Last year I told you to watch Ireland…that fire sales would come. The process has started. That’s why last Friday, at Ireland’s first ever fire sale auction, you could have picked-up a three bedroom home in the midland town of Mullingar for as little as 30,000 euro. That’s close to a 90% discount on peak prices.
The auction generated a lot of excitement by all reports. The auction hall in the luxury Shelbourne hotel on St. Stephen’s Green was packed. The overflow room and bar couldn’t cope with a crowd of more than one thousand. Outside, the road was blocked as more arrived. Events were temporarily suspended as police tried to clear the road.
In an ironic twist, the International Monetary Fund and European Union delegations were photographed making their way through the crowds as they walked from meetings in government buildings nearby. They were in town to see if we were behaving…and living up to the terms of the loans they made to Ireland so our banks could pay back the money lent to them in the boom years by (mostly) French and German banks.
Press reporters gathered from across Ireland and from the UK. This wasn’t a standing-room only affair. It was much more dramatic and buzzing than that. A crowd of some 300 or so drifted down to the famous Doheny and Nesbitt pub. Many a big business or political deal was sealed with pints of Guinness in this pub in the boom. Last Friday, the fire sale auction was beamed directly into the pub. The craic was mighty. This is a great pub on Friday afternoons on the dreariest of days. Throw in a fire sale auction and you can only imagine the buzz.
81 of the 82 lots in the auction sold…most for above the reserve prices. Some for substantially more, in fact.
You could however have picked up a three-bedroom semi- detached (known as a suburban row house in the US) home in the midland town of Mullingar for 30,000 euro. Or, a city center condo in scenic and culture-filled Galway city for 70,000 euro. Right in the heart of Dublin’s Temple Bar, a studio apartment overlooking chic Essex Street, with a maximum reserve of 80,000 euro sold for 128,000. Dublin was buzzing with real estate transactions…or so it appeared!
Theater…and the excitement about being able to observe a fire sale auction like this in a character-packed pub aside… what can we learn from the results?
Firstly, at the peak of the Irish property boom there were about 400 transactions every business day. Last Friday at this auction there were 81….a pretty insignificant number. But we can reach interesting opinions based on the event.
A Ceiling, not a Floor…
These were fire sales of pretty random units that are in foreclosure and controlled by mostly foreign-owned banks. All the units owned by failed developers where an Irish bank was the lender are controlled by our “bad bank”, NAMA. (NAMA was established to remove all developer and speculator real estate loans from Irish banks’ books and realize as much as possible from the wind down.)
Word on the street (we don’t know for sure as this information hasn’t been made public) is that NAMA controls 16,000 units that are effectively in foreclosure in Dublin city alone. Extend to Dublin’s commuter belt and that number grows…include the entire country and you have a huge number. Then add residential mortgages that are in default (remember, NAMA only has the developer loans) and you get an even more alarming number. I don’t know what that number is but I would certainly wager that it’s well north of 50,000 units….maybe a multiple of 50,000 units.
So, just to clear this notional inventory of 50,000 units in “foreclosure” we would need an auction like last Friday’s on each of the next 617 days. That’s every single day…and of course ignores all the inventory that will be added to the foreclosure list over that period. A week into such an exercise, buyers would start drying up. They just aren’t there. It’s extremely difficult even for those with good credit and savings to borrow to buy a home. Investors and speculators can forget about it.
For example, a swanky condo in the shiny financial district sold at a discount of 70% on its original valuation. You would have expected every young banker and lawyer in town to be rubbing their hands together with glee. Not so. It sold, not to a young professional but to an English guy who wanted decent digs for his daughter who is studying in Dublin. Something is seriously up when this unit wasn’t attracting young professionals like bees to honey. There’s only so many students in the Royal College of Surgeons with daddies who have the cash and appetite for this kind of thing.
My point is that rather than putting a floor on prices in Ireland as some have suggested, this auction actually put a ceiling on prices. They are only going down from this level as more inventory is released. At the margins, inventory in the over-built commuter belts will be unsellable. Or at best will be in that 30,000 euro range. As with any market, prime and quality inventory will do better.
A very interesting data point I did glean from the results was that tenanted investor units sold at an average yield of 9% or so. One building for example with a retail unit on the ground floor and office space above sold with a yield of 9%. And that was with the office space vacant…earning nothing. Find a tenant, even if you halve the going rate for the space, and you are into low double-digit yield territory. The ground floor tenant is a bookmaker (the sports gambling type: this is a legal business in Ireland). Businesses don’t come much more recession-proof than this.
There are more of these auctions coming. The next is scheduled for July 7th. Next time around, they will list 200 or so units.
Further auctions are expected to follow. But the elephant in the room is what will NAMA do with all its inventory, and what will the major banks do as more people walk away from their mortgages.
While the weight of this inventory combined with a contraction in the labor force (due to emigration) will almost certainly drive prices further down, things are starting to get interesting. I expect to see even better deals at the next auction…and better deals at the auction after that. But now is the time to study…and get ready to pounce. When all this washes out I expect those who bought last Friday will have jumped the gun. They would probably have done better if they waited.
Within the next two years you will:
- be able to buy vacation or second homes in Ireland’s most scenic places for cents on the euro.
- buy blue-chip residential and commercial units with stable double-digit yields. If there’s a recovery these will be the first and fastest to see values rise.
Interesting times indeed. I’ll keep you posted. I’m getting ready to make personal investments here myself.