Monday 28 September 2009

NAMA, the Commission on Taxation and rent reviews: the rogue's guide to Irish finance

An Saoi: I have refrained from making any comment on the Commission on Taxation Report to date, mainly because of its lack of any new content and silence about many issues, in particular VAT and property-based incentives. We now know why they ignored the property tax incentives - the Government’s NAMA plan is dependent on the re inflation of the property bubble.

Rónán Lyons of Daft in an analysis of NAMA points out that rents are continuing to fall. His earlier work, the Daft Rental Report for Quarter 2 2009 showed the degree of the fall and also suggested that there was no sign of it reaching a floor. Any Government Minister who bothered to leave the bunker and take a stroll around Grafton St and surrounds would see the effects of inflexible rents described recently in the Sunday Business Post.

The developers also seem happy to put it up to State and NAMA. Real Estate Opportunities (REO) announced that they intend to go ahead with the development of the Ballymun town centre (to be called Spring Cross, not Ballymun) and are pressing for huge loans to commence the project next year. Now REO itself is hopelessly insolvent and intends as part of this project to add 35,000 sq m of office space to an already oversupplied market, 60,000 sq m to North Dublin, which already has a surplus of shops and 360 apartments to an area where there are thousands vacant. Now this company has debts of over €1,700M on its balance sheet at 30th June and wants NAMA to pony up another €800M! A quick look at their interim accounts to June 2009 paints the picture.

Dermot Ahern announced recently that he was not now going to ban upward only commercial rent reviews. This again is another part of the vain attempts to prop up the silly levels of rents. Commercial rents need to fall dramatically, at least 20% to ensure retail businesses survive and perhaps by 50% to enable the retailers pass on meaningful price reductions to customers. Rónán Lyons' piece in Friday’s Irish Times explains simply as to how rental changes influence valuations.

Apart from the dud loans the State has already agreed to take over, it appears that NAMA will be expected to produce money to complete half-finished projects. NAMA also parks approx. €13,000M of small developer/builder/speculator loans, which remain with the banks. It also leaves the residential landlord outside the tent. They account for approx. 20% of mortgage borrowing or around €30,000M of total mortgage debt. We can only presume that the banks will be back to get help with those also, particularly as the tenants continue to disappear.

Banks, builders and their shareholders have successfully transferred all their risk to the rest of us and we will pay for it for the next fifty years.

3 comments:

Martin O'Dea said...

Well said, I remember a period where a typical interest in history transferred to a typical young interest in politics and the mechanisms of power, and the thought occurring that 'well nothing much happens, now, at least certainly no great sate wide "bad" can be found to get really animated about' - goodness, how wrong can you be.

I loudly applaud this article, and this website. I hope more and more people get to review this content. I try to avoid hyperbole and irrational emotional perspectives; and I do not believe that the individual people in Fianna Fail and elsewhere set out on their early professional lives intending to do such harm. But this is where the dynamics and the evolving ideologies (or lack tehreof), personal interactions, the leaders and the followers have brought us at this time. We are now, effectively, getting personal security tips from a thief.

There is vast amounts of overlapping interests in how we deal with our deficit, our banking sector, our property market, our governance and our society. The people making immensely important and far-reaching decisions are hopelessly compromised. In fact, if election reuslts did not provide politicians with their livings i am sure the current power holders would consider stepping aside. The need to show them the door is now very urgent (perhaps necessarily pre NAMA)
If there is ever a time for animation!

An Saoi said...

Martin, Thank you for your kind comments. If the Government wished to give a kick start to the economy, then forcing rents down would have an immediate influence. The French Govt. showed how a drastic cut in VAT could influence customers' habits when they slashed VAT rates on restaurants. Rents are taking far too high a percentage of turnover and landlords who are not happy to cut rents, should be forced to move to differential rents based on the tenant's turnover. Reducing rents cuts the cost of doing business and is just one step needed to cut the costs of doing business. However it is a major base cost of doing business. Why is a minor city like Dublin the 8th most expensive from a commercial rent perspective? Anyone who feels that we can go on should note that the Ir£ is today trading at Ir£1 = Stg£1.16. Our exchange with sterling has gone one direction while we have had consistently higher inflation than our main trading partner. There are a lot of hard decisions to be made, but protecting passive income from reality seems one too far to me.

Martin O'Dea said...

There's a lack of rational thinking here. This is not sitting back with a sense of perspective and applying logic with justice as a parameter. This is constrained thinking. I can't do that, or that - I won't do that to them; they are too important to us to mess around with - I really don't want to do that - and with all of that in mind what can I do to stop people asking me to do something.

What's worse, if this doesn't get any better there will be an election - and unless I am seen to do something I will loose my job and my livelihood.

I am tired of looking at politicians looking like memebers of an embatted religious order. Tired, unhappy and completely limited in what they can say.

A political body needs to emerge and say something akin to 'look this is bad - here's what it is, these are exaclt the problems that we now have and these are the mistakes that got us in that position and here is how we propose to avoid repeating them - the world has not ended though and here is how we mean to proceed - These are the things we will prioritise and we look forward to your participation in moving on together -
This type of talk cannot emerge from someone who looks at you constantly with an expression that outlines - please don't blame me for this.

And, an Saoi, that's the generous outlook on the causes of the obvious stupidity and recklessness you highlight (keep rents up so you can support artifically a market that has just imploded due to being artifically supported and bloated). The more cynical interpretation, appropriate to perhaps just some or all of the participants, is probably influenced by a very large dollop of arrogance. Closer to thought processes that resemble - look stop going on at me - you don't really understand what you are talking about - the plebs seem a little annoyed - lets ride it out and we will soon return to receiving the adulation, that to be honest we deserve! Taxi for Fianna Fail, can take the greens in the back