Have you noticed the way Irish property investors are like Man Utd supporters? Last week, the poor Man Utd supporters trending on Twitter swung between optimism and anger. Deep down, both emotions come from the belief that a couple of results back to back must signal a return of the glory years. The hurt this week at being demolished by Man City is more a function of believing in the divine right of United, rather than an honest assessment of a world that has changed.
As result of these denials, when United beat some Greek outfit at home and Wayne Rooney manages to lob an off-form West Ham keeper, the Stretford Enders rally around each other singing ”Glory, Glory Man Utd, dreaming of former glory when the reality is they have just beaten two second raters.
Similarly, the Irish property investors, the ones who are not bankrupt, see a few months of slightly rising prices as being the signal that the new boom is under way.
Like the United fans, they tend to be driven by memory, rather than reality. Aided and abetted by the forces of hype, the banks, the estates agents and the property pornographers in the media, the entire property apparatus whips itself into hysteria.
The utterances and editorials from these jaundiced sources are like reading the manager’s note in a match programme, or relying on a fanzine to give you an assessment about the true strength of a team. The fanzine approach to property postulates that property could again move back to the glory years of 2006.
At the more effervescent end of the property market (usually the ones whose balance sheet is most damaged), investors want to get back to the ra-ra days of the glossy brochure, 100 per cent mortgages and mezzanine financing deals. Now, while they will never say this openly and are sensible enough to deny this in public, this is what they hope for. They pray for the day when fear is replaced by greed once more.
Yet, similar to the chastened United supporter, they realise that expectations count and they all protest that the market doesn’t need to go back to the boom years but rather make a “transition” to something more “sustainable”.
The watchword is now sustainability. Sustainability has a ring to it, but there’s a smugness to the word because it means that while we have recovered from the trough and we are all being well behaved now, there are just enough fees for all the various snouts – from financiers, lawyers and large estate agents – to hoover up without appearing greedy.
All the while, during the period of sustainability, big trophy property deals are bragged about in order to send a signal further down the property food chain of just what might be coming down the tracks for those in the know.
These trophy deals are the Champions League fixtures of the property game and even though United can’t even beat Stoke, their fans can still claim to be in the Champions League and salivate over the clash with Bayern Munich. Similarly, the Irish property apparatus clings onto the presence of some hedge fund or other as being symbolic of the big time ahead. So the likes of Kennedy Wilson buying a funky building on the docks is the commercial property equivalent of a Champions League clash against Bayern. It is a trophy symbol of past triumphs, rather than a reflection of the true state of the environment.
So what’s the true state of the market for commercial property based on analysis in Ireland?
The first thing to realise is that there is no credit in the country. Ads from the banks may try to say the opposite, but the numbers don’t lie.
If you look at bank lending in Ireland, it has not only collapsed, but also continues to contract.
Therefore, the main source of financing in the country is foreigners. These guys are borrowing in yen at zero interest rates in a currency that is falling against the euro – which is great if you have debts in yen and assets in the euro. They buy the Irish commercial property assets and because of the exchange rate dynamics, even if the Irish asset yields nothing, they get a deal. But the asset does yield something since rents in Dublin at least are firm.
This excludes the local buyers from the deal, because if the locals have to borrow, they will automatically be 5 per cent down against the foreigners. So what you need to be more than anything else to partake in the great Irish commercial property sale is non-Irish!
Now do you think the foreigners are natural long-term owners of Irish property? Of course not – we are! And these leveraged guys have at most a three-year time horizon to flip the asset, pick up their 30 per cent price profit and scarper. So who will buy this stuff from them? Irish investors will, but not at the discounts that exist today or existed yesterday but at massive premiums to today’s prices. And who will finance these deals? Why, the recapitalised Irish banks in a few years! So we will end up with a banking system once again exposed to expensive Irish property ten years after a property bust destroyed the banks.
Interestingly, what agency has most say in this process, which will put the Irish banks deep into the property market at high prices once again? Well, of course, Nama will be the main player in this game. So an arm of the Irish state financed by Irish taxpayers will actively give foreigners the best deals and when they sell after they have got their upside, the more expensive, and therefore more risky, asset will be bought by Irish players financed by banks which are owned by the taxpayer, who owned the assets in the first place!
You couldn’t make it up.
This is the equivalent of Man United selling its best players to pay the debts of the club, allowing the club to falter and watch these players help other teams to glory at United’s expense. Then when United are battling relegation a few year hence, they buy back these players who are old and over the hill, hoping that their experience will help them avoid the drop.
Once they avoid the drop, the salad days of the treble are in just in sight again.
Glory, glory!
Liverpool for the league.
Very good analogy and pure lunacy,
Hi David, Superb article. If you remember you posted a graph a few weeks back where a graph form of a boom to bust cycle was presented. In it if you remember there was an upturn called a bull trap and this article is prima fascia evidence of the “return to normal” nonsense the whole establishment is pedaling. If you could produce an article which also highlights domestic property that would be great. I read recently a Canadian reit is trying to buy north of 7000 apts at the moment in Ireland for renting out. They will get north of… Read more »
And of course Ireland doesn’t do accountability, responsibility or forward thinking – so we are doomed to repeat our mistakes until the natives are all on social welfare paid for by foreign nationals imported just to do some work and pay taxes.
David,
Excellent article, this is where you are peerless David.
Poor auld Marc ‘wrong again’ Coleman is setting himself up for another almighty clanger if he believes what he writes.
http://www.independent.ie/opinion/columnists/marc-coleman/get-housing-in-order-before-interest-rate-hikes-strike-30138608.html
Back to levels seen in 2004, eh Marc? I remember 2004 Marc. It was property porn mania Marc.
Your paragraph in which you refer to the activities of NAMA, a state agency, really sums up the reality that this country is run by a gang of politicians who are incapable of looking to the long term because they cannot see past the next general election, jobs as EC commissioners, and maybe a lot of lies and false promises that might just preserve their jobs and pensions for another five years if the suckers who provide the money choose to listen to them. If we ever had a true and independent media in this country, your blogs should be… Read more »
Superb take on the situation. In terms of economics, how can you have a shortage of property on an island with only 5 million people and the lowest density of population in the EU. The idea that there is a shortage of property proves that the market has and is being rigged. Anyone and everyone needs to understand, Ireland has so much vacant land, so much development land, there can never be a shortage of property or premium prices unless someone is setting it up to be that way. All we have to do is look at countries like the… Read more »
Fantastic article comments from all.
Just looking at http://www.daft.ie/priceregister for Dublin.
Around 1175 houses sold in 2014.
Total sales and registered since the implementation of Price Register 01/01/2010 around 30200.
That is roughly 3.8 % of all properties sold since 01/01/2010.
A question for all you statisticians: Is this sufficient data to draw conclusions?
Superb article. Great analogy. I would also equate David’s ‘Champions League’ red-herring with Intel’s announcement. As someone on the ground in the IT sector travelling the country, all I’m witnessing since Christmas is rounds of redundancies in every Irish IT company I deal with. No single company’s numbers are dramatic enough to make the news but collectively they point to a widespread contraction. Over 30 years in the industry I always considered ITC as a niche industry in regards to the modest quantity of employment it generates. It was and always will a modest employer due to its very nature.… Read more »
I’ve always worked for American IT companies and it is always “restructuring” as the excuse for letting people go. The procedure is to lay them off bit by bit so it doesn’t hit the media and their customers. This trend/pattern has been like that during my 20 year career in the this sector. Always bit by bit. Especially just days before Xmas seem to be the preferred period to do a big clean up of contractors. Some of them are taken on again a couple of months later. As a permanent member of staff I was lucky all the time… Read more »
[ Therefore, the main source of financing in the country is foreigners. These guys are borrowing in yen at zero interest rates in a currency that is falling against the euro – which is great if you have debts in yen and assets in the euro. They buy the Irish commercial property assets and because of the exchange rate dynamics, even if the Irish asset yields nothing, they get a deal. But the asset does yield something since rents in Dublin at least are firm. ] Not just an Irish problem. The stats with respect to London are even more… Read more »
Why not talk about the elites league. Fraud is government licenced and condoned
http://usawatchdog.com/zero-prosecutions-of-elites-for-most-destructive-frauds-in-world-history-william-black/
Hello all, I am looking for rental accommodation. Can someone help me? Unfortunately I am a bit fussy. I am looking for a fully furnished six bedroom house, not an apartment. Each bedroom needs to accommodate a double bed for guests. At least 3 bedrooms must be en-suite and a bathroom/toilet on the ground floor. By fully furnished house I mean it must meet the latest standards and fashion including 50 inch flatscreen. A walk-in wardrobe is nice to have. I am willing to share but then it needs to have a fully fitted kitchen. Two at least. It also… Read more »
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