Friday, August 20, 2010
Dear Reader,
The Celtic Tiger is curled up whimpering in a ball…sick and stricken by its condition. We’ve gone from labour shortages to unemployment of more than 13%. Emigration, a curse for generations of Irish until the 1990s, is back. The tax payer has underwritten an entire failed banking system. Recapitalising one tiny bank alone will cost the tax payer one entire year’s worth of tax collections. On top of all this, we will spend 20 billion euro more this year than we collect in tax revenue.
Not a good time to be selling shiny new condos…or BMWs. Official stats tell us that real estate prices have fallen by 40%. This is misleading. It hides the fact that there is no liquidity…no buyers whatsoever in many parts. To find a buyer you may have to drop prices by 70% or more. And if you do find a buyer, chances are the sale will fall through anyway—as the buyer can’t get bank finance.
Last week, I met an old friend for lunch in a Dublin hotel. He has just bought a new home in central Dublin. He paid 800,000 euro. His neighbour paid 1.8 million euro for the same house a couple of years ago. On the outer reaches of Dublin’s commuter belt, to clear unsold inventory of new apartments, they need to be priced in the 70-80,000 euro range. That’s the price you can get a buyer to pay. Before this time of fire sales, the list price on the same units would have been higher: 200,000-260,000 euro.
Does this mean there are opportunities today? First, you need to understand the foundations that Ireland’s real estate market sits on. Here are the two HUGE considerations:
1) In September 2008, fearing a run on the banks, the government guaranteed all deposits and liabilities of Irish banks. That put us on the hook for every bad loan made and every bond issued. Subsequent to this, the government decided to create a “bad” bank called NAMA (National Assets Management Agency). NAMA would take all real estate-related loans made to developers and speculators (performing and non- performing) from the banks. The idea was to free up banks’ balance sheets so they could start lending again. There is years, maybe decades, of inventory now in the hands of NAMA. For example, this building in a prime location in my home town of Cork (http://www.theelysian.ie/) is fully complete and is just sitting there empty.
NAMA is only starting to get their heads round what assets they have, let alone what to do with them. This real estate is now off the market and in hands of bureaucrats. We have no idea what they will do with it. Will they fire sell…or will they bulldoze completed and partly completed units? We have no idea. Whatever they decide will have a dramatic impact on the market.
2) The tsunami of mortgage debt hasn’t even started to register yet. Interest rates are still at rock bottom levels. Folks who have kept their jobs have held onto their homes. Some folks who lost their jobs came to an agreement with their bank to pay a portion of the interest over a period of time.
3) Foreclosures (or repossessions as we call them) are rare. The legal process for foreclosures is difficult, and considered bad publicity for the banks concerned. Thing is: the majority of homes purchased in the last decade are now underwater. The mortgage is more than the home is worth. It wasn’t uncommon at the peak of the boom to borrow 100% of the purchase price and also borrow the transfer costs of up to 9% and pay interest only. That’s a 109% mortgage on something that now might be worth between 30% and 70% of the purchase price.
In addition to this, many homes that were bought decades ago were mortgaged up to the roof to buy investment and buy-to-let properties that are now close to worthless.
The banks will do almost anything to keep a mortgage in the “performing” file. That way they don’t have to make a contingency for a loss. To this end, they are fudging all the numbers. Any rise in interest rates would be catastrophic for home owners. In Ireland we don’t have “jingle post” to the same extent as other countries. You can’t just send the keys to the bank and walk away. You will be pursued for the balance of your loan, and Irish bankruptcy laws are particularly harsh. Unless there is a dramatic turnaround in the economy a tipping point will come where people just up sticks and leave their home. Why not take a chance to start over… rather than spend a lifetime digging themselves out of a hole.
This means even more inventory—on top of excess supply— that is so great there will likely never be a level of demand that will meet current supply levels.
What does all this mean? Here’s my take…
1) If your dream has always been to own an Irish cottage, now might be the time to start looking. You’ll find a deal. Remember though that the deals may get better if Irish owners start to come under further pressure and have to sell their weekend and holiday homes.
2) There is a flood of development land that is being fire sold…with much more to come. Like 500 acres I looked at near Kinsale that was due to be the site for an Ernie Els golf resort. The location is only 10 minutes from an international airport, and the land has a couple of miles of frontage of incredible coast. The land is being sold for what is a very depressed agricultural price.
3) There will be commercial and residential fire sales (remember the golden rules of buying distressed property) when NAMA decides what to do. There will be a lot of junk but there will be some nuggets, too. Wait for those. I’ll keep you posted.
4) We have more than 10,000 excess hotel beds. These were built with tax incentives and now have no purpose. Figure out an alternative use for these and you could do really well. More about this is a future dispatch…
There are positives from all this…for locals who still have a job, and for visitors. Traffic is lighter, and everything is significantly cheaper—from eating out to hotel rooms to playing a round of golf. It’s a great time to visit Ireland. Everyone seems more friendly and relaxed. People have time to stop and chat. It’s like Ireland… in the days before the Celtic Tiger. Maybe the success of the Celtic Tiger just didn’t suit us!
Ronan McMahon
Posted Under:
opportunities, distressed, ireland
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