25 Aug 2009

THE State’s new ‘bad bank’ could end up taking control of more than €4bn worth of property bought by Irish investors across Europe at a time when the global economy was shuddering to a halt.

New figures show that €4.3bn was spent investing in shopping centres and office blocks in Germany, Russia, France and eastern Europe in 2007 and 2008 alone, new figures obtained by the Irish Independent reveal.

Investors who financed their splurge with bank borrowings could find themselves holding onto assets worth less than they paid as property values fall.

This means that the National Asset Management Agency (NAMA) will be expected to step in and take over the loans from the main lenders.

Experts last night said the values in most EU countries will not be known until at least next year. However, they do not expect property prices to fall much lower in Ireland and the UK.

This could have serious consequences for taxpayers.

Last week the Irish Independent revealed that NAMA expects to take over €25bn worth of property in the UK, and another €3bn in the US.

Recovery

But NAMA has not said how much property in the EU may have to be taken over as part of the massive recovery operation aimed at saving the financial system and kick-starting the economy.

Figures compiled by international estate agents Jones Lang LaSalle, which operates in 60 countries, shows the extent of the spending spree undertaken by investors in the last three years.

The data shows that Irish investors spent €9.3bn on commercial property around the world in 2007, and another €2.1bn in 2008.

But when the US and UK investments are stripped out, the figures show that €3.7bn was spent on property in 2007, and another €592m in 2008.

The most popular countries for investors were Germany, France, Belgium, the Netherlands and Sweden, where the “worst is yet to come”.

Dr Claire Eriksson, head of research at Jones Lang LaSalle, said the financial strength of the investors would dictate what happened to these properties.

Many were institutions and pension funds but there were private investors involved. Agents CB Richard Ellis (CBRE) said it would take at least six months for values to become apparent.

“The main thing driving this was debt funding and that’s not available now,” Marie Hunt of CBRE said.

“The UK and Ireland are stabilising. This is like a wave going across Europe but most of mainland Europe hasn’t seen the worst yet.

“The worst has yet to come in France, Germany and Belgium, which were all popular with investors, and recovery in central and eastern Europe is going to be even slower. Undoubtedly it’s going to fall.

“The UK was popular because it was like our system, with long leases of 20-25 years and upward rent reviews. Europe is different with five- or six-year leases and rents linked to inflation. There’s further to fall in the European markets and it will take six months to see,” she added.

The ‘bad bank’ is expected to take over up to €90bn worth of toxic loans from the banks over the next year, in the process becoming one of the biggest property owners in the world.

Labour finance spokeswoman Joan Burton last night said it was still unclear if NAMA would take over smaller loans which were extended to the hundreds of thousands of Irish who bought holiday homes.

Up to 60,000 foreign properties are estimated to be owned by Irish investors.

“I suspect it will be much more difficult to value those properties,” she said. “There aren’t a lot of investors to replace those Irish investors so prices will fall.

“There are a lot of people with 20 or 30 properties leveraged against each other. The banks will try to sell the best properties, but will the rest go to NAMA? Will it define what the assets are and what the minimum values are?,” she asked.

26 Aug 2009

Investment property owners could be liable to heavy fines if they do not pay the new property tax on second homes by the end of September.

The €200 tax is payable to the local authority where the property is located.

Failure to comply with the new law could result in a fine of up to €2,000.

Analysts are advising second-home owners to find out which council they need to pay.

Karl Deeter, of Irish Mortgage Brokers, said failure to pay the tax on non-principal private residences on time will incur additional fines of €20.

“People may not be aware that this is coming up and if they do not pay it then there is a monthly 10pc surcharge imposed for failing to pay,” he said.

The late-payment fee will apply after October 31, according to Joe McCall, of Byrne & McCall. Unpaid taxes and fines will accumulate.

The new tax is expected to give local authorities up to €40m per year in additional funding.

Any outstanding charges and unpaid late payment fees will remain as a charge against the property for up to 12 years, even if the property is sold, according to Mr McCall.

Earlier this year, the Government decided to exempt mobile home owners from the tax. Newly constructed and unsold, never-let homes are also excluded from the tax.

People who atemporarily have two properties, for example, when they have just married or divorced or are in the process of selling and buying a home are also exempt, as are granny flats vacated by people now living in nursing homes.

27 Aug 2009

ANALYSIS: IRISH LIFE & Permanent (IL&P) signalled that there was some light at the end of the tunnel when it said mortgage arrears and loan losses would peak this year, writes SIMON CARSWELL

Kevin Murphy, in his first results presentation since taking over as chief executive in June, said that arrears on mortgages doubled in the six months to June 2009, but that the pace of increase had fallen as job losses had slowed.

Mr Murphy’s second-in-command, finance director David McCarthy, said he expected arrears to peak at the end of this year, following the same trend for IL&P’s UK buy-to-let mortgages on which arrears have peaked.

While the group raised its long-term forecast for bad debts, the market responded positively, with IL&P’s stock climbing 2 per cent as the results showed there was an end in sight to loan losses.

“It’s positive in that it’s no worse than expected and the capital position looks pretty resilient,” said Sebastian Orsi at Merrion Capital. “The funding environment is improving, but it’s still tough.”

Permanent TSB’s decision to raise its standard variable rate by a half-point last month helped bring the bank’s interest margin above 0.9 per cent, up from 0.87 per cent in June, but still below 1.05 per cent last December.

The battle for deposits and wholesale funding remains costly.

The haemorrhaging of corporate deposits in the first quarter has not been covered by rising retail deposits, driving the key loans-to-deposits ratio above an alarming 300 per cent.

Mr Murphy said that IL&P had been making enquiries with the Government about whether inter-group deposits were covered by the State bank guarantee. If they are, the company may seek to put on deposit at Permanent TSB some of the cash pile of up to €2 billion that is held by Irish Life.

Mr McCarthy said that, as a standalone entity, Permanent TSB would have a core tier one capital ratio of 5 to 6 per cent, assuming that it bought back some bonds from investors at a discount.

This year will be tough for banking, Mr Murphy said, while the life business will be “subdued” and the investment market will not return to normal until 2010.

Some 6,122 of IL&P’s 188,000 mortgages are in arrears of 90 days or more. About 25,000 mortgages, worth in the region of €500 million, or 12 per cent of loans, are in negative equity where the loan is higher than the property’s value.

On its involvement in any restructuring of the sector, IL&P must play a waiting game. It will not be partaking in Nama because it has no development loans to sell to the State body.

Any restructuring that will take place, said Mr Murphy, will occur post-Nama in the latter half of 2010 after the loans with a book value of €90 billion are moved.

Only then will the size of the balance sheets of Irish Nationwide and EBS building society, potential partners of Permanent TSB, be known and how a larger banking group might be created.

In the meantime, IL&P will “look after itself”, according to Mr Murphy. It will continue to seek to grow its deposits and will, during the final quarter of the year, ask shareholders to approve the creation of a new holding company separating Permanent TSB and Irish Life.

Given the drag that the loss-making bank has been on the profitable life business, this will pave the way for a possible off-loading of Permanent TSB and the chance to park the bank in a larger group following the Nama purge of toxic assets across the banking sector.

This in turn will realise some long-awaited value for Irish Life.

26 Aug 2009

The Irish Nationwide Building Society is preparing to launch a range of home loans, putting into effect its plans to move away from commercial lending in favour of growing its residential mortgage business.

Among the products being developed is a number of high loan-to-value mortgages for first-time buyers to grow its share of this market, as the building society attempts to concentrate on expanding the home loan side of its business.

The building society is also planning to recruit a new head of commercial lending for Ireland and Britain in the coming weeks.

The executive, who is expected to be appointed in the coming weeks, will play a key role in liaising with the Government’s toxic loans agency, Nama, which is estimated to acquire up to 75 per cent of the society’s €10 billion loan book.

The building society grew its commercial loan book aggressively during the property boom, particularly in lending to developers.

About 80 per cent of Irish Nationwide’s €10 billion loan book relates to commercial property, with just €2 billion outstanding from residential mortgage borrowers.

Irish Nationwide’s new mortgage products are currently being developed. A staff meeting has been scheduled for later this week at which employees are expected to be briefed on the products, although sources close to the building society said that the launch of the new loans was not imminent.

A spokesman for Irish Nationwide declined to comment when contacted yesterday evening.

Irish Nationwide chairman Danny Kitchen told members at the annual meeting last May that the building society planned to reduce commercial property loans to about 50 per cent of its overall loan book by 2013, and that the lender would try to “prudently expand its home mortgage business”.

The building society this week sold an additional €500 million of Government-guaranteed bonds, bringing to €1.75 billion the amount Irish Nationwide has raised using the support of the State bank guarantee, which expires in 13 months’ time.

Oil climbed alongside Asian equities after established home sales jumped more than forecast in July to the highest in almost two years, signaling the housing crisis that crippled the world’s largest economy may be easing. The dollar was little changed after falling for a fourth day against the euro Aug. 21, bolstering the appeal of commodities.

“A lot of the gains in commodities have been based on what I’d call ‘loose fundamentals’ — driven heavily by what’s happening in equity markets rather than supply-demand issues,”

20 Aug 2009

But charity claims house prices kept artificially high

The country’s biggest housing charity yesterday accused banks of keeping property prices “artificially high” by refusing to fund mortgages for low-cost homes.

The Respond charity said that people hoping to buy affordable properties were being refused access to credit, which only served to keep house prices inflated which would benefit the banks when NAMA begins taking over property loans later in the year.
The charity claimed that 10 buyers hoping to purchase homes at an affordable scheme in Athy, Co Kildare, could not get mortgage approval even though they had deposits, were employed, were seeking just 92pc mortgages and met all lending criteria.

The houses were being sold for prices between €110,000 and €160,000.

“People are being refused mortgages for no good reason,” a spokeswoman said.

“We’ve had applicants who have come back and said they’ve been told they’re being refused even though they have a deposit and meet the criteria.”

The charity said the effect of the policy was that house prices remained artificially high which was “important for banks prior to the assessment of house and land prices by the National Asset Management Agency (NAMA)”.

“Considering the number of vacant properties currently in the country, this is a scandalous situation,” the spokeswoman added. “It is akin to the shopkeeper withholding goods in order to stimulate demand so that higher prices can be charged. We are calling on the Competition Authority to take note of these practices and protect the Irish consumer.”

Unsold

When NAMA begins its work later this year, it will take over property loans worth tens of billions of euro, some of which have been used to fund housing developments.

Estimates suggest that up to 150,000 new homes may be completed but unsold, and NAMA will decide how much these properties are worth.

Respond claims that if the banks are refusing access to credit, units will not sell and prices will remain at today’s levels. But the main banks rejected the claims, saying that the price of the property, employment history and ability to repay a loan were the deciding factors in a mortgage application.

One of the country’s biggest mortgage lenders, AIB, said it would lend as little as €25,000 to buy a home — which would not buy anything in the country.

“It is categorically not the case that we’re withholding mortgages or not lending to particular levels,” a spokesman said. “The lowest mortgage is €25,000, and we have personal loans up to €30,000.”

Other banks surveyed said the minimum amount of money they would lend — called a Minimum Property Value (MPV) — ranged from €20,000 to €100,000, and rejected claims they were refusing to lend for cheaper properties.

Permanent TSB said it did not have an MPV, while National Irish Bank said the lowest mortgage it would process was for €20,000.

Bank of Scotland (Ireland) and Halifax said it operated an MPV of €100,000. Ulster Bank had an MPV of €85,000.

Bank of Ireland said that property values were taken into account when deciding if a mortgage application should be approved.

21 Aug 2009 

€4.7bn slump in lending highlights business and housing woes

The banks continued to tighten the screws on credit lines during the second quarter this year, with figures from the Central Bank showing lending to business fell by €3.3bn.

The dramatic decline in house sales is also reflected in the data, which shows the first quarterly decline in residential mortgage lending on record.

Overall, the Central Bank said there was a €4.7bn, or 1.2pc, decline in private sector credit during the quarter and that the fall was mainly due to write-downs on the value of loans by the banks. However, while it described the decline as “marginal”, it said that lending to all sectors of the economy fell during the second quarter.

It said lending to the property related sector was almost unchanged at €108.4bn.

Writedowns

However, on an annual basis, credit to the construction and real estate sectors fell by 3.7pc, with writedowns and rising bad debt provisions likely to have been significant factors in this drop. The decline compares with an annual increase of 17.1pc in the same period of 2008.

Property related lending accounted for 61pc of total outstanding private sector credit at the end of the second quarter.

A breakdown of the data shows a much bigger decline in lending to what are described as non-property, non-financial sectors.

This fell by €3.3bn or 6.2pc, with most of the decline due to lower levels of lending to manufacturing and wholesale businesses.

Overall, the sector saw its share of the credit cake fall from 12.3pc in the first quarter to 11.6pc in the second quarter.

Lending to the personal sector was down by €563m in the quarter with a fall of €368m in non-mortgage credit. This type of credit has now declined for five quarters on the trot, although the Central Bank said the rate of decline eased considerably during the quarter.

Residential mortgage lending accounts for the lion’s share of personal sector credit and was down by €194m in the quarter, the first such quarterly decline on record.

All categories of residential mortgage fell, with the combined decline in mortgages for buy-to-let and holiday home properties amounting to €38m. This was accompanied by a fall of €157m in mortgages for principal dwellings.

“The significant reduction in consumer credit witnessed in early 2009 eased somewhat during the latter part of the second quarter. This is consistent with the less severe pace of contraction in retail sales during the second quarter compared with quarter one this year, as reported by the Central Statistics Office,” the Central Bank said.

“Reduced demand for credit and continued tightening of credit standards by lenders are impacting on credit developments,” it added.

21 Aug 2009 

Property tax on every home in the country, averaging up to €1,000 a year, is among the recommendations of the Commission on Taxation, which will deliver its report to the Government in the next few days.

The report, compiled by the Government-appointed commission says that new taxes and charges should be balanced with reductions in other levies.

Measure such as taxing child benefit with a tax credit for lower income families to offset the impact, the introduction of water charges for every house, with water meters being installed at a later date, and a carbon tax on energy use are among the 250 recommendations.

The report also proposes replacing tax reliefs for the blind and handicapped with direct payments, scrapping artists’ tax exemptions, phasing out tax relief on bin charges and trade union subscriptions, and abolishing the PRSI tax ceiling so workers would pay on all income.

Abolished

In addition, it suggests a new SSIA-type pension for the lower paid with the State contributing €1 for every €2 paid by workers, a new tax relief rate of 30pc for pension contributions and a €200,000 cap on the retirement tax-free lump sum.

Tax relief would also be abolished for those providing student accommodation in the Gaeltacht.

The property tax would initially be a self-assessed tax with home owners asked to file a tax return giving an approximate value for their property. The lower paid and the elderly would be exempt from this tax.

The Commission says the tax should raise around €1bn for the Exchequer, but does not specify at what rate it should be paid.

To raise this amount, however, would require a tax of between €600 and €1,000 on each home and the money would be used to fund local authorities.

Initially, the scheme would be done through self assessment but this system would be replaced in time with a comprehensive valuation on every house in the State.

The imposition of water charges would raise another €500m a year towards the funding for local authorities. Any new property tax should be balanced by a lowering in other taxes such as the income levy, says the Commission.

The pension provision is aimed at encouraging the lower paid to take out a pension, since up to a million workers in Ireland have no pension provision.

Difficulties

Taxes on child benefit payments could create huge logistical difficulties, so the report also recommends considering other options, such as means testing the payments.

The report is expected to go to the Department of Finance in the next few days and is likely to be discussed by the Cabinet early next month.

21 Aug 2009 

THE Commission on Taxation has called for property taxes to be levied on all homes in the State, with a few minor exemptions.

The tax would initially be a self-assessed tax, with home owners asked to file a tax return indicating the approximate worth of their property.

Homeowners would be told to indicate if their home, for example, fell within a band of between €250,000 and €500,000. Other likely bands would be between €500,000 and €750,000.

If the property tax proposals are implemented, the average payment would be less than €1,000 per annum and could be in the region of €600 to €800.

Also recommended is that stamp duty be phased out with the implementation of a new property tax.

A transaction tax like stamp duty has proved to be hugely unstable as large amounts of money were generated from it during the housing boom, but the stamp duty tax take collapsed when the property market crashed.

The commission does not specify what rate the property tax should be set at. Instead it indicates that the new property tax should raise around €1bn for the cash-strapped Exchequer.

To raise this much would require a property tax of between €600 and €1,000 on each home. Members of the commission have agreed the property taxes should be imposed on all homes — except those of the lower paid and the elderly.

The proposal is that the self-assessment system would be replaced, in time, with a comprehensive valuation put on every house in the State.

Problems

It is likely this would have to be carried out by a much expanded State Valuations Office. However, the proposed new property tax is expected to run into the same problems as the disastrous property tax in the early 1990s, which was seen as hitting Dublin residents disproportionately.

The commission, which is made up of a range of people from accountancy firms, unions, employer bodies, academia and charity groups, was aware that house prices were tumbling. This means that owners would be unsure of the value of their homes, but the commission expects house prices to stabilise over time.

Commission members were also aware that retired people and the low-paid would not be able to pay a property tax and this should be taken into account, the report recommends.

As with the recommendation for water charges, funds raised from a new property tax should be used to fund local authorities.

Any new property tax imposition on households should be balanced by lowering the likes of the income levy, the commission says.

21 Aug 2009 

LATEST figures from the Central Bank show personal debt fell by €563 million in the second quarter of this year while mortgage debt was down €194m.

The bank’s figures show that overall the outstanding debt owed by private individuals and businesses was down 1.2% or €4.7 billion in Q2 of this year.

The bank said this was mainly due to write-downs of bad loans.

Yesterday Anne Breen, head of property research at Standard Life Investments said the Irish property market has still “some way to go” before reaching its low.

“The unsustainable peak in values reached in the Irish market compared with the rest of Europe mean its correction can be expected to be sharper and deeper than its European peers.

“Although there are signs of revival in the real estate market, with yields becoming more stable attracting international attention, capital values will continue to be impacted by rental declines going forward. We don’t expect the market to bottom until 2011,” she said.

Ireland’s banks face loan losses of about €35bn following the property bubble burst, the International Monetary Fund has said.

House prices have fallen 22% from their January 2007 peak, while banks have applied tougher conditions on loans as risks increase.

The decline “is mainly due to write-downs of existing credit arrangements and increased provisions for bad and doubtful debts”, the Central Bank said.

In the year to the end of Q2, personal sector credit was broadly unchanged, as falls in non-mortgage lending have been largely offset by the increase in residential mortgages outstanding over the year.

Meanwhile, Irish residential mortgage-backed bond delinquencies increased on expectations for a prolonged recession, Moody’s Investors Service said in a report.

The weighted average 90 days-plus delinquency trend reached 2.3% in Irish prime RMBS transactions in the second quarter, up from 1% in the year-earlier period, the report said.

Moody’s also notes that the weighted-average 360+ days delinquency trend stood at 0.37% at the end of quarter two 2009, which compares with 0.14% a year ago. Seven transactions recorded more than 0.60% of 360+ days delinquencies, while three showed more than 1.00%.

“The 360+ days delinquency trend is a lagging indicator, which means the full effects of the strong economic deterioration may not yet be fully reflected,” said the report’s co-author.