13/5/15: Dublin Commercial Property Market 1Q: No Fireworks, yet...

CBRE's commercial property report for 1Q 2015 is worth reading. If only for the surprising sub-trends that go largely unnoticed in the overall frothy markets.

Let's start with the summary: "Office take-up in Dublin during Q1 2015 reached 38,359m2 in 64 individual lettings." And, "the highest number of lettings in a quarter since Q1 2008".

So we have a handy chart:

Do tell me this is somehow a sign of 'strong' performance - 1Q 2015 lettings are lower than 1Q 2013 and 1Q 2014.

"15 of the 64 transactions signed in Q1 were to US companies with a further 39 lettings to Irish companies"

Which is good, because up until recently, main new signees were MNCs and Irish public sector. But… "There were no large lettings of over 4,645m2 (50,000 sq. ft.) completed in Q1." Wait, there were no large lettings completed in 4Q 2015 either, as I recall. Which means no large lettings in at least 6 months.

"62% of office take-up in Q1 occurred in Dublin City Centre" which is lower than in 1Q 2014, but higher than in 1Q 2013. Which suggests no clear trend in terms of pick up outside Dublin City Centre. Actually, ex-Dublin City Centre, lettings completed are the lowest for 1Q period compared to 2013 and 2014.

"The overall rate of vacancy fell to 11.27% down from 11.84% at the end of 2014. The Grade A vacancy rate in Dublin 2/4 at the end of Q1 2015 was 1.78%." And "prime office yields now 4.75%". Which suggests that while the prime market is clearly over-heating, secondary market is not.

"2 of the ten largest lettings completed in Dublin during Q1 were expansions, while 5 were relocations and 3 were lettings to new entrants." Which is an improvement on 4Q 2014 when there were no new entrants at all.

So I dare say there is not that much of a 'revival' going on, compared to where we are relative to the pre-crisis activity. It is probably more accurate to describe 1Q 2015 as steady, gradual and potentially risky recovery. Cautious, except when it comes to pricing Grade A prime location properties - the trophy treasure of MNCs and Public Sector and Semi-States.

24/10/2013: SCSI/IPD Ireland Property Index Q3 2013

SCSI/IPD Ireland Q3 2013 report is out for commercial property markets and the data is returning some interesting news.

• Irish commercial property (down 65% since the pre-crisis peak) rose 0.3% in Q3 2013 - the first time capital values were up in 23 quarters.
• Per SCSI/IPD, the drivers were: improving sentiment relating to the value of discounted properties (bottom fishing is on) and "gradually increasing occupier demand". 
• Total quarterly return on commercial real estate were at 2.6% - highest since the end of Q3 2007.
• Per release: "Demand for offices in central Dublin, from both investors and tenants, are driving returns, while recovery across the retail and industrial sectors is slower." So things are very much compressed into few sub-zones of Dublin and the 'bottom-fishing' ain't that good in the rest of the nation. 
• Office capital values rose 0.9%, while capital returns to industrial and retail property were still down at -0.5% and -0.3% respectively.
• All property annual income returns were 9.7% in September 2013, the highest measured globally by IPD and much higher than 6% in the UK.
• Annual income returns were 10.2% for offices, 12.2% for industrial properties and 8.5% for retail.
• Alas, rental values fell 0.4% overall on weak retail demand (down 1.9%), offices rents were up 0.5% nationwide and 1.0% in central Dublin. Industrial rents are up 0.3%.

Summary:

30/7/2013: It ain't recovery until prices start rising, folks...

You know the myth - the one spun by the realtors and the likes of the various business development bodies around the country - that goes something like: "Irish recovery is showing green shoots, as foreign investors are flocking to the Irish market, kicking tyres and snapping all commercial property they can get their hands on".

As usual, there's a basic logic flaw with much of the internal Irish commercial / business world. Normally, when someone is flocking with suitcases of cash to some destination to buy, demand goes up, and prices rise. In the short run, this logic might fail to hold if there is a supply rise of involuntary sales of properties in the market. In the long run, this demand-price relationship must hold, because both voluntary and involuntary supply of properties adjusts to move along with prices. In other words, even idiot bankers would begin to withhold property from the falling market when there are willing buyers kicking tyres in hope of gaining more on sale.

It has been years, that's right - years - since the reports of the alleged 'tyres-kicking' foreign investors first started to percolate. And yet... oh well... just look at prices:

Yes, per Central Bank chart (above), commercial property is still shrinking in terms of prices. The rate of shrinkage is moderating. But that is not the same as saying that prices are rising. They are falling, falling at a diminished rate, but still falling.

The 'recovery' is much more likely in the housing market, where cash-rich farmers (having made their dosh on pre-bust sales of land and still awash with CAP cash), cash-rich and property-secured senior professionals and retirees (having made their surplus money on pre-bust sales of homes in Donneybrook etc) and cash-rich Googlites and Namanoids (the sub-sects of the South Dublin younger professionals in cushioned jobs) are all chasing prime properties in the upper middle class segment of the market. Aside from that, things are not exactly hunky-dory, like...

Still, the housing market is telling a much better story of a 'recovery' (albeit it is still not a true recovery, yet), than the fabled foreign-investors-teaming commercial property markets... The old Widow Scallan's reincarnation as an ex-Spar 'prime retail' space is out for grabs... There's (allegedly) American investment funds-led bidding war going on across the country... so hurry up...

24/7/2013: CBRE Q2 2013 Irish Commercial Property Report

A very good quarterly report from CBRE on Irish Commercial Property markets in Q2 2013.

Some highlights:

In the above, I added the red line for referencing current yields to other urban locations across the EU. Pretty much suggests current valuations are in line with current macro fundamentals. Also, the chart above shows just how much more dramatic the swing has been from the cycle high to the cycle low in Dublin - wider than anywhere else.

Does this mean the market is now priced about right? Barring any dramatic improvement in the fortunes, I can't see much of an organic upside here. That said, external investment demand and longer-time investment horizons can (and probably will) push prices up. On the downside, there is the pressure of cost of long term funding news acquisitions.

On the shorter end, there are strong signs of market recovery. Per CBRE: "There was a significant improvement in transactional activity in the Irish investment market during the first half of 2013. In total, there were 34 investment transactions of more than €1 million in value completed in the six month period. In total, €603 million was invested in the first half of 2013, compared to a full year spend of €545 million in 35 transactions in the entire year last year."

More on the good news side: " Total returns in the Irish market in Q2 2013 increased by 2.3% while capital values were flat in the period according to the Investment Property Databank (IPD) Irish Index. Indeed, total returns in this index have been positive for seven consecutive quarters now." However, the chart shows continued negative capital returns:

The chart also shows that cumulated total returns over the positive 7 quarters are just about cover total losses cumulated from Q4 2009 -Q1 2010.

The headwinds remaining in the market, in my opinion are:

1. Risk to growth fundamentals in the economy: any further significant compression on current yields will have to be factoring stronger growth than recorded in 2010-2012,
2. Risk to the future long-term interest rates
3. Risk to supply/demand balance: current demand is driven largely by lack of other asset classes with comparable returns, plus surplus cash positions built up by some domestic investors. These are at risk of reversals on foreign demand side and exhaustion of domestic cash reserves. On supply side, there is a risk of NAMA eventually starting to dispose of domestic assets in earnest. 

For now, however, my feeling is that the yields are close to fundamentals-determined equilibrium.

24/6/2012: Sunday Times June 17, 2012

This is an unedited version of my Sunday Times column from June 17, 2012.

The current Government policy, and indeed the entire euro area crisis ‘management’ is an example of ‘the lesser of two evils’ con game. The basic set up involves presenting the crisis faced by the euro area or the Irish economy as a psychological construct, e.g. ‘We have nothing to fear, but fear itself’. Then present two options for the crisis resolution, similar to the choice given to Neo by Morpheus in the Matrix. You can take the blue pill, the surreal world you currently inhabit will continue unabated (the ATMs will keep working, the banks will be repaired, the economy will turn the corner, etc) but a cost of complying with the demands of the system (the banks bondholders and other lenders must be repaid, the EU systemic solutions must be embraced, confidence in the overall system must continue). Take the red pill, you go to the Wonderland and see how deep the rabbit-hole (of collapsed banks, wiped-out savings, destroyed front-line services, vulture-funds circling their prey, etc) goes.

Unlike in the Matrix, it’s not a strong, cool, confident Morpheus who’s offering the option, but Agent Smith, aka the Government and its experts. And, unlike in the Matrix, we are not heroic Neo, but scared humans, longing for stability and certainty in life. This disproportionality of the power of the State as the offerer of the false choice, and the powerlessness of the society assures the outcome – we take the blue pill and go on feeding the Matrix of European integration, harmonization, and self-validation. The very fact that the blue pill choice leads to the ever-accelerating crisis and ultimate demise of the entire system is irrelevant to our judgement. We are in a con-game.

How I know? I was told this by the Government own statistics.

We all agree that our real economic performance is abysmal. Take unemployment – officially, it rose to 14.8% in Q1 2012, unofficially, broader measure of unemployment – that including those recognized as being under-employed – is hovering over 22%.

But to-date, our fiscal performance has been so stellar, we are ‘exceeding Troika targets’. Right?

Ireland’s Exchequer deficit for the period from January 2012 through May was €6.5 billion or €3.7 billion below the same period last year. This ‘improvement’ in our deficit is due to €1 billion transfer from the banks customers and taxpayers (via banks holdings of Government bonds) to the Central Bank of Ireland that was paid out by the Central Bank to the Exchequer. Further ‘improvement’ was gained by the ‘non-payment’ of the €3.1 billion due on the promissory note, swapping one government debt for another.

Underlying day-to-day Government spending (ex-banks and interest payments on debt), meanwhile, is up year on year. Tax receipts are rising, up €1.6 billion, but if we take out the USC charge which represents reclassified non-tax receipts in the past currently being labelled as tax revenues, the increase shrinks to €726 million. In the mean time, interest costs on Irish national debt rose €1.3 billion on same period of 2011, wiping out all gains in tax revenues the Government has delivered on.

Take that blue pill, now and have a 15% increase on the 2007 levels of budgeted Government spending (protecting ‘frontline services’, like HSE senior executives payouts in restructuring and advisers salaries), or a red pill and face Armageddon. Yet, the red pill in this case would lead us to the realization that the entire charade of our reforms and austerity measures is nothing more than a false solution that risks making the crisis only worse.

This week, Professor Karmen Reinhart of the Kennedy School of Government, Harvard University was dispensing red pills of reality at the Infiniti 2012 conference over in Trinity College, Dublin. Her keynote address focused on the area she knows better than anyone else in this world – debt overhangs and the pain of deleveraging in resolving debt crises. The audience included many central bankers and monetary and fiscal policy experts from around the world, including even ECB. No one from the Irish Department of Finance, the NTMA or any branch of the Irish Government, save the Central Bank, showed up. Blue pills crowd don’t do red pills dispensations.

Professor Reinhart spoke extensively about Europe and, briefly, about Ireland. In our conversation after the speech, having met senior Irish Government decision makers, she reiterated that, like the rest of the euro area, Ireland will have to face up to the massive debt overhang in its fiscal, corporate and household sectors and restructure its debts or face a default. In 26 episodes of severe debt crises in the history of the world since the early-1800s she studied, only three were corrected without some sort of debt restructuring, and in all three, “the conditions that allowed these countries to resolve debt overhang problems absent debt restructuring are no longer present in today’s world”.

Worse than that, Professor Reinhart explicitly recognized that “Ireland has taken debt overhang to an entirely new, historically unparalleled, level”. She also pointed out, consistent with this column’s previously expressed view, that in the Irish case, it is the household debt that “represents the gravest threat to both short-term stability and long-term sustainability of the entire economic system”.

Per claims frequently made by the Government that debt deleveraging is on-going and progressing according to the policymakers’ expectations, Professor Reinhart stated that “in the US, deleveraging process had only just begun. Despite the fact that house foreclosures and corporate defaults have been on-going since 2008, the amount of deleveraging currently completed is not sufficient to erase the build up of debt that took place over preceding decades. With that, the US is well ahead of Europe and Ireland in terms of what will have to be achieved in terms of debt reductions.” Furthermore, “structural differences in personal and corporate insolvency laws between the US and Europe imply the need for even deeper debt restructuring, including direct debt forgiveness and writedowns in Europe. And, once again, Ireland is in the league of its own, compared to the European counterparts on personal bankruptcy regime.”

But don’t take Professor Reinhart’s and my points of view on this. Take a look at the forthcoming sixth EU Commission staff report on Ireland, leaked this week by the German Bundestag. The Troika is about to start dispensing its own red pills of reality to the Irish Government.

According to leaked report, the IMF and its European counterparts are becoming seriously concerned with two key failings of our reforms. The first one is the delay in putting in place measures to address – on a systemic basis, not in a case-by-case fashion as the Government insists on doing – the problem of households’ debts. Incidentally, this column has warned about this failure repeatedly since mid-2011. The second one is the rising risk that accelerating mortgages defaults pose to banks balancesheets. Again, this column covered this risk in April this year when we discussed the overall banks performance for 2011.

From independent analysts, to world-class researchers like Professor Reinhart, to Troika, red pills of reality are now vastly outnumbering the blue pills of denial that our Government-aligned experts are keen at dispensing. The problem is – no one seems to be capable of waking up inside the Matrix of our doomed policymaking.

To put it to the policymakers face, let me quote Professor Reinhart one more time: “Europe’s solution to the crisis, focusing on austerity instead of restructuring household and sovereign debts will only make the crisis worse. The pain of deleveraging is only starting. …Europe’s hope that growth can help in addressing the debt crisis is misplaced, both in terms of historical experiences and in terms of European economic realities.” And for our home-grown Mr Smiths: “Ireland’s current account surpluses [or exports growth] are welcomed and will be helpful [in deleveraging] but are not sufficient to avoid restructuring economy’s debts.” So fasten your seatbelt, Dorothy, cause Kansas is going bye-bye…

Charts:

Sources listed in the charts

Box-out:

Few months ago I highlighted in this very space the risks poised to the Irish banks and Nama from the excessive over-reliance, in the pre-crisis period on covered bonds and securitization-based funding. The core issue, relating to these two sources of funding, is the on-going deterioration of the quality of the collateral pools that have to be maintained to sustain the bonds covenants. Things are now going from bad to worse, and not only in Ireland. Per latest Moody’s Investors Service report, across Europe, 79 percent of all loans packaged into commercial mortgage-backed securities rated by the agency that came due in Q1 2012 were not repaid on time. Three years ago, the non-repayment rate was only 35 percent. Per Moody’s, “real estate with mortgages that match or exceed the value of the property… suffered defaults in nearly all cases in the first quarter. About a third of borrowers with LTV ratios of up to 80 percent didn’t pay on time.” If this is the dynamic across Europe as a whole, what are the comparable numbers for Ireland, one wonders? And what do these trends imply for the Irish banks and Nama?