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Markets News Friday: Irish commercial property values down 53% from Q4 2007 peak; AIB approves 42,000 loans/ overdrafts totaling €1.85bn for Irish SMEs in 2009
By Finfacts Team
Oct 30, 2009 - 12:59:26 PM
The SCS / IPD Ireland Quarterly Property Index measures ungeared total returns to directly held standing property investments from one open market valuation to the next and in Q3 2009 returned -6.7%.
Irish Commercial property prices down almost 55% from peak
Davy chief economist Rossa White comments: "Commercial property prices declined for an eighth straight quarter in Q3. Unlike in the UK where the monetary policy response has been dramatic and prices have begun to rise, liquidity remains an issue in Ireland. But valuation has improved dramatically: rental yields are close to their highest point since the economy began its rapid growth phase in the mid-1990s. The economy is set to bottom at the end of this year. Commercial investment prices may follow with a lag of six-to-nine months, as domestic credit conditions ease somewhat and foreign buyers increase.
Irish commercial property prices fell 8.4% quarter-on-quarter in Q3 2009. That brings the decline from peak (in Q4 2007) to 53.3%. Retail dropped 8% (the slowest rate of decline since Q1 2008) while office fell 8.7% and industrial 8.5%. The price of retail is now down 57.4% from peak, while office has fallen by 51.2% and industrial by 46.1%. Rents fell again in the quarter, by 8.3% this time. That is the biggest decline yet; it means that rents have dropped by 17% so far. The decline in rents and prices is helping the economy to regain competitiveness.
Rental yields are at their highest point since 1996. The risk premium built into commercial property has returned to more normal territory: average equivalent yields have jumped to 8% (from a low of 4%). It makes valuation start to look interesting, especially if rents stabilise as the economy begins to grow again modestly next year year. Taking five-year swap rates (plus a 250bps bank margin) as the funding basis, commercial property now provides yield pick-up not seen in the last 13 years. Prices may remain under pressure for the next few quarters, given tight funding conditions and a rental market yet to floor. But downside may be limited to 10-15% from here. Commercial property may bottom in H2 2010."
AIB Bank said today that it has approved 42,000 loan and overdraft facilities totaling €1.85 billion for Irish SMEs so far this year.
The bank said its annual TNS mrbi survey of SMEs, in which over 1000 companies took part, identified some key messages:
-the number of businesses feeling confident about the economic prospects for their own business rose by 10% to 80%.
-39% of SMEs have requested finance from their bank in the last twelve months principally to support working capital and cash flow.
-In general, businesses indicated that they need more contact with their bank and want relationship managers readily available whenever such contact is needed.
AIB Bank said is working hard for SMEs around the country.
The bank has:
-created 15 new business centres staffed by 250 experienced relationship managers. These are complemented by 700 relationship managers and 200 SME specialists in over 270 branch outlets.
-provided over €15bn in total credit facilities to the SME sector
-opened over 6500 new business start-up accounts to date this year
The Ifo Institute said today that the credit hurdle for German industry and trade was at a slightly lower level in October. Of the surveyed firms, 41.7% assessed the banks' lending policies as restrictive compared with 43.7% in September. However, this decline is no cause for concluding that the financing situation has eased. Especially the large firms are faced with restrictive bank credit awarding practices.
UK house prices posted their first annual gain since early '08 and consumer confidence hit a 21-month high in October, surveys showed Friday. "Any increase from a very low base is obviously positive but not necessarily a guarantee that we're returning to prosperity," Geoff Tresman, chairman of Punter Southall Financial Management, said:
Irish Financials; Irish bank betas and cost of equity remain elevated
Goodbody analyst Eamonn Hughes comments: "After their heavy falls earlier in the week, the Irish banks stabilised yesterday, with BOI in particular recouping about two-fifths of its 25% collapse on Wednesday. It has been clear to us recently in deliberations with clients that investors have minimal, if any, visibility on normalised earnings for the Irish banks (which we think will be 2014), so have traded them as beta plays on the wider macro environment, with fundamental analysis a mere sideshow. However, we are analysts, so will attempt to put some analytical framework on recent share price moves.
As we mentioned yesterday, run your Bloomberg screen and the beta of the Irish banks against the E300 Index is 2.7x. This is a two-year average beta, though run it from the start of the year it is closer to 4x. So with European banks selling off this week (particularly those with any State aid in a post-ING world), the Irish banks are at the forefront of the selling pressure, particularly given strong gains in recent months. However, the beta of the banks highlights to us that the required return investors need on these banks, given the risk and volatility is quite high and likely to remain so in the short to medium term. The ING decision absolutely hammers home this point. The Irish bank betas recognises the high risk profile of the banks, particularly driven by the substantial level of equity the banks are going to need on our estimates over the next few years, but also that the NAMA legislation still remains to be passed, EU rulings on state aid and the likely harsh Irish Budget in December. For the record, we estimate that AIB will need 2x its current market cap, whilst BOI needs 1.35x. Compare this with say Lloyds which is set to raise an estimated 56% of its market cap in an issue that most regard as super-jumbo size. Recently, the French raised a mere 7% of market cap in the case of BNP and 15% for SG. So the Irish figures are big on a relative basis.
So if you run a COE now on an Irish bank you are going to generate a figure of about 19%. We don’t think it is sustainable at this level over the longer term, but it probably highlights that investors are going to need to see substantial upside to share prices before becoming engaged. However, as we said yesterday, with the stocks almost halving since their September highs, the current share prices are now starting to pique our interest given our reservations at the pre and post NAMA euphoria in August and September. However, a high beta/COE also implies high volatility, so investors are going to have to be willing to trade these stocks."
Irish Financials; Committee stage of NAMA legislation completed.
Goodbody analyst Anna Lalor comments:"The Dáil (Irish parliament) completed the committee stage of the NAMA legislation at 5:30 this morning. It now needs to be passed by the Dáil and then by the Seanad (senate), before being sent to the President to sign. The President, should she think it necessary, can refer the legislation to the Supreme Court to test the constitutionality of the legislation, a point highlighted by the Minister for Finance yesterday. Should this happen, it would probably be completed quickly, but it could push out the timing of the creation of NAMA, and the start of the transfer of assets, but this is not new news. A final amendment was also made in the early hours of the morning in relation to the levy on the banks should NAMA make a loss on completion. The levy has been replaced with a corporation tax surcharge on the banks should NAMA make a loss, which could, therefore, only be charged if the banks were profitable. The change has been made to avoid any complications that could arise for bank balance sheets or capital from the explicit legal contingency of the levy. The Minister also indicated that the long term economic value methodology has the support of the European Commission and is in keeping with its guidelines. An amendment empowering the Minister to give the banks guidelines in relation to lending was also made."
"The real question is: Have the conditions been laid for sustainable organic growth?" Jack Bouroudjian from IndexFuturesGroup.com said Friday, adding he hasn't seen any factors to support growth when the stimulus is removed. He likened the US government's stimulus as steroids to a sick patient and said it "needs to be weaned out":
US dollar
The US dollar has recovered some ground over the past few weeks following a pronounced depreciation since the spring. The US currency fell by an average 16% against the major currencies from its March high, with the New Zealand and Australian dollars rising by over 45% against the greenback over that period. The euro appreciated by 20%, rising from $1.25 to a high of $1.50 before falling back a little of late according to Bank of Ireland’s latest Bulletin which was published today.
Bank of Ireland economist Dan McLaughlin said that the dollar’s appreciation in the second half of 2008 (the euro/dollar rate fell from $1.60 to $1.25) was driven by risk aversion, with investors seeking the perceived safety of US government bonds amid plunging equity markets. The dollar subsequently suffered as investors shifted back to riskier assets this year in anticipation of a global recovery. He says the dollar is negatively correlated with the US equity market, at present, falling if the S&P rises, lending support to the risk aversion view.
On that basis a dollar rally would be inconsistent with a further rise in equity markets but we suspect that the performance of the US economy and expectations about Fed monetary tightening will become more significant drivers of the US currency, particularly given the return to positive growth in the third quarter.
McLaughlin says ultimately, currencies tend to reflect relative economic performance and it is not clear to us that the outlook for the US economy is worse than for the euro economy. Consequently, BoI still expects the euro/dollar to trade in a broad $1.40 to $1.50 range over the next six months.
Discussing the growth in the GDP and whether the Fed should react to this data, with John Carney, BusinessInsider.com; Andrew Bary, Barron's; Megan McArdle, Economist.com and CNBC's Steve Liesman:
US markets
Following the US GDP report on Thursday - - see link to news in Box below- - the Dow rallied and closed up 200 points or 2% at 9,963.
The Nasdaq rose 1.84% and the S&P 500 added 2.25%.
The Bank of Japan said today it will stop buying corporate debt at the end of the year, as central banks around the world phase out emergency measures taken at the height of the financial crisis.
The MSCI Asia Pacific Index added 1.5% Friday and the measure lost 2.6% this week.
Japan’s Nikkei 225 Stock Average rose 1.5%; China’s Shanghai Composite Index added 1.2% andAustralia’s S&P/ASX 200 Index increased 1.5%.
Gold is trading at $1,043.00 down $2.80 from Thursday's spot price close in New York.
Goodbody chief economist: Dermot O’Leary comments: "As expected, GDP data yesterday confirmed that the US economy came out of recession in Q3. Annualised growth of 3.5% was achieved but, in truth, this flatters to deceive for a number of reasons. Firstly, the US economy is still 2.3% smaller than it was in Q3 2008. Secondly, there were a number of special factors at play that will have the effect of ensuring that the debate around the sustainability of the expansion will continue: (1) car sales, due to the “cash for clunkers”, accounted for almost 30% of that growth; (2) inventory rebuilding accounted for about one-quarter and; and (3) residential investment was partly boosted by the government tax credit. There was some good news in the form of a return to growth, albeit modest, in investment in equipment and software and continued expansion in consumer spending on services. However, it is clear that the ongoing stimulus from Uncle Sam was a big contributor to the growth. This, of course, was what it was supposed to do. It needs to be followed by more signs that the recovery has morphed into a sustainable one. There is momentum in economic activity, but those signs have not arrived just yet.
On this side of the Atlantic, survey evidence suggests that growth returned in Q3 in the euro-area also, and likely continued into Q4. All economic sectors – consumer, services, industrial and construction – experienced an increase in October’s European Commission survey. As a result, the index is now back to pre-Lehman levels of last September. Our own analysis shows that the sentiment indicator, which has been a pretty decent indicator of growth in the past, is pointing to the annual growth rate improving from -4.8% in Q2 to -1% in Q4. More importantly, this would imply quarterly sequential growth of close to 1% in both Q3 and Q4 of this year (Q3 data for the euro-area are not expected until the middle of November). This would be at least equivalent to the pace achieved in the US, as noted above. The key point here is that while the euro-area did lag the rest of the world when emerging from the last recession at the start of this decade, the latest evidence suggests that it is not being left behind this time around."
