Taking home the Canadian bacon

Irish investors will suffer again as Ireland’s largest private landlord bides its time to cash in

Why do you think the share price of Bank of Ireland, Ireland’s least bust bank, has been falling dramatically? Obviously, there are clear international factors at play, such as negative interest rates, but could there also be some significant local factors?

Could it be that the market has realised that a banking/land/credit crisis that started with Irish investors being overleveraged to expensive Irish property financed by the Irish banks, will end with Irish investors once again being overleveraged to expensive Irish property financed by Irish banks?

If this scenario were the case, why would you want to own stock in an Irish bank?

The vertiginous fall in Bank of Ireland’s share price at a time when the economy is motoring was on my mind as I read the annual report of a company that you have probably never heard of, but which is Ireland’s largest non-governmental landlord.

Now have I got your attention? Yes, you read right, the largest landlord in the county.

Do you know the name of Ireland’s largest private landlord?

Would you be surprised to know that the company comes from that nice country north of Buffalo? You know that polite place, full of decent folk, home of the two Justins – the first being the good-looking, liberal, gay-friendly new prime minister and the second being, well you know, simply the Bieber. Quite apart from their luxuriant tattoos, the thing that binds both Justins together, is that they are both Canadian – and so too is Ireland’s biggest private landlord.

The company is the Irish Residential Properties Reit, set up by the Canadian Apartment Properties Real Estate Investment Trust.

How did that happen?

It happened because the crash has involved a massive transfer of Irish property assets from the original Irish owners, who ran out of money, to foreign funds who had access to cash when the merry go round stopped. The foreigners bought these Irish assets at deep discounts and the difference between what they bought these assets for and what was originally lent out on them was paid by you in both Nama bonds – which are written in your name – and the money that went to pay the bondholders who were paid out in full.

So in effect, Ireland Inc sold its assets, which were worth something to foreigners at a discount and paid back bank debts to foreigners, which were worth nothing, at a premium.

All this was orchestrated by the Irish state. These moves were explicit choices made by the Irish government. The bondholders, we know, didn’t have to be paid back. Even the IMF admits this now. But they were all paid in full. That’s the debt side.

And on the other side of the national balance sheet, the assets side, Nama was financed with Nama bonds underwritten by the taxpayer until 2020 in order to prevent a mass fire sale. That was why the Nama bonds were issued. But Nama went ahead with the fire sale anyway.

No one is saying that it didn’t have to kick off some sales to get the market going, but mass, wholesale flogging is the type of desperate selling that goes on when a property company runs out of money and has to liquidate, not a state-financed public-sector entity that is fully financed until the next decade, with taxpayers’ money.

But the selling goes on, to those who have access to liquidity. Right now, as central banks are keeping interest rates below zero, large vulture funds can borrow for free and deploy this free capital where they see fit.

This is how a Canadian company came to be the biggest landlord in the country with 2,000 apartments. Assets were gifted to it. Sure it paid money, but it got a deep discount. All of which is good for the Canadians. This is capitalism as practised in post-bust Ireland. It is not illegal.

But when you read the chief executive’s letter to investors, you see how subsequent Irish policy – after the gift – is making the Canadians very rich at the expense of Irish renters. And don’t take my word for it. Read what David Ehrlich says about the state of the Irish property markets and the implication of these problems for the bottom line of his company.

This is from page 12 of the company’s annual report. This is from the Irish Residential Properties Reit.

“There is little new supply of residential housing coming to market, and new housing starts are expected to remain well under forecasted requirements over the next number of years. As a result, we continue to see strengthening fundamentals in the residential rental business.

“The current planning guidelines and the high cost of new construction will make it difficult for the severe shortage of accommodation to be rectified, at least over the short to medium term.

“The company will benefit in two ways; firstly, it helps it to continue to build on its strong operational performance, and secondly, the company has capacity at its existing properties to build between approximately 600 to 650 apartments, subject to required planning and any other necessary approvals.”

So you can see what is happening. Planning restrictions and the high cost of land, itself driven by land hoarding, is constricting supply and the company doesn’t see any change coming for a few years.

According to the chief executive, this will help the company’s “strong operational performance” which is corporate speak for being able to get higher rents out of every apartment they own. In addition, the shortage will allow the company build and sell lots of new apartments as high prices.

This is an extraordinary outcome.

Bottlenecks, which are entirely within the gift of the Irish state to solve, are enriching foreigners. Irish rents, which are paid by Irish workers, are going directly out of the country to Canadian investors.

In time, the company will probably want to realise its good fortune, sell its assets and head back to Canada. If it chooses to do this, who will buy its assets? Most likely Irish people who will have these investments financed by Irish banks.

So a crisis that started with Irish people over-exposed in and leveraged in Irish property, financed by Irish banks will end up with Irish people, over-exposed and leveraged in Irish property, all financed by Irish banks.

You know what else is likely to be happening around this time? Global interest rates are likely to be going up, not down.

Digest that.