our conference will look rationally and without emotion at the property and planning issues. The good news is that the market will – eventually – solve the problem in the majority of situations. The bad news is that the cost of maintaining a unit in good order is about €1,500 each year, or much more if there are infrastructure deficiencies. If these costs are not paid by someone, then both buildings and infrastructure will disintegrate, leading to a risk of slum estates. This situation is very hard on buyers who acquired units at full market prices, and they must be built into the equation.
Many of the developers controlling these estates are insolvent and owe more than they can expect to realise from low-price sales. Their motivation to find a solution may be impaired as a result and we may have to focus on banks, Nama and liquidators. Many professional builders who hope to be in the game in five years may stay involved, but where amateurs are involved as developers, they will just want out.
When liquidators are appointed in insolvency cases, their statutory duty is to realise liquid assets for their banking clients as quickly as possible and to as great an extent as possible. They have no community-focused remit. This results in fire sales and further falls in prices, as witnessed by the recent sale of apartments in Mullingar for about €70,000 – less than 50% of what they cost to build, well below the original pre-sales price and probably less than the original land cost.
Some ghost estates will come into the Nama remit. Those that do may be the lucky ones, because Nama will go about managing its loans and related assets in a structured and responsible way. Nama has a long-term remit and will have funds available in suitable cases to maintain these assets pending market recovery.
One of the past problems of Irish town planning was that it did not encompass the full gamut of stakeholders necessary to build a proper urban environment. Education is planned by the Department of Education, health by the HSE, transport by the RPA, etc. Heretofore there has been poor coordination (and indeed sheer stupidity) as agencies competed at political, regional and administrative levels. Various legislative and administrative steps are currently being taken, including giving teeth to regional planning authorities. These hoped-for solutions are in the Planning Bill currently before the Dáil. Undoubtedly many of these issues will also be debated in Tullamore.
The really hard cases will be those estates that have little or no prospect of long-term demands and are apart from Nama.
Seeds of the next property cycle are germinating
All indications are that the market will bottom out in 2010 followed by a slow recovery in values in the years ahead
We all know property values have crashed but the anatomy of that crash has become clear with the recent publication of the Society of Chartered Surveyors/Investment Property Database (SCS/IPD) figures and in particular those for the past two years. This is a database of institutional properties and their valuations from a number of banks and pension funds going back for nearly 30 years.
The first most striking feature is that for the typical institutional property portfolio, values are back at where they were in September 1999. That value would have risen to almost 2.25 times its September 1999 value by December 2007 before crashing back over the past two years. In other words, if it had been possible to invest €1,000 in a typical fund, that €1,000 would have reached a value of €2,250 in 2007 but would be back to being worth only €1,000 today.
The second most striking feature is that if €1,000 had been invested at the height of the boom in September 2007, it would be worth only €447 today. (All figures are without any gearing/borrowing).
So, with hindsight, it is easy to see why many people and the banks have a problem. They would have bought and borrowed right through the build-up of the bubble and few would have got out before the bubble burst in 2008. Much of the buying was done in the period 2003-2006.
Further analysis of the SCS/IPD figures shows that the technical driver of the price bubble was what property professionals call yield compression. This is the process whereby buyers are prepared to pay more and more for the same income. In 2002, the typical yield on an office block would have been about 6.4% but by 2007 this yield had fallen to less than 4.3%. This yield would move the rent multiplier from about 15.6 to 23.3, resulting in a 50% increase in the value of the property. Rents did move upwards but not anything like the same rate – with the exception of retail, where rents rose very significantly.
The third important message from the SCS/IPD figure is that what is bad for capital values is good for the income of acquiring investors. The figures show that income yields fell from just over 6.5% in September 1998 to 3.8% in 2007 but are now back to about 7% and still rising. This is because as yield compression reverses and values fall, then income yield increases.
The fourth striking feature of the IPD figures going back to 1983 is how clearly they depicted the property bubbles over that period. The first up to 1990, the second up until 2001 and our current one just ended (peaking in September 2007).
In reality, the current boom began in the early 1990s, was temporarily interrupted by 9/11 and the dotcom bust and finished in 2007, almost 14 years later.
But if property cycles are normal phenomena, can we use this cyclical pattern to predict when we might get out of the current depressed situation?
I believe we can if we understand the elements of a property cycle. Each property cycle is self-correcting. The normal process is that in recession, rental levels fall to the point that the market accepts the new 'norm'. Then yields rise to levels that are also accepted as the new 'norm'. This norm is set against yields from other forms of investment such as shares, bonds, deposits etc, adjusted of course for the normal property risks and cost factors. As values and rents fall, then new development becomes uneconomical because the cost of new development is more than the value of the finished buildings. This chokes off the new supply of buildings.
At this point, the fall in values generally bottoms out. The property market bumps along the bottom while the economy gradually absorbs the oversupply of built space. Those adjustments have been happening in Ireland for the past two years.
The big question is, are values at the bottom or have they further to fall? This is where I move from being an analyst to being a forecaster.
I believe we are almost at the bottom. Yields have reached a new level where investors are prepared to buy quality property let at market rents. The fall in rentals has slowed down and in some sectors, such as quality offices, is levelling off.
One has to look at what is happening in the real economy. The demand for floor space comes from business. While long-term property investors are patient and usually prepared to invest ahead of a recovery, the issue of their confidence in an economic recovery is critical. We may have reached a valuation floor but this will only hold for as long as investors and businesses believe that there is a real recovery in prospect.
I have to add a second caveat, which is that there is good, bad and ugly property out there as a result of the banking and development excesses. The IPD index has an in-built bias toward institutional or quality property so the messages from this database only apply to good property.
With these caveats, I believe that we will see a further fall of 3% to 5% by year-end before a bottoming out of property values in 2010. However we will see a slight recovery in values in the next few years of about 3% to 5% a year.
But remember, property investment is, or should be, more about income than about capital appreciation and definitely will be for the next few years.
Real property investors, as opposed to property speculators, are focused on income. Reliable income will be the key focus of the new breed of investors. Such investors, many from overseas, are currently watching Ireland and are ready, willing and able to do deals.
The seeds of the next property cycle are in the ground and slowly germinating as the detritus of the last boom are cleared away.
We all know property values have crashed but the anatomy of that crash has become clear with the recent publication of the Society of Chartered Surveyors/Investment Property Database (SCS/IPD) figures and in particular those for the past two years. This is a database of institutional properties and their valuations from a number of banks and pension funds going back for nearly 30 years.
The first most striking feature is that for the typical institutional property portfolio, values are back at where they were in September 1999. That value would have risen to almost 2.25 times its September 1999 value by December 2007 before crashing back over the past two years. In other words, if it had been possible to invest €1,000 in a typical fund, that €1,000 would have reached a value of €2,250 in 2007 but would be back to being worth only €1,000 today.
The second most striking feature is that if €1,000 had been invested at the height of the boom in September 2007, it would be worth only €447 today. (All figures are without any gearing/borrowing).
So, with hindsight, it is easy to see why many people and the banks have a problem. They would have bought and borrowed right through the build-up of the bubble and few would have got out before the bubble burst in 2008. Much of the buying was done in the period 2003-2006.
Further analysis of the SCS/IPD figures shows that the technical driver of the price bubble was what property professionals call yield compression. This is the process whereby buyers are prepared to pay more and more for the same income. In 2002, the typical yield on an office block would have been about 6.4% but by 2007 this yield had fallen to less than 4.3%. This yield would move the rent multiplier from about 15.6 to 23.3, resulting in a 50% increase in the value of the property. Rents did move upwards but not anything like the same rate – with the exception of retail, where rents rose very significantly.
The third important message from the SCS/IPD figure is that what is bad for capital values is good for the income of acquiring investors. The figures show that income yields fell from just over 6.5% in September 1998 to 3.8% in 2007 but are now back to about 7% and still rising. This is because as yield compression reverses and values fall, then income yield increases.
The fourth striking feature of the IPD figures going back to 1983 is how clearly they depicted the property bubbles over that period. The first up to 1990, the second up until 2001 and our current one just ended (peaking in September 2007).
In reality, the current boom began in the early 1990s, was temporarily interrupted by 9/11 and the dotcom bust and finished in 2007, almost 14 years later.
But if property cycles are normal phenomena, can we use this cyclical pattern to predict when we might get out of the current depressed situation?
I believe we can if we understand the elements of a property cycle. Each property cycle is self-correcting. The normal process is that in recession, rental levels fall to the point that the market accepts the new 'norm'. Then yields rise to levels that are also accepted as the new 'norm'. This norm is set against yields from other forms of investment such as shares, bonds, deposits etc, adjusted of course for the normal property risks and cost factors. As values and rents fall, then new development becomes uneconomical because the cost of new development is more than the value of the finished buildings. This chokes off the new supply of buildings.
At this point, the fall in values generally bottoms out. The property market bumps along the bottom while the economy gradually absorbs the oversupply of built space. Those adjustments have been happening in Ireland for the past two years.
The big question is, are values at the bottom or have they further to fall? This is where I move from being an analyst to being a forecaster.
I believe we are almost at the bottom. Yields have reached a new level where investors are prepared to buy quality property let at market rents. The fall in rentals has slowed down and in some sectors, such as quality offices, is levelling off.
One has to look at what is happening in the real economy. The demand for floor space comes from business. While long-term property investors are patient and usually prepared to invest ahead of a recovery, the issue of their confidence in an economic recovery is critical. We may have reached a valuation floor but this will only hold for as long as investors and businesses believe that there is a real recovery in prospect.
I have to add a second caveat, which is that there is good, bad and ugly property out there as a result of the banking and development excesses. The IPD index has an in-built bias toward institutional or quality property so the messages from this database only apply to good property.
With these caveats, I believe that we will see a further fall of 3% to 5% by year-end before a bottoming out of property values in 2010. However we will see a slight recovery in values in the next few years of about 3% to 5% a year.
But remember, property investment is, or should be, more about income than about capital appreciation and definitely will be for the next few years.
Real property investors, as opposed to property speculators, are focused on income. Reliable income will be the key focus of the new breed of investors. Such investors, many from overseas, are currently watching Ireland and are ready, willing and able to do deals.
The seeds of the next property cycle are in the ground and slowly germinating as the detritus of the last boom are cleared away.
Monday, February 15, 2010
Straight Talking - In commercial property, tomato rules apply
Landlord-tenant relationships are self-correcting, and do not need government intervention.
Rents for commercial properties let on new leases have fallen by 25% to more than 50% over the past two years according to the new IPD report, but are they still too high? Rents are set by the normal market interactive process. Until the recent legislative knee-jerk rent review intervention, the government has had a consistent policy of deregulation in the relationship between landlord and tenant. This has been good for all.
I started my business career as a young teenager bringing tomatoes the family had grown to the Dublin fruit and vegetable market. I learned there that if there were more tomatoes for sale than buyers then prices went down, and if there were too few tomatoes then prices went up. Rent levels are set by exactly the same process but with two important differences.
The first is that the supply chain for new buildings is very long, meaning it takes three to five years to add to supply but this supply cannot be reduced or increased quickly. Secondly, lease terms historically have been for long periods ranging from one year to 15-plus years, leading to inelasticity of actual rents paid.
In Ireland we now have an oversupply of buildings. Users of space are negotiating rents down – just like my tomatoes when there was an oversupply. Demand is low and supply is high. Many tenants entered into long leases during the boom at rents that are now above the going rate. Some tenants are going broke and others are trying to negotiate reductions. Italian restaurant chain Carluccio's very public closing down and reopening of an outlet in Dublin following a significant rent reduction illustrates the point.
I advise both landlords and tenants in such discussions to know both sides of the argument. Some claims are legitimate, others are not.
No landlord wants to reduce rents as it will have a major impact on income and a negative impact on value. The landlord's position is that he signed a contract and tenants may not walk away because times have changed. However, if the choice is between no income or a more than 30% reduction, then a landlord will choose the latter. The tenant regards rent as an overhead hurting his business. In a tough environment he needs to get his overheads down.
In some property types the situation is a lot more stressed than others. In retail, which makes up only about 15% of the property market, the situation can be particularly acute. Usually a retailer would spend about 8% to 10% of turnover on rent and this would represent 30% to 50% of their gross profit in good times.
Many leases were signed on the basis of retail turnover levels in 2005-2007. But with turnover down by 20%-25% and squeezed margins, rent may now be absorbing most of a retailer's gross profit. On the other hand, there are retail tenants whose turnover and margins may not have been significantly squeezed.
In retail the problem is exacerbated by new lettings of nearby shop units at rents significantly below historic levels. This gives rise to the current campaign to adopt new legislation enabling downward rent reviews, which would be a fundamental attack on property rights. Section 132 of the Land and Conveyancing Law Reform Act includes a provision that, in new leases, future rents will be upward or downward at rent review.
It is not retrospective. This legislation is irrelevant, in my view, as the market has already moved to the point that the structure of all leases has changed to align with reality. Short leases, break clauses and turnover rents are now the norm. However, the recent legislation banning new rent reviews is dysfunctional, particularly in the commercial sector, as it is creating serious problems for large financing deals and will have to be revisited.
Two years ago, prime office space in Dublin would lease at €50 per square foot. This has fallen to €30 per square foot. New tenants, or tenants with break clauses, are having a field day in renegotiations. However, the position of non-retail business is fundamentally different to retail.
For a business occupying commercial space, rent as a proportion of overheads is usually well below 10% and may be as low as 3% or 5%. While rent reductions would be welcome, they are not essential. The biggest cost for such organisations is staff, and we all know what is happening on that front.
While retail rents went through the roof, rents for commercial property moved upward only a little faster than inflation over the past seven years, so generally the position is not acute.
As an asset manager, the way I approach any application for rent concession is to look for up-to-date accounts to establish a tenant's true profit position. If survival is at stake, then the landlord may have to make concessions – and many are doing so.
Shopping centre landlords also have to look at the drawing power of the shopping centre overall. They must consider the consequences if key tenants close down. Lessons are being relearned that shopping centres are businesses as opposed to simple high-street investments.
The era of low rents will be temporary if the economy recovers significantly. At prevailing market rental and yield levels, it is generally not viable to carry out new development.
This is the market's self-correcting mechanism, be it for tomatoes or property. Inevitably scarcities will emerge – rents will rise to make development viable again – but it's some way off.
Rents for commercial properties let on new leases have fallen by 25% to more than 50% over the past two years according to the new IPD report, but are they still too high? Rents are set by the normal market interactive process. Until the recent legislative knee-jerk rent review intervention, the government has had a consistent policy of deregulation in the relationship between landlord and tenant. This has been good for all.
I started my business career as a young teenager bringing tomatoes the family had grown to the Dublin fruit and vegetable market. I learned there that if there were more tomatoes for sale than buyers then prices went down, and if there were too few tomatoes then prices went up. Rent levels are set by exactly the same process but with two important differences.
The first is that the supply chain for new buildings is very long, meaning it takes three to five years to add to supply but this supply cannot be reduced or increased quickly. Secondly, lease terms historically have been for long periods ranging from one year to 15-plus years, leading to inelasticity of actual rents paid.
In Ireland we now have an oversupply of buildings. Users of space are negotiating rents down – just like my tomatoes when there was an oversupply. Demand is low and supply is high. Many tenants entered into long leases during the boom at rents that are now above the going rate. Some tenants are going broke and others are trying to negotiate reductions. Italian restaurant chain Carluccio's very public closing down and reopening of an outlet in Dublin following a significant rent reduction illustrates the point.
I advise both landlords and tenants in such discussions to know both sides of the argument. Some claims are legitimate, others are not.
No landlord wants to reduce rents as it will have a major impact on income and a negative impact on value. The landlord's position is that he signed a contract and tenants may not walk away because times have changed. However, if the choice is between no income or a more than 30% reduction, then a landlord will choose the latter. The tenant regards rent as an overhead hurting his business. In a tough environment he needs to get his overheads down.
In some property types the situation is a lot more stressed than others. In retail, which makes up only about 15% of the property market, the situation can be particularly acute. Usually a retailer would spend about 8% to 10% of turnover on rent and this would represent 30% to 50% of their gross profit in good times.
Many leases were signed on the basis of retail turnover levels in 2005-2007. But with turnover down by 20%-25% and squeezed margins, rent may now be absorbing most of a retailer's gross profit. On the other hand, there are retail tenants whose turnover and margins may not have been significantly squeezed.
In retail the problem is exacerbated by new lettings of nearby shop units at rents significantly below historic levels. This gives rise to the current campaign to adopt new legislation enabling downward rent reviews, which would be a fundamental attack on property rights. Section 132 of the Land and Conveyancing Law Reform Act includes a provision that, in new leases, future rents will be upward or downward at rent review.
It is not retrospective. This legislation is irrelevant, in my view, as the market has already moved to the point that the structure of all leases has changed to align with reality. Short leases, break clauses and turnover rents are now the norm. However, the recent legislation banning new rent reviews is dysfunctional, particularly in the commercial sector, as it is creating serious problems for large financing deals and will have to be revisited.
Two years ago, prime office space in Dublin would lease at €50 per square foot. This has fallen to €30 per square foot. New tenants, or tenants with break clauses, are having a field day in renegotiations. However, the position of non-retail business is fundamentally different to retail.
For a business occupying commercial space, rent as a proportion of overheads is usually well below 10% and may be as low as 3% or 5%. While rent reductions would be welcome, they are not essential. The biggest cost for such organisations is staff, and we all know what is happening on that front.
While retail rents went through the roof, rents for commercial property moved upward only a little faster than inflation over the past seven years, so generally the position is not acute.
As an asset manager, the way I approach any application for rent concession is to look for up-to-date accounts to establish a tenant's true profit position. If survival is at stake, then the landlord may have to make concessions – and many are doing so.
Shopping centre landlords also have to look at the drawing power of the shopping centre overall. They must consider the consequences if key tenants close down. Lessons are being relearned that shopping centres are businesses as opposed to simple high-street investments.
The era of low rents will be temporary if the economy recovers significantly. At prevailing market rental and yield levels, it is generally not viable to carry out new development.
This is the market's self-correcting mechanism, be it for tomatoes or property. Inevitably scarcities will emerge – rents will rise to make development viable again – but it's some way off.
Thursday, January 28, 2010
NAMA ‘A Work out Vehicle-not a Liquidation Vehicle’
With many of the big developers now part of the NAMA experiment, much of the Irish property and construction market is now a semi-State industry. This is a fact of life that we all have to get used to. NAMA, a State organisation, is one of the biggest property asset managers in the world, and most of us are now, or will be, NAMA men.
Our industry is accustomed to good old fashioned property bubbles- but this is different. We got hit by an international tsunami as well as a local bubble. I look back and wonder how we got from being the most adventurous and independent property market in Europe to being the most controlled one. The answer is that we built too much, borrowed too much, bought too much, and did all this too quickly and without appropriate checks and balances in place. In past property bubbles, the bankers, Regulators and Government eventually rationed the availability and the price of money and called a halt to property excesses before too much damage was done. This did not happen this time; no one shouted stop! The instincts of the speculators, developers and investors turned into a feeding frenzy. In the process property prices at least doubled from what I would regard as a stable position and they have now come crashing back down. They are unlikely to get back to 2007 levels for a very very long time.
In the circumstances the Government had little choice but to set up NAMA. It was the only viable way to save the banks, who are even more critical to the overall economy than the property industry. As a result NAMA is now the main banker to our industry and all key decisions will emanate from NAMA for several years. So we are where we are, but how do we get out of here? Hopefully NAMA will have a relatively short life and our industry will return to normal territory soon. Fortunately its semi-nationalisation is not ideologically driven – only the 80% land-tax element is.
Having resolved the banks’ balance sheet problems in practical terms, NAMA’s job is threefold, as follows:
• To effectively warehouse the oversupply of houses, offices, development sites etc, and feed them out as the economy requires.
• To restore an operational property and construction industry in Ireland.
• To repay- over time- its Bonds with the funds realized from the sale of warehoused property assets.
The key to the capacity of NAMA to do this work is the almost free line of credit given to it via the massive €54bn ECB supported Bonds issued to the Banks and currently costing1.5% p.a.
The modus operandi selected by NAMA is to require all its significant borrowers to prepare Business Plans showing how they intend to work out their portfolios and repay their borrowings over time. As NAMA’s CEO Brendan McDonagh said at a recent conference, NAMA is not a liquidation vehicle: it’s a work-out vehicle. NAMA wants its borrowers to produce plans showing how they will survive (and hopefully prosper), and thereby repay their borrowings. The last thing that the management of NAMA will want is to take direct control over millions of square feet of empty buildings and acres of development sites. It will want developers and borrowers who know every detail of their schemes to stay in control, to add value, and to work in collaboration with NAMA to achieve a satisfactory outcome for both parties. But, while NAMA will not want to take possession of land and buildings, it will have the powers to do – so don’t mess with it!
The key to survival will be the quality of the Business Plan presented to NAMA. The calibre of these Business Plans prepared by borrowers/ developers will impact on their contractors, subcontractors and suppliers, and on their professional advisors such as architects and QSs. So the big issue is how to go about preparing a robust Business Plan that will get the support of NAMA’s Management and Board.
NAMA in its own Business Plan gives some help in this regard. It wants the following to be included by each borrower:
• Current situation
• Level of indebtedness
• Full list of assets and liabilities
• Short, medium and long-term objectives
• A list, in order of priority, of assets to be disposed of and assets which require additional investment etc
• Funding requirements.
The essential part of any Business Plan will be the cash-flow statement. This will show the projected movement of assets and resulting funds over a realistic time span, whether it be 3, 5 or even 10 years (the circumstances, including the size and nature of the portfolio, will dictate the time frame). The content of the cash-flow statement will be based on various assumptions made in respect of each asset, including:
• Interest payments being made or accruing
• Cash from disposals and rents
• Payments to creditors and from debtors
• Further expenditure required before an asset can be sold
• Further equity input or borrowings and sources of these.
The most critical element of the Business Plan will relate to assumptions about sales or lettings of properties and their price levels. Most Business Plans will have to assume some improvement in market conditions from those currently prevailing, or else the plan will not stand up. The first must be a recovery in the economy, which is critical for us all, but we need to know from NAMA the assumption it will consider reasonable – a 3% p.a. recovery in values, say, or 5% perhaps? NAMA itself has projected its own break-even on a basis of 1% growth, but this is very conservative in my view.
Apart from the need for an overall recovery in the economy so as to restore demand for buildings, much will depend on the local market and the level of oversupply, and on other developers’ plans for supplying product into a given market or sub-market. One of the issues causing concern is to what extent NAMA will seek to control supply in each sub-market. Will it leave it to market forces or will it actually try to control supply? For example, if all the developers intent on providing new office blocks in Sandyford were to get funding and support from NAMA, this would exacerbate an already bad situation. But if NAMA were to favour one developer at the expense of another, this would lead to its own problems. We don’t know how NAMA will address issues such as these, and some indication would be helpful in preparing Business Plans.
When NAMA gets a Business Plan, it will assess it to evaluate whether it is sensible, logical and realistic, and will meet with each of the major borrowers to give a response. If agreement can be reached on a work-out plan, NAMA will work constructively with the borrowers to achieve the optimal outcome. However, if no agreement can be reached and/or the borrower does not wish to cooperate he will be asked to repay his debt in full. If this does not happen or is not feasible, NAMA will take enforcement action against the borrower. NAMA will have the choice of taking possession of the assets or appointing liquidators or statutory receivers. The latter will effectively act as Asset Manager in possession, reporting to NAMA. For those unfortunate enough to have their assets taken over by NAMA, the debt will not be wiped out. Indeed one of the tough provisions in the legislation is that if NAMA takes possession then the property will be valued and only that valuation amount will be credited to the debt. If the property is sold later by NAMA and they receive more for it than the valuation then none of the extra is credited to the borrower’s debt.
So the alternative to coming up with a sound Business Plan is not very attractive, and borrowers would be best to set their minds on becoming a ‘NAMA man’ and producing a robust Business Plan.
My definition of a NAMA man is as follows:
• Trust-worthy
• Technically competent
• Good market/industry knowledge
• Good attitude towards NAMA
• Realistic expectations
• Resourced to walk the talk
• In it for the long haul
• Focused on debt repayment.
So what does all this mean to you as architect, surveyor, builder or supplier associated with developers with borrowings from NAMA? You will need:
Firstly, to support your client in preparing a good Business Plan, one that gets the support of NAMA. Don’t accept hairbrained ideas based on unrealistic outcomes. NAMA will not support this.
Second, to look at your own cost inputs. If cost is too high it could jeopardise the whole Business Plan. NAMA will not tolerate excessive costs.
Third, to recognise your and your client’s weaknesses and try to find solutions to any deficiencies in leadership, management or skilled resources. NAMA will want an ‘institutional’ attitude and performance from its ‘client’ and will not tolerate incompetence.
For you personally, if NAMA decides to run with your client’s Business Plan then your prosperity will depend on its being rolled out successfully. NAMA will need you as a professional or contractor if the plan is to meet its objectives. This is your opportunity. NAMA will not want to get involved in selecting new professionals for projects that already have competent suppliers, contractors or professionals.
As to NAMA’s administrative procedures, we have been told that it will directly control the top hundred borrowers who make up 50 % of borrowings. The other 50 % will be administered by one of the participating banks. Thus, if outside the top hundred, your bank may not appear to change – but that bank will be supervised by a NAMA official who will be calling the shots: forget good old-fashioned relationship banking of the golf club variety!
One of the big concerns that I have about the NAMA project is the amount of time required to carry out due diligence and to transfer each of the loans across to NAMA. This was all planned to be completed by mid 2010, but NAMA have already admitted to time slippages in transferring the big loans, and this does not auger well for the smaller ones. As we all know, the commercial property market has been in a sort of limbo for the past twelve months or more, with no decisions forthcoming from banks on how to go forward. All have been waiting for NAMA. If the delay extends past the middle of next year I believe that NAMA must put in place some interim procedures that allow decisions to be taken by the banks administering these loans. How such an interim procedure might work would need to be worked out, but it would be totally unfair to allow interest to accrue and projects to be frozen simply because NAMA can’t get around to processing what are their new clients.
So 2010 will be the year of NAMA for us all. Those who survive will be NAMA men. We are all on a learning curve – including NAMA. Hopefully by this time next year we will all be in harmonious partnership with our new main banker.
Our industry is accustomed to good old fashioned property bubbles- but this is different. We got hit by an international tsunami as well as a local bubble. I look back and wonder how we got from being the most adventurous and independent property market in Europe to being the most controlled one. The answer is that we built too much, borrowed too much, bought too much, and did all this too quickly and without appropriate checks and balances in place. In past property bubbles, the bankers, Regulators and Government eventually rationed the availability and the price of money and called a halt to property excesses before too much damage was done. This did not happen this time; no one shouted stop! The instincts of the speculators, developers and investors turned into a feeding frenzy. In the process property prices at least doubled from what I would regard as a stable position and they have now come crashing back down. They are unlikely to get back to 2007 levels for a very very long time.
In the circumstances the Government had little choice but to set up NAMA. It was the only viable way to save the banks, who are even more critical to the overall economy than the property industry. As a result NAMA is now the main banker to our industry and all key decisions will emanate from NAMA for several years. So we are where we are, but how do we get out of here? Hopefully NAMA will have a relatively short life and our industry will return to normal territory soon. Fortunately its semi-nationalisation is not ideologically driven – only the 80% land-tax element is.
Having resolved the banks’ balance sheet problems in practical terms, NAMA’s job is threefold, as follows:
• To effectively warehouse the oversupply of houses, offices, development sites etc, and feed them out as the economy requires.
• To restore an operational property and construction industry in Ireland.
• To repay- over time- its Bonds with the funds realized from the sale of warehoused property assets.
The key to the capacity of NAMA to do this work is the almost free line of credit given to it via the massive €54bn ECB supported Bonds issued to the Banks and currently costing1.5% p.a.
The modus operandi selected by NAMA is to require all its significant borrowers to prepare Business Plans showing how they intend to work out their portfolios and repay their borrowings over time. As NAMA’s CEO Brendan McDonagh said at a recent conference, NAMA is not a liquidation vehicle: it’s a work-out vehicle. NAMA wants its borrowers to produce plans showing how they will survive (and hopefully prosper), and thereby repay their borrowings. The last thing that the management of NAMA will want is to take direct control over millions of square feet of empty buildings and acres of development sites. It will want developers and borrowers who know every detail of their schemes to stay in control, to add value, and to work in collaboration with NAMA to achieve a satisfactory outcome for both parties. But, while NAMA will not want to take possession of land and buildings, it will have the powers to do – so don’t mess with it!
The key to survival will be the quality of the Business Plan presented to NAMA. The calibre of these Business Plans prepared by borrowers/ developers will impact on their contractors, subcontractors and suppliers, and on their professional advisors such as architects and QSs. So the big issue is how to go about preparing a robust Business Plan that will get the support of NAMA’s Management and Board.
NAMA in its own Business Plan gives some help in this regard. It wants the following to be included by each borrower:
• Current situation
• Level of indebtedness
• Full list of assets and liabilities
• Short, medium and long-term objectives
• A list, in order of priority, of assets to be disposed of and assets which require additional investment etc
• Funding requirements.
The essential part of any Business Plan will be the cash-flow statement. This will show the projected movement of assets and resulting funds over a realistic time span, whether it be 3, 5 or even 10 years (the circumstances, including the size and nature of the portfolio, will dictate the time frame). The content of the cash-flow statement will be based on various assumptions made in respect of each asset, including:
• Interest payments being made or accruing
• Cash from disposals and rents
• Payments to creditors and from debtors
• Further expenditure required before an asset can be sold
• Further equity input or borrowings and sources of these.
The most critical element of the Business Plan will relate to assumptions about sales or lettings of properties and their price levels. Most Business Plans will have to assume some improvement in market conditions from those currently prevailing, or else the plan will not stand up. The first must be a recovery in the economy, which is critical for us all, but we need to know from NAMA the assumption it will consider reasonable – a 3% p.a. recovery in values, say, or 5% perhaps? NAMA itself has projected its own break-even on a basis of 1% growth, but this is very conservative in my view.
Apart from the need for an overall recovery in the economy so as to restore demand for buildings, much will depend on the local market and the level of oversupply, and on other developers’ plans for supplying product into a given market or sub-market. One of the issues causing concern is to what extent NAMA will seek to control supply in each sub-market. Will it leave it to market forces or will it actually try to control supply? For example, if all the developers intent on providing new office blocks in Sandyford were to get funding and support from NAMA, this would exacerbate an already bad situation. But if NAMA were to favour one developer at the expense of another, this would lead to its own problems. We don’t know how NAMA will address issues such as these, and some indication would be helpful in preparing Business Plans.
When NAMA gets a Business Plan, it will assess it to evaluate whether it is sensible, logical and realistic, and will meet with each of the major borrowers to give a response. If agreement can be reached on a work-out plan, NAMA will work constructively with the borrowers to achieve the optimal outcome. However, if no agreement can be reached and/or the borrower does not wish to cooperate he will be asked to repay his debt in full. If this does not happen or is not feasible, NAMA will take enforcement action against the borrower. NAMA will have the choice of taking possession of the assets or appointing liquidators or statutory receivers. The latter will effectively act as Asset Manager in possession, reporting to NAMA. For those unfortunate enough to have their assets taken over by NAMA, the debt will not be wiped out. Indeed one of the tough provisions in the legislation is that if NAMA takes possession then the property will be valued and only that valuation amount will be credited to the debt. If the property is sold later by NAMA and they receive more for it than the valuation then none of the extra is credited to the borrower’s debt.
So the alternative to coming up with a sound Business Plan is not very attractive, and borrowers would be best to set their minds on becoming a ‘NAMA man’ and producing a robust Business Plan.
My definition of a NAMA man is as follows:
• Trust-worthy
• Technically competent
• Good market/industry knowledge
• Good attitude towards NAMA
• Realistic expectations
• Resourced to walk the talk
• In it for the long haul
• Focused on debt repayment.
So what does all this mean to you as architect, surveyor, builder or supplier associated with developers with borrowings from NAMA? You will need:
Firstly, to support your client in preparing a good Business Plan, one that gets the support of NAMA. Don’t accept hairbrained ideas based on unrealistic outcomes. NAMA will not support this.
Second, to look at your own cost inputs. If cost is too high it could jeopardise the whole Business Plan. NAMA will not tolerate excessive costs.
Third, to recognise your and your client’s weaknesses and try to find solutions to any deficiencies in leadership, management or skilled resources. NAMA will want an ‘institutional’ attitude and performance from its ‘client’ and will not tolerate incompetence.
For you personally, if NAMA decides to run with your client’s Business Plan then your prosperity will depend on its being rolled out successfully. NAMA will need you as a professional or contractor if the plan is to meet its objectives. This is your opportunity. NAMA will not want to get involved in selecting new professionals for projects that already have competent suppliers, contractors or professionals.
As to NAMA’s administrative procedures, we have been told that it will directly control the top hundred borrowers who make up 50 % of borrowings. The other 50 % will be administered by one of the participating banks. Thus, if outside the top hundred, your bank may not appear to change – but that bank will be supervised by a NAMA official who will be calling the shots: forget good old-fashioned relationship banking of the golf club variety!
One of the big concerns that I have about the NAMA project is the amount of time required to carry out due diligence and to transfer each of the loans across to NAMA. This was all planned to be completed by mid 2010, but NAMA have already admitted to time slippages in transferring the big loans, and this does not auger well for the smaller ones. As we all know, the commercial property market has been in a sort of limbo for the past twelve months or more, with no decisions forthcoming from banks on how to go forward. All have been waiting for NAMA. If the delay extends past the middle of next year I believe that NAMA must put in place some interim procedures that allow decisions to be taken by the banks administering these loans. How such an interim procedure might work would need to be worked out, but it would be totally unfair to allow interest to accrue and projects to be frozen simply because NAMA can’t get around to processing what are their new clients.
So 2010 will be the year of NAMA for us all. Those who survive will be NAMA men. We are all on a learning curve – including NAMA. Hopefully by this time next year we will all be in harmonious partnership with our new main banker.
Monday, January 18, 2010
Commercial property has not hit a plateau yet
My nagging fear is that it is too early to buy real estate - it's a tenant's market and will be for some time
Dublin: one in four offices available
With Bloxham Stockbrokers saying that property values will rise in 2010, now is a good time to consider buying property. As commercial property values having fallen by over 60% since 2007, the answer is not as simple as it was two, three or even four years ago. Back then I was very negative about Irish property – but few listened to grey-haired advisers in those exuberant days.
The first thing to realise is that we are now in a completely new property game. New rules, new stadium and a different shaped ball. Over the next decade property investment will be mainly about income and little about capital appreciation so don't expect to make a quick killing.
The second basic change is that it will be a tenants' market for quite some time.
I have spent my life acquiring and managing institutional property and there are a number of principles or mantras that I have successfully used as follows:
• Timing – more money is made (or lost) out of getting the timing right than any other decision.
• Location is critical.
• The quality of the building really matters.
• Tenant(s) strength, fair rent and satisfactory lease terms are important
• Price/ yield – does the yield make sense and fit into long-term parameters?
• The economy – what is happening?
• Competition – what else is happening in the property market?
• Mix – no single property should represent more than 10% of a portfolio.
• Replacement – what would it cost to build?
• Borrowing increases risk and has to be repaid – often out of (taxed) income.
Whenever I looked at any given property in any country or city, these were my personal 10 commandments.
So how do we apply this methodology to the current property situation in Ireland?
On the key issue of timing, whilst I would not have considered buying in Ireland since 2005, the point for reversing that position must be approaching. My nagging fear is that it is still too early.
There will be lots of well-located good buildings in good locations coming available over the next few years from the Nama stable so scarcity has to be discounted. The big issues for consideration now are:
• Rental levels – will they rise or fall further?
• Tenants (or their absence).
• Oversupply of space.
• Yields/prices.
• Interest rates.
• The prospects for the economy.
To buy now you would have to be taking a long-term view on these issues, unless the building was let for a very long term to an undoubted tenant such as the government. Rents, which have been falling for the past two years, will eventually stabilise but I do not know if they will plateau at current levels or fall further. This situation will be driven by the economy and the interplay of supply and demand. The situation is currently unstable, with rental values falling throughout 2009. However, apart from retail, occupiers of offices and industrial are not having serious problems with rental levels but of course they will seek the lowest price going.
Yields have come back to a spectrum that I am now comfortable with and fit into long-term trends. Yields are currently in the spectrum range of 6-6.5% for retail, 7-7.5% for office and approaching 10% for industrial – all in respect of quality, well-let property – but if not prime quality, I would be adding significantly to these returns.
Recovery over the next few years may see yields coming down to around 5-6% for retail, 5.5-6.5% for offices and 7-8% for industrial, but the boomtime yields are gone for ever.
The big unknown is the economy. Traditionally, commercial property has lagged behind recovery in the real economy because business space users do not rush out and take more space as soon as
business improves. They generally have surplus space in existing premises and will await taking more space until they have constraints.
The equivalent of about one in four of Dublin offices is available, so the supply is not constrained when demand does come back. There is the possibility that FDI will create new demand particularly in the office sector and this could give an earlier lift off. So having regard to all these factors, what advice do I give to those clients seeking to invest in property in 2010?
These are risky times for all investment. The safe option is to keep the money in the bank and see how markets evolve over the next six months. But if one wants to be adventurous and jump in now, I would make five points as follows:
• Make sure the rents on a given property are not at historic high levels and if so adjust your price accordingly.
• Be aware of your tenant's financial health.
• Look carefully at the lease terms and take professional advice.
• Look at the bricks and mortar and location. This is your only real long-term security.
• Don't over borrow.
Really brave investors will be those who buy high-quality vacant buildings at knock-down prices in 2010 and wait for an economic recovery to achieve lettings – it's risky and takes nerve but is potentially very rewarding.
Dublin: one in four offices available
With Bloxham Stockbrokers saying that property values will rise in 2010, now is a good time to consider buying property. As commercial property values having fallen by over 60% since 2007, the answer is not as simple as it was two, three or even four years ago. Back then I was very negative about Irish property – but few listened to grey-haired advisers in those exuberant days.
The first thing to realise is that we are now in a completely new property game. New rules, new stadium and a different shaped ball. Over the next decade property investment will be mainly about income and little about capital appreciation so don't expect to make a quick killing.
The second basic change is that it will be a tenants' market for quite some time.
I have spent my life acquiring and managing institutional property and there are a number of principles or mantras that I have successfully used as follows:
• Timing – more money is made (or lost) out of getting the timing right than any other decision.
• Location is critical.
• The quality of the building really matters.
• Tenant(s) strength, fair rent and satisfactory lease terms are important
• Price/ yield – does the yield make sense and fit into long-term parameters?
• The economy – what is happening?
• Competition – what else is happening in the property market?
• Mix – no single property should represent more than 10% of a portfolio.
• Replacement – what would it cost to build?
• Borrowing increases risk and has to be repaid – often out of (taxed) income.
Whenever I looked at any given property in any country or city, these were my personal 10 commandments.
So how do we apply this methodology to the current property situation in Ireland?
On the key issue of timing, whilst I would not have considered buying in Ireland since 2005, the point for reversing that position must be approaching. My nagging fear is that it is still too early.
There will be lots of well-located good buildings in good locations coming available over the next few years from the Nama stable so scarcity has to be discounted. The big issues for consideration now are:
• Rental levels – will they rise or fall further?
• Tenants (or their absence).
• Oversupply of space.
• Yields/prices.
• Interest rates.
• The prospects for the economy.
To buy now you would have to be taking a long-term view on these issues, unless the building was let for a very long term to an undoubted tenant such as the government. Rents, which have been falling for the past two years, will eventually stabilise but I do not know if they will plateau at current levels or fall further. This situation will be driven by the economy and the interplay of supply and demand. The situation is currently unstable, with rental values falling throughout 2009. However, apart from retail, occupiers of offices and industrial are not having serious problems with rental levels but of course they will seek the lowest price going.
Yields have come back to a spectrum that I am now comfortable with and fit into long-term trends. Yields are currently in the spectrum range of 6-6.5% for retail, 7-7.5% for office and approaching 10% for industrial – all in respect of quality, well-let property – but if not prime quality, I would be adding significantly to these returns.
Recovery over the next few years may see yields coming down to around 5-6% for retail, 5.5-6.5% for offices and 7-8% for industrial, but the boomtime yields are gone for ever.
The big unknown is the economy. Traditionally, commercial property has lagged behind recovery in the real economy because business space users do not rush out and take more space as soon as
business improves. They generally have surplus space in existing premises and will await taking more space until they have constraints.
The equivalent of about one in four of Dublin offices is available, so the supply is not constrained when demand does come back. There is the possibility that FDI will create new demand particularly in the office sector and this could give an earlier lift off. So having regard to all these factors, what advice do I give to those clients seeking to invest in property in 2010?
These are risky times for all investment. The safe option is to keep the money in the bank and see how markets evolve over the next six months. But if one wants to be adventurous and jump in now, I would make five points as follows:
• Make sure the rents on a given property are not at historic high levels and if so adjust your price accordingly.
• Be aware of your tenant's financial health.
• Look carefully at the lease terms and take professional advice.
• Look at the bricks and mortar and location. This is your only real long-term security.
• Don't over borrow.
Really brave investors will be those who buy high-quality vacant buildings at knock-down prices in 2010 and wait for an economic recovery to achieve lettings – it's risky and takes nerve but is potentially very rewarding.
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