The big property news stories this week all centred around Nama; is the agency ready to wind up or merely change focus; is it in a position to pump billions into strategic development that will stimulate the Irish market and if so, is that a good thing in an already vulnerable marketplace?
With so many questions remaining, one question that has already been answered is about the on-going investment value in the Irish market. On a general basis, rising prices and low levels of suitable stock in desirable – or even serviceable areas – have sucked the value out of the market. The buy in costs are rising disproportionately to the rental yields. We have the usual situation of home-buyers and investors chasing the same properties. For example, at a recent viewing in Northumberland Street, there were as many home-buyers walking around a run-down office building as there were builders and investors. This simply would not have happened a decade ago. It is driving up prices in quite a false way, leading to greater fall-through rates and ultimately frustrating the higher end of the market. One of the consequences of this is that vendors, both private and institutional, are electing to deal with cash buyers exclusively. As less than 5 per cent of all mortgage lending is in favour of residential investors, is it creating an unsustainable buying stream. In certain key areas in Dublin, property prices have doubled in three years. While it might sound like a positive thing, this is not helpful at this particular stage of recovery. Anecdotally, estate agents fear that cash is running out as properties are taking slightly longer to sell and competition is ever so slightly less intense compared with the ferocious bidding that was going on over the past two years.
International property advisers Cushman & Wakefield earlier this week forecasted that Ireland will lose European investors to Spain, as Spain gets the process of cleaning up their ‘bad banks’ underway. There is an estimated €200 billion worth of property assets to be disposed of there over the next few years. The Spanish equivalent to Nama, Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (Sareb) will be dealing with more than half of that.
Ireland and the UK accounted for 63 per cent of sales activity across Europe in the first half of 2014, with Spain alone accounting for 29 per cent. Furthermore, one third of so-called live transactions across Europe currently are in Spain. If this trend continues, it could have a detrimental impact on the recovering market in Ireland.
Since the market crash in 2007, Ireland was the preferred ‘broken market’. It became a hotspot for investors, both Irish and International, who were looking for riskier property deals. There is a very simple reason for this; high risk deals, when successful, lead to high return. Despite the vulnerabilities in the Irish market, even during the crash, it was seen to have a relatively stable geo and political baseline that would not prohibit recovery. The problem today is that prices have risen sharply but in real terms, the risk has not diminished sharply. Essentially, the current marketplace demands a high price to be paid, with a high level of risk but without the high return. This can never be sustained as investors have so much choice elsewhere. It is natural that as the market evolves, it attracts a different style of investor; however, if the Cushman & Wakefield report is to be accepted in its entirely, then Ireland is already starting to lose the very investors who drove early recovery. Our recovery in urban centres and surrounding areas has been strong, but this is not indicative of what is happening nationwide. What will happen to rural areas now that the drivers of recovery are effectively gone from the market? It is not just international cash that is being lost, but Irish cash, which will be used to fund overseas investments. Can the market withstand that loss at this stage? More importantly, can the pillar banks be relied upon to pony up enough residential lending to home-buyers to bridge the gap?
Nama has its critics, but the agency’s performance has been more efficient and arguably more effective than expected back in 2009. Now may not be the right time for the winding down process to begin. Nationwide recovery requires a firm hand and strategic approach from an agency with expertise that is capable of making tough decisions. There are not too many departments or agencies that could fill those boots. A change in focus might well be a more productive use of the collective expertise. In fact, it would be interesting to see what stimulus initiatives could be put in place by an agency with a commercial focus rather than a purely political focus.