Irish Life & Permanent’s (IL&P) bad debt estimates assume that the fall in Irish house prices will be confined to 40 per cent, even though a leading credit rating agency is already assuming a 45 per cent decline.

Commenting on its banking operation in its half-year results earlier this month, IL&P said that ‘‘the key assumption used in the group’s provisioning models and methodology, constructed in conjunction with Oliver Wyman, is house prices. The group’s assumption is that house prices fall 40 per cent peak to trough.”

Oliver Wyman is an international risk management consultancy which is part of the Marsh and McLennan group.

It is best known in Ireland as the consultancy which named Anglo Irish Bank as the best bank in the world at the 2007 World Economic Forum in Davos, Switzerland.

IL&P’s assumptions seem optimistic compared with those of international credit rating agency Fitch, which last month announced that it now ‘‘expects a peak-to-trough house price decline in Ireland of 45 per cent, and anticipates that this will ultimately lead to high loss severities’’.

IL&P said that credit quality and impairments were critical issues for the group’s banking business. It said the number of accounts in arrears greater than 90 days at the end of June in its Irish residential mortgage book increased to 5.2 per cent of the portfolio, compared with 3.9 per cent for the comparable period the previous year.

HOUSE prices in city suburbs could see a modest growth next year.

Head of residential property at Savills Ronan O’Driscoll said the most active sector of the housing market is the realistically priced three- and four-bedroom family houses in traditional, established city suburbs.

He said for houses in this category there is “clearly an undersupply of suitable houses and plenty of mortgage-approved buyers”.

“A return to price growth, assuming no more catastrophic economic events take place, is within sight for the right locations, particularly in the cities.

“In some limited cases, a return to competitive bidding is taking place and modest price growth is likely as soon as 2011 for houses in these locations,” he said.

Mr O’Driscoll said activity levels for rural houses, apartments, holiday homes and trophy Celtic Tiger mansions continue to be weak with downward pressure on prices continuing.

“Predicting when house prices will eventually rise is difficult, particularly as we are so heavily reliant on an active mortgage market which no longer exists.

“However, we have seen a significant increase in the level of activity and we are selling more houses this year than we have for the past two years,” he said.

Mr O’Driscoll said evidence over the past quarter illustrates that prices in some sectors have stabilised and builders who have dramatically reduced prices are generating sales in good volumes.

Director of the Irish mortgage corporation, Frank Conway said he is finding the mortgage situation is no longer getting worse and levels of enquiries are steady. “There is a consistent level of interest in how much borrowers can actually borrow based on their current earnings. The big challenge of course is the state of the overall market. Many consumers that we have engaged with for their mortgage want to move on and buy their first home. However, they are loath to buy when there is a big risk that prices may continue to moderate.

“Everyone is looking for signs that the property market has stabilised and no one wants to overpay for their home so it is a game of cat and mouse at the moment.”

He said there is a real need for a national house sales transaction index, adding one is “sorely needed” to measure what is a major aspect of economic activity.

TALKING PROPERTY: THESE days we don’t hear a peep of complaint from first-time buyers. They are now top of the heap: property prices have plummeted and they appear to be the only sector of the mortgage market managing to extract a loan from the banks.

The pyramid which was the Irish property market has been turned upside down and is now balancing precariously on the jagged remains of its once pointed head.

Historically, the property pyramid was a solid structure with a wide base consisting of low-income earners and first-time buyers, gradually narrowing to the tiny number of super-wealthy individuals positioned at the top.

Most of us had a fair idea which level of the property pyramid we were on.

Some struggled to stay where they were, others were happy with their situation and many, during the boom times, grabbed every opportunity to climb higher, aiming for the pinnacle.

In the early days of the recession, when those on the sharp pointed top of the pyramid were dramatically knocked off their perch, few cared.

Many believed the super-wealthy property investors could afford the hit and had squirrelled away much of their wealth in offshore accounts.

The media (myself included) laughed at their misfortune and expressed little sympathy regarding their demise.

The figures bandied about were so vast that they were beyond most people’s comprehension. Behind the glee at their fall, many secretly admired their nerve.

Soon, however, the ripple effect began to register. Those at the top of the property pyramid employed, either directly or indirectly, many of those on the lower layers of the structure.

As the pyramid crumbled and dole queues grew to include solicitors, architects, estate agents, builders, quantity surveyors, interior designers, manufacturers, retailers and myriad other related professions, it dawned on the nation just how much we all relied on the construction industry.

We watched the structure disintegrate and topple sideways, but were told we would all survive if we ‘took the pain’ and accepted ‘the new reality’.

Two years on, with more pain coming down the line and no sense of any sort of reality, let alone a new one, we now realise that the pyramid has, of late, completely turned on its head. Inverted, it is now top-heavy and structurally unstable.

According to the latest mortgage market report from the Irish Banking Federation and PricewaterhouseCoopers, there has been a drop in lending of almost 40 per cent compared with the same period last year.

Only 7,800 new mortgages were issued in the second quarter of 2010, with a total value of €1.31 billion.

First-time buyers account for 38 per cent of the loans drawn down during this period and represent the largest segment of the much reduced mortgage market, with an average first-time borrowing of less than €200,000.

Many of these first-time buyers work for state or semi-state organisations or have a secure job contract.

Others, however, work for formerly safe public sector companies which now admit that they’ve been struggling to stay afloat for the last few years and are on their last legs.

Last weekend, I spoke with a couple whose company will shortly have to cease trading.

They have already invested almost all of their personal savings into the business, in the vain hope of keeping their heads above water, but must now admit defeat.

In order to save themselves, they must close down their business, which they’ve been running for nearly 30 years, and let their staff go.

This upsets them greatly, as they are acutely aware of the fact that their staff have families and mortgages and are unlikely to find another job.

They were refused medium-term support from their bank – and told to raise money by selling their family home.

This, however, is easier said than done, as their home is a rambling old country house, an hour’s drive from Dublin.Their estate agent has told them the chances of finding a buyer are slim right now.

“It’s all a farce. Without working capital we’ll go down the tubes and we’ll drag at least five other families down with us. The banks don’t give a damn and the Government is oblivious.”

Perhaps it is now time for banks to adopt a more holistic approach to lending – and it is certainly time the Government took its nose out of the Anglo trough and started to examine the bigger picture.

There is little point in banks lending to first-time buyers if, at the same time, they are pulling the rug out from under everyone else.

A stable structure is required, now more than ever before – and it may be worth remembering that the Pyramids are still standing.

New figures show that asking prices for homes fell by 3.4% in the second quarter of 2010, bringing the fall for the year so far to 7%.

Property website MyHome.ie, which compiled the figures, says the latest quarterly fall is the 14th in a row and brings the total decline from the peak in late 2006 to almost 30%.

But the survey shows that there are some signs that the three-bedroom market in Dublin is stabilising, with asking prices for three-bedroom terraced houses increasing by 4%.

The average asking price for a home nationally is now €291,278 compared with €301,449 three months ago and €337,600 12 months ago.

In Dublin asking prices overall fell by 4.5%, bringing the total fall over the last 12 months to 17%.

New homes saw a higher fall compared to second hand homes during Q2, falling by 4.2% compared with 3.3% for second-hand homes.

Limerick city saw the biggest decrease of the main urban centres, with the median asking price falling 7.3% to €222,500. In Cork the fall was 5%, while in Galway it was 3.6%.

THE Dublin commercial-property market has received a number of fillips in recent days, with strong prices and rents for prime properties. AIB has pulled the sale of its Grafton St branch which would have generated more than €28m.

The price would reflect a yield of around 5.8pc which reflects a value of about 9pc more than that achieved by Marks and Spencer when it sold the Tomy Hilfigger shop across the street last ye

At least three of the offers were above the €25m to €26.5m price guided by the agents, CB Richard Ellis, and most of the offers were from UK investors. However, AIB resisted the temptation to accept the highest offer of around €28m.

Meanwhile, Real Estate Opportunities, the publicly quoted firm led by Johnny Ronan and Richard Barrett, has negotiated increases of around 12pc on the rents from three tenants at its Central Park development in Leopardstown, Co. Dublin. The largest of these rents is the €7.2m per annum now being paid by Vodafone for its 263,000sq.ft of offices.

The new rent of almost €295 per sq.m. is backdated to October 2006 and is well above the €187 per sq.m. being achieved on average for new suburban Dublin offices.

The second tenant is Tullow Oil plc, which agreed a 12.8pc rent increase for its 24,000sq.ft of offices at Central Park.

Ulster Bank is also believed to be close to doing deals for around 12 of the 49 First Active branches that it is currently marketing through DTZ Sherry FitzGerald.

Meanwhile, the overseas investors, F&C Reit Asset Management and Area Property Partners, are understood to be close to completing the purchase of the Liffey Valley shopping centre from Aviva and Grosvenor in a deal believed to be worth about €350m.

This deal will not include the 120 acres of development land at Liffey Valley which is owned by Barkhill, the joint venture between O’Callaghan Properties and Grosvenor.

South Dublin Co. Council recently gave the green light for 450,000sq.ft of retail space on 60 of these acres.

Nevertheless, a majority of Irish estate agents are forecasting that commercial rents and prices will continue to fall in 2010, according to the annual survey from the Irish Auctioneers and Valuers Institute. (See commercial-property section of today’s Irish Independent).

AIB’s decision to pull the sale of its Grafton Street branch came as a surprise, considering that the bank appears to be under pressure to generate and conserve capital in order to alleviate its balance-sheet bad debts. A spokesman for the bank said it was considered inappropriate to sell this particular branch at this point in time.

However, sources close to the bank have indicated that it has no plans to stop selling other properties and is willing to accept offers that it considers to be good value.Prior to the recent change of management, AIB had generated hundreds of millions of euro from the sale of both its prime Dublin offices, as well as branches.

In all, it has completed sale-and-leaseback deals on about 50 of its 186 branches, north and south of the border.

At the time of the market peak, the sales were part of a strategy for generating capital which could then be lent on to the bank’s clients. This was when there was a strong demand for funds to buy all types of properties.

Simultaneously, investors paid strong prices for bank properties because the bank was also offering attractive sale-and-leaseback deals.

Not alone were the rents attractive and came with upward-only rent reviews but the risk was low because of the blue-chip nature of the tenants.

14 Jan 2010

The fall in house prices left many homeowners in negative equity, but this need not necessarily prevent you from trading up, says John Cradden

IT’S the topic no one wants to talk about, but this elephant has no plans to leave the room. Negative equity happens when the value of your property on the open market amounts to less than the sum of your mortgage.

If you bought a house within the past five years, you are likely to be in negative equity to some degree.

The average household is sitting on negative equity estimated at €43,000, according to Irish Independent calculations based on a recent report by Goodbody Stockbrokers.

It was estimated that 116,000 households were in negative equity at the end of 2009, rising to nearly 200,000 by the end of this year, according to the Economic and Social Research Institute.

However, this is a conservative estimate based on prices falling by 24pc from their peak in 2007. If house prices end up falling by 50pc, this figure would rise to 350,000.

It is generally expected that when the National Asset Management Agency is established and house prices start to recover, they will do so only very slowly and steadily. But this means that thousands of us may be stuck in negative equity for quite a number of years. This may not be an issue for you if you plan on staying where you are for the foreseeable future.

You may also have just enough of your mortgage paid off that it will not prevent you from trading up in the short to medium term. However, if your LTV (loan to value ratio) is still above 70pc or so, the financial challenge of trading up takes on a new dimension.

Kevin McNerney, director of the Mortgage Finance Company, says most first-time buyers borrowed between 90pc and 100pc of the purchase price.

“This leaves people in a position whereby, even if they wanted to sell the property and rent something for a few years, they would need to come up with a large lump sum to hand over to the mortgage provider, just to clear their mortgage debt.” He estimates that if someone wanted to trade up, they would also have to come up with an additional lump sum ranging from 8pc to 20pc of the purchase price of the new property.

“If they buy a second-hand house they will need to have money for their stamp-duty also.”

But what if you definitely need to move at some stage within the next five years? Is there anything you can do to prevent negative equity from scuppering your plans?

Depending on your circumstances, the ultimate answer may be no, but at the same time there seems to be little point in just waiting and hoping.

“If someone feels that they will need to trade up their property within the next three to five years, then the only option available really is to start putting additional money aside each month to enable them to have a lump sum set aside for when the time comes,” says Mr McNerney.

For those who may need to move in three years’ time, Patricia Foskin, of Waterford-based mortgage brokers Foskin Mortgage & Finance, suggests fixing mortgage rates now for the next three years. Depending on the lender, three-year fixed rates start from 3.19pc.

“This way they can avail of the current low rates for the next three years and save as much as possible by opening a regular savings account, where there are rates available of up to 4pc at the moment,” she says.

Karl Deeter, operations manager at Irish Mortgage Brokers, says: “I think that it really comes down to what you can afford. If you can repay a little extra on your mortgage, now is a great time because with rates so low you will eat into capital in a more rapid fashion.” For those on a cheap tracker mortgage, Mr Deeter suggests putting surplus funds into a high-interest savings account, so that you have the flexibility to decide what to do with it, whether as a down payment against another property or to pay off a lump sum on your existing mortgage.

However, he warns that whatever you do, it is vital that your credit score stays good as missing even a single mortgage payment could create more difficulties, particularly as banks become much more conservative about their lending.

“People need to find a way to avoid damage from the downturn as much as they need to find ways to get themselves lined up for any future move,” he said. He also recommends overpaying your mortgage, but warns that those on fixed rates will not be allowed by their lenders to overpay, or will have to pay a penalty for doing so that will negate the overpayments in the first place.

You should also assume that property prices will not increase when determining how much you need to put by in order to clear the negative equity portion of your loan and also raise a deposit for a new property.

“This will help you to work out how much you need to be putting aside every month,” says Mr McNerney

13 Dec 2009 

A complete ban or long delays on repossessions is going to be difficult for the banks who use their mortgages as collateral for their own borrowing, reports Jon Ihle

Last Wednesday, just in time for the budget, Moody’s issued a press release highlighting further deterioration in the quality of securities backed by Irish residential mortgages.

Delinquent loans – those overdue by three months or more – reached 2.9% of total loans in October, the agency said, double the amount from the year before. Borrowers more than a year behind on payments hit 0.7%, an increase of 300% over last October.

Why does Moody’s, a bond-rating agency, care about Irish mortgages? Because the banks who issue those mortgages use them as collateral for their own borrowing, which is done by wrapping the mortgages into bonds and either selling them or lodging them with a third party, such as the European Central Bank, in exchange for cash. So mortgages are crucial not just to a bank’s profits and capital, but for access to funding.

Although Moody’s acknowledged in the statement that Irish mortgage-backed bonds had not yet reported significant losses, the analysts worried that delays in foreclosure on bad loans – very common in repossession-averse Ireland – would only lead to higher losses later on. When that happens, the banks who depend on these bonds to raise money for new lending are going to face a funding problem as counterparties refuse to provide fresh cash.

So the banks are facing another conundrum: mortgage arrears are rising, but tough collection action is impractical due to social, political and economic reasons. Yet if they don’t curb loan-delinquency, the banks won’t be able to pledge mortgages for new money to fund lending. In fact, the various measure banks are using – and the government is insisting on – to keep delinquent borrowers from defaulting and losing their homes could ultimately cut off vital credit to the economy down the line.

Less than two weeks ago, Fergus Murphy, the chief executive of EBS, and his chief risk officer Fidelma Clarke met the Oireachtas Committee on Social and Family Affairs to discuss mortgage arrears and defaults and to consider ways banks, the government and borrowers could work together to address the problem.

Murphy and Clarke aren’t the only bankers interested in this issue. It’s an industry-wide concern. And government is waking up to the growing numbers of people – 35,000 at last count – who are missing payments on their mortgages and raising fears of a second-wave crisis in the banking sector.

The banks have so far tried to deal with rising arrears through borrower-friendly mechanisms, such as the Irish Banking Federation’s (IBF) protocol with the Money Advice and Budgeting Service (Mabs), which sets out a formal debt-recovery approach that seeks to avoid a more antagonistic method, such as repossession proceedings. But bankers are concerned that the clock is ticking on the various forbearance measures they use to keep from seizing loan security.

There is a recognition in the banking industry of the value of forbearance as a short- to medium-term measure to address difficulties some borrowers are having paying their mortgages, but in the long-term bankers say something else is required. Nobody has a definitive answer yet – although there are several strategies under consideration by lenders – but there is a realisation too that whatever replaces the current ad-hoc approach must avoid disrupting the banks’ funding, which depends on using mortgages as collateral for credit lines from institutional investors.

This is what Clarke had to say to the committee on the subject: “The way the system works is that institutions use loans as collateral for lines of credit for wholesale funding purposes and liquidity. Any damage to any contract as would be seen by an international investor, could have unattended negative consequences for the Irish banking system. If all covered bonds, securitisations or liquidity facilities with the ECB were no longer deemed to be of the quality people thought they were signing up for, they could be downgraded.”

The main concern emerging in the capital markets revolves around the uncertainties caused by forbearance measures such as interest-only periods, payment holidays and moratoriums on foreclosure. Bond investors want to be sure of their coupon payments; forbearance introduces some uncertainty. For example, last month when the IBF announced its members would extend delays on repossession action for an extra six months, a number of nervous UK bond analysts contacted the organisation with questions about how this would impact the funding side of the banks.

The ratings agencies who grade mortgage-backed bonds for their quality have picked up on this, too, as Moody’s recent attention shows. The ratings and the other bond analysts reflect a sensitivity in the bond and securities markets about the safety of any investment where the prospect for regular payments is uncertain.

Under normal market circumstances, the banks would be lending enough year-on-year to replace old loans as they matured. But because of the property crash, lending volumes are only about a quarter of what they were at the peak. That means as time goes on, more and more of the banks’ loan books are made up older loans, many of which were granted on overpriced properties during the boom. As unemployment, pay cuts and tax rises continue to wreak havoc on incomes, banks are naturally facing higher levels of arrears on these loans, leaving a smaller and smaller proportion of good loans to replace them.

According to Bloxham Stockbrokers, which was commissioned by EBS to research possible solutions to the arrears’ problem, there is a risk that concern about the potential reaction among bondholders could be used as an excuse for denying debate and evaluation. Bloxham seems to think alternative structures could be explored without spooking providers of long-term liquidity to the banking system and EBS brought several suggestions to the table, including the idea of a sector-wide refinancing plan for the hardest-hit borrowers and a more general mortgage insurance fund similar to the bank-deposit fund that traditionally has guaranteed savers’ money. Dolmen Stockbrokers analyst Oliver Gilvarry believes the government may ultimately have to set up a state mortgage bank to absorb troubled loans.

But both the banks and the government will have to tread carefully here, as the whole point of the bank-guarantee scheme and Nama is to assure funding lines into the Irish banking system so that normal credit is available to both consumers and business.

Momentum is gathering both in the financial industry and in government behind some form of mortgage rescue scheme. Since Green energy minister Eamon Ryan got the issue into the Programme for Government in October, it has become a significant issue on the political agenda. But the mechanics of any package – for borrowers or lenders – are far from being worked out. Ryan has put together an interdepartmental group made up of senior civil servants to assess option.

But capital markets and debt investors will have to be assured that any systemic solution to the mortgage arrears problem is sound, otherwise they could pull vital lines of credit from the Irish banks, which would prolong the recession and heap more misery upon cash-strapped mortgage borrowers.

Causes of rising mortgage arrears

» Unemployment: there is a direct relationship between the unemployment rate and mortgage arrears. With unemployment at 12.5% and due to climb in 2010, the outlook for arrears is getting worse. Even if the economy begins to grow towards the end of next year, bank analysts expect arrears to increase as job growth will lag GDP growth.

» Pay cuts: falling incomes mean the houses people bought at 2006 prices with 2006 wage expectations are a lot less affordable.

» Higher taxes: the crisis in the public finances has spilled over into household finances as new income and health levies have eaten into take-home pay.

» Non-mortgage debt: car loans, overdrafts, credit cards and personal loans add to the debt burden. While Central Bank figures show credit card balances, for instance, are declining, judgments on personal debt defaults are rising – and so are the amounts being sought.

» Falling house prices and negative equity: once the value of your house falls below the amount you owe on it, selling is no longer a viable option for getting out of debt trouble. The housing market is so sluggish that quick sales are all but impossible anyway, trapping even willing sellers.

Rules on repossession

Although repossession rates have been rising steadily over the two years of the recession so far, the gross numbers are still relatively low.

The reason for this is, firstly, the protocol agreed between the Irish Banking Federation and Mabs, which sets up a formal process for debt recovery designed to avoid foreclosure if possible, and delay it if not, and, secondly, the government code of conduct on mortgage-lending for banks under the guarantee scheme.

The IBF/Mabs protocol requires banks to adopt a partnership approach with Mabs when pursuing debts. It also lays out a five-step process leading to a formal payment plan for troubled borrowers which is then monitored and reviewed on a six-month basis. This approach meshes with the IBF’s own pledge to give six months’ grace on mortgage arrears on top of the statutory period.

The government’s code of conduct on mortgage lending says lenders must adopt flexible procedures for handling mortgage arrears and assist the borrower as far as possible with deferral of payments, extending term of mortgage, changing type of mortgage, or capitalising arrears and interest. They must also must wait at least six months (12 months for the two recapitalised banks, AIB and Bank of Ireland) from the time of arrears first arising before applying to the court to commence legal action for repossession.

14 Dec 2009 

Apart from extending the time period during which some borrowers can claim tax relief on their mortgage interest, Brian Lenihan’s budget contained no measures designed to stimulate the property market.

However, in the wake of the National Asset Management Agency (Nama) and the bank bailout, it would have been politically impossible for him to do anything that could have been interpreted as helpful to developers.

Aine Myler, president of the Irish Auctioneers and Valuers Institute (IAVI), summed up the reaction of the industry when she said that, overall, the budget would have ‘‘no major impact’’ on the property sector.

However, she did applaud the extension of mortgage interest relief. ‘‘We welcome this move to protect new entrants to the market, but remain concerned about those who are struggling to pay existing mortgages,” she said.

Under the changes announced in the budget, mortgage interest relief will continue to be applicable for seven years for all qualifying loans taken out before July 2011, and transitional arrangements will be put in place for loans taken out between July 2011 and the end of 2013.

In addition, anyone whose mortgage interest relief was due to expire next year or in subsequent years will now continue to get relief up to the end of 2017. Lenihan said he intended to abolish the relief entirely by 2017.

There were no changes to stamp duty rate for residential or commercial property - some industry watchers had speculated that the rate for commercial property might be lowered in an effort to attract investment from large overseas investors and property funds.

As expected, Lenihan did make reference to the future introduction of a property tax - based on site value - that would replace the stamp duty regime on residential properties.

He said the government had accepted the recommendations of the Commission on Taxation on the need for a property tax.

However, it could be a number of years before such a tax is implemented, depending on how the government decides to go about valuing residential property. Even when that task is completed, the government will then face the tricky task of deciding how to levy the tax.

Last week, the joint Oireachtas Public Accounts Committee was told that the State Valuation Office had ‘‘early stage’’ talks with the Commission on Taxation about its ability to value residential properties. At present, the Valuation Office only values commercial properties, and charges businesses a flat fee of €250 to do so.

Aidan Murray, the commissioner of valuation, told the committee that the office could possibly play a supervisory or audit role if residential properties were to be individually valued.

He said that while the office does not have the resources to value the residential sector, this could be addressed by hiring property professionals to carry out valuations.

Just who would pay for these valuations remains unclear, but sources suggested last week that making homeowners pay for their own valuations had not been ruled out.

03 Dec 2009

BUYING ABROAD: . . . but there is still momentum in the market, driven by long-term planning for retirement Investing via your pension, writes DIARMAID CONDON

THE COMMON consensus these days would appear to be that the overseas property market has collapsed entirely. Quite apart from the usual “recessionary economic conditions”, the overseas industry has suffered a plethora of catastrophic events.

Most of those companies that have not been sued for one reason or another at this stage appear to have filed for bankruptcy. No one would really be surprised if the overseas market was fatally wounded.

The new wariness in foreign property is prompted by a long list of sound reasons including: the sometimes high-profile collapse of so many Irish-based companies selling investment properties in countries ranging from Dubai to Bulagaria, Cape Verde to Spain; the current economic environment; people struggling with properties overseas they now don’t want or can’t afford and the continuing lack of regulation of the property market.

However, this would appear not to be the case – there is still some life in the market.

It seems there are a number of factors making certain types of overseas investment still look attractive, principally: a loss of confidence in the pension market, the Government’s approach to the Irish property market, an inability to raise finance at home and the current strength of the euro.

There is still interest in overseas property, but only to a limited extent. The infatuation with holiday homes in obscure locations for investment purposes has, apparently, come to an end – at least for the time being.

What little momentum there is in the market appears to be driven primarily by long-term planning for retirement, whether through pensions or via direct investment.

Despite there being a significant appetite for UK property at reasonable values, the difficulties with, and expense of, organising finance, particularly for Irish buy-to-let investors, is currently proving a significant barrier.

The UK market is, of course, still suffering from the glut of apartment properties brought to market by so-called “buy-to-let investment clubs” during the peak of the boom, which has made UK banks very wary of the buy-to-let sector as a whole.

In the US, however, it is still possible to raise finance at reasonable rates as long as a valid set of figures can be produced. Clear Sky Capital, which promotes yield-driven property investment in the north-east of the country, raised over 200 enquiries at recent seminars and is confident that it will engage in more than 20 viewings in the US at the end of the month. This certainly puts paid to the view that the overseas market is totally dormant.

The UK and US are traditional havens in turbulent times at home, but what about other countries that could be monitored with a view to longer term investment? In the current environment investors want to stick with countries with a long tradition of freehold property ownership and, preferably, also a tradition of long-term rental.

Apart from the US, distance also seems to faze investors at the moment. The two standout candidates on that basis would have to be Germany and Sweden. Both are stalwart members of the EU (although Sweden does not use the euro, which is actually somewhat of an advantage for purchasers at the moment) and both look to be gradually bringing their economies back to some semblance of normality.

Sam Roch-Perks of Swirish, a Swedish/Irish investment company based in Waterford, says that following a considerable lull period, there are signs of some traction in the market again, particularly for long-term and retirement planning, whether through pensions or otherwise.

“Sweden is ideal for this,” he says, “as yields are reliable and there is no unrealistic expectation of huge capital appreciation.” It has also been relatively unaffected by the past year’s global real estate collapse, particularly in the smaller cities and their satellite towns.

He says yields of 6–7 per cent net of all costs are quite common in Sweden and borrowing is attractive as the Swedish base rate of 0.25 per cent is a full 0.75 per cent below the euro rate. Loan-to-values (LTV) of up to 80 per cent are, he says, also freely available depending on the product. The euro has been strong against the Swedish krona of late, giving investors some extra buying power. The krona has typically ranged around 9-9.5 krona/€1, but is currently just under 10.5, having reached just under 11.2 in March 2009.

Germany, the largest economy in the EU, has also proven attractive for longer term, yield-driven investors. During the boom years across Europe, Germany bore the cost of integrating the old GDR, consequently its property prices remained quite sane, often under the cost of construction.

Finbarr Flahive, MD at Youngfields OCP, a Dublin-based firm with offices in Cork and Stuttgart, says his company has recently seen a significant increase in demand for commercial property investments through pension funds.

“People are unhappy with the current investment strategy of their pension providers, such as over-exposure to volatility in stock markets and managed funds,” he says.

Flahive believes that post-Nama, current attractive Irish bank deposit rates will drop significantly leaving risk-averse investors with no option but to consider investments outside the country.

Germany is the world’s largest exporter and its third largest economy and has, according to Des Quigley of Louth-based Off-Plan Investments “proven its resilience to the downward price pressures being experienced in other markets”. He says that investors who were sold the promise of high potential capital gains have run into problems as they do not have the backup of a solid, mature rental market, which is where Germany wins out over many other countries.

“Prices are realistically valued on actual and historical rental income and German banks remain confident in financing overseas investors on a non-recourse basis, with a loan-to-value (LTV) of around 70 per cent for well-located residential properties which can return up to 8.5 per cent gross,” Quigley maintains.

Current lending rates are around 4.25 per cent for five-year fixed and 4.88 per cent for 10-year fixed – fixed rates are the preferred option with German banks.

He concludes that Irish investors are also steering away from “trophy” type properties because of lower yields; everything is returns-driven these days.

Why overseas investments can still be attractive

THERE is a perception in the marketplace that traditional pension funds simply aren’t performing as they should. These funds thrived in the good times – but it is widely felt they didn’t exhibit the foresight for which fund managers are paid. Now people want to know in what, exactly, they are investing, and many aren’t prepared to pay large fees to allow someone else to plan their investment strategy.

The second factor is a lack of confidence in the Irish property market, particularly from investors. Not alone do they feel that there is not sufficient upside in the investment market here, the new second home property tax has been taken as a snub to the property investment community. Despite the fact that nearly every country has a property tax of some description, the potential for dramatic increases in the Irish tax is the obvious concern. There is certainly a feeling among investors that there are other countries with better prospects for short-term economic recovery than Ireland, where investment in property is still welcome.

The third factor is an inability to raise finance in Ireland. Although banks claim to be “open for business” it is apparent to anyone who has had any dealings with one recently that this is patently not the case.

In any case, property has rapidly moved from the most desirable asset class to a virtual pariah – hence Nama.

The last thing Irish banks want on their books at the moment is more property.

The final factor is the current strength of the euro against a number of currencies, particularly sterling and the dollar. The US has proven particularly attractive of late as it is possible to borrow for investment grade property product with proven yields; such investment is proving far more difficult in the UK, although this is a market with which the Irish have traditionally been very comfortable.

Investing via your pension

PROPERTY in overseas jurisdictions may be included in self-administered pension schemes such as a Small Self Administered Pension Scheme (SSAS - for company directors) or a Self Invested Personal Pension (SIPP - for self employed and professionals).

There are a number of restrictions, such as the inability to purchase your principal private residence (PPR) and a necessity for the transaction to be at arm’s length from the pension recipient (for instance, the property cannot be let or sold to the intended recipient).

Essentially, a self-administered pension scheme allows the pension owner to control their pension investment decisions without the assistance of a third party insurance provider. A trust is set up and administered by the appointed trustees, one of whom is required to be a revenue approved “pensioner trustee” (see www.pensionsboard.ie).

Fund investment is entirely up to the pension recipient, as long as these comply with Revenue rules.

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Figures show rate of decline in national house prices of 1.1% in September 

Nationally prices down 11.1% in first nine months 

National prices now at Christmas 2003 levels Friday 30th October 2009.