Powerful forces at play in the Irish market

Navigating the strong currents in the Irish property industry will be the big challenge for 2013. The extent of these forces could make it a great year or a terrible one.

We are finishing 2012 with some sense of direction, with about €600 million in investment sales, a reviving housing market, particularly in inner Dublin, and a level of mortgage finance emerging for house buyers. Maybe this trend will continue, but the forces at work could drive us off this benign course.

Those forces include bank deleveraging, uncertainty about the euro’s future, a moribund world economy, the impact of the Budget on the Irish economy, the absence of credit for purchasers, the level of foreign direct investment into Ireland and the limited availability of equity to buy property. But whatever the outcome, it can’t be worse than the experience of 2009-2011, when almost nothing positive happened.

Bank deleveraging

Probably the most significant current is the need for the Irish banks to deleverage over the next seven years to comply with new banking rules. The extent of deleveraging so far by the Irish banks is about €35 billion but the rundown of the loan books has a long way to go. This will involve sales of loan books to overseas investors.

As a result, many professional borrowers will have a new banker in the not too distant future – and not out of choice. That lender will have a totally different attitude to his debtor than his former Irish banker, having bought the loan at a significant discount to its nominal value.

The expectation is that the new banker will adopt a far more aggressive approach to their borrower but the good news is that that they will be prepared to slice and dice to get a result. That result will be either a turn on the price paid for the loan, or a handsome income, while awaiting the eventual disposal of the asset. I have tried to get an estimate on the likely level and timing of loan book sales but there is a very wide range of estimates in the marketplace. Nama seems to be in the best position as it does not have to comply with the various Basle rules applying to the banking sector. It also has very cheap funding and is well ahead of its bond repayment commitments. The big question about bank deleveraging is the risk that much more property comes onto a credit-starved Irish market than it can absorb and thus forces down values even further.

Values

Until I learned recently about the possible scale of the deleveraging coming down the tracks I would have subscribed to the idea that we were at the bottom of the property value curve, particularly in Dublin.

However, now I am not so sure, specially in the secondary markets where most of the loan books are secured. It will come down to four factors: volume of sales; price paid for the loan; investment timescale of the loan purchaser; and the ability of the borrower/property to generate income to service the loan or capital to pay it back from its own resources or by forced sale of the asset – even at a significant discount. Trying to guess the outcome of this and its impact on asset values is like predicting the winner of the 3.30 at Punchestown.