Oireachtas Joint and Select Committees
Thursday, 2 April 2015
Committee of Inquiry into the Banking Crisis
Context Phase
Ciarán Lynch (Cork South Central, Labour)
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I welcome everyone to the 18th public hearing of the Joint Committee of Inquiry into the Banking Crisis. This morning we will be focusing on issues related to the nature and functioning of the commercial real estate market in the period prior to 2008 in the context of the banking crisis in Ireland. In our first session we will hear from a representative of Jones Lang LaSalle, Mr. John Moran. Jones Lang LaSalle is an international professional services and investment management firm which offers specialised real estate services, with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion. It has more than 230 corporate offices and operates in 80 countries. It has a global workforce of approximately 58,000. It is a wholly owned subsidiary of Jones Lang LaSalle Inc. Jones Lang LaSalle Ireland was established in 1964 and provides a full service offering across all aspects of Irish real estate. The company employs 80 people and provides services for occupiers, tenants, developers, landlords, owners, banks and institutions. Services offered include valuation, sales, letting, acquisition, rent reviews, rating, consultancy advice, research and property management. Mr. Moran is an international director of Jones Lang LaSalle and managing director of Jones Lang LaSalle Ireland. He is a qualified chartered valuation surveyor and has been in practice for 29 years. He joined Jones Lang LaSalle in 1986 and has had various roles within the company. He was appointed managing director in January 2009 and is still the lead director for the investment department. His day-to-day role, alongside running the business, is advising on the acquisition and disposal of investment properties on behalf of pension funds, life assurance companies, financial institutions, receivers, private investors, property companies and high net worth individuals. He is very welcome.
Before we begin, I advise that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the Chairman to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and, as they have been informed previously, the committee is asking them to refrain from discussing named individuals in this phase of the inquiry.
Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I invite Mr. Moran to make his opening comments.
Mr. John Moran:
I have provided the committee with a detailed opening statement which I will run through again this morning. I was asked to comment on issues relating to the nature and functioning of the commercial real estate market in the period up to 2008 in the context of the banking crisis in Ireland. I will deal with the size and nature of the real estate market in Ireland and I will give a brief overview of Jones Lang LaSalle and the nature of the services that we provide. I will give broad details of our client base, the sources and extent of funding to the commercial real estate market, the composition of investors in that market, its interrelationship with international markets and investors, and the understanding of risk at the time.
My comments relate to the commercial property market though I will occasionally reference the residential market, particularly as it affected land levies. The Irish retail real estate market is made up of various components. There is the residential market, the development land and agricultural market, the investment market and the various occupier markets such as offices, retail, industrial, hotels and licensed and leisure premises.
Up to 2008 the commercial real estate market was growing strongly. There were increased levels of purchasing, leasing and construction activity. Ireland's economy was performing well with GDP and employment driving the expansion. It is worth remembering that, at that time, we were the fastest growing economy in western Europe, the second wealthiest economy on a per capitabasis measured by GDP and we had the fastest growing population in Europe. During that period unemployment averaged just over 4%, which was effectively full employment. That is important because the real strength in occupier and investor demand is what was supporting the property market. That demand was driving activity levels and increases in values and the capital values of Irish commercial investment property increased by 72% in the five-year period up to 30 September 2007, the date we define as the peak of the market in terms of value appreciation. Property yields were at record levels, which was a reflection of both the strong investor demand and the availability of significant amounts of debt. The graph on page 1 of my submission shows the 72% appreciation in capital value from Q1 2002 to Q3 2007.
This all translated itself into particularly strong transactional activity. Between 2004 and 2008, €8 billion worth of commercial investment property was sold in Ireland. The peak year for investment volumes was 2006, with €3.6 billion traded in 12 months. For context, this compares to the previous record of €1.2 billion in 2005 and an average of €768 million per annum between 2001 and 2004, and they were record levels in comparison with what had happened in the 30 or 40 years preceding that. In addition to domestic spending, there was also considerable Irish investment activity overseas, particularly in the UK and continental Europe. The graph shows the spending patterns of Irish investment in Ireland over the six-year period. All sectors of the market were active, with demand outstripping supply. Demand was not solely focused on prime assets, with secondary and tertiary assets also trading. There was evidence of demand across all size categories and activity was taking place in all locations across the country.
The investment market was characterised by large amounts of money seeking product. Demand was exceptionally strong, with the vast majority of transactions involving domestic purchasers. Values really intensified in 2005 and 2006 and so did attitudes towards investment, with investors seeking to move more aggressively up the risk curve and undertake either development in their own right or in conjunction with developers as joint ventures in search of better returns.
Alongside a very strong investment market there were also exceptionally strong occupier markets. The letting market for offices averaged 2.3 million sq. ft. per annum between 2004 and 2008, totalling 11.6 million sq. ft. over the five years. This is significantly higher than the 8.8 million sq. ft. in the last five years 2010 to 2014. The record years for office take-up in Dublin remain 2006 and 2007. Demand was focused on core, city centre locations, accounting for approximately 60% of take-up per annum. Traditional banking, financial and professional service companies were driving demand during this period, with a new wave of the technology sector just starting to take off. Page 3 shows graphically how office take-up compares from 2002 to 2014 and members will see that the peaks were 2005, 2006 and 2007. In response to that demand there was a response from developers in supplying office construction, with 8.8 million sq. ft. constructed between 2004 and 2008. This represented a 33% increase on the total stock levels at the end of 2003.
The retail market was also performing strongly, with improvements in the economy boosting consumer sentiment and spending. A number of international chains and domestic retailers were entering the market and trading well. As demand continued, vacancy in core schemes and high streets was tightening, with limited choice for occupiers. The market responded to this with a surge in retail development. Between 2004 and 2008, total shopping stock in Ireland increased from 13.7 million sq. ft. to 22.4 million sq. ft., an increase of almost 9 million sq. ft. and a lot of this was in provincial locations. By the end of 2008 Ireland had the second highest shopping stock per capitain Europe.
Other sectors performed relatively steadily in comparison to retail and offices. Industrial activity was relatively subdued until 2006, when again there was record occupier take-up of 2.9 million sq. ft. Industrial land values saw significant growth due to a scarcity of supply in areas where people wanted to locate, generally in the south west of the city and in north west Dublin. Occupiers were predominantly general distribution companies which, as is often the case in the Irish distribution and industrial market, are generally purchasers rather than renters.
The values of commercial property adjusted to this strong demand with significant increases over a short period of time. Rents experienced similar growth, with prime office rents increasing from €40 to €60 per sq. ft. and retail rents such as on Grafton Street increasing by more than 100%. Industrial premises also saw rental growth but not at the same pace. The highest rent levels ever achieved in the market remain 2006 and 2007, which is graphically illustrated on page 5.
In response to very strong occupier markets and investment markets, development land also saw an enormous increase in activity. The land market always responds to occupier markets and as activity and pricing grew significantly across all sectors this was also mirrored in development land. Between 2004 and 2006, the number of deals in Ireland increased significantly, reaching over 250 transactions in 2006. The market was characterised by strong demand from developers and investors, who were chasing product and competitively bidding on all assets that came onto the market. In 2006, the highest sale price for a development site was achieved, which was €155 million per acre. This compares to the current top values of approximately between €35 million and €37 million per acre. There was a push for higher densities by the planning authorities but, in the absence of clear guidelines, many developers factored very ambitious densities into their land pricing. The underlying strength of the residential market and residential values also contributed enormously to the high levels of land value that pertained.
I was asked to comment on what JLL do in this market so I will run through the details very quickly. The Chairman has already given members the global overview of the company. In Dublin we have a full service offering, with expertise across all sectors and processes involved in buying, selling and managing real estate. This involves investment sales and acquisitions, leasing activity for both landlord and tenant, property and asset management, planning and building services, valuation advisory services, land and research.
Our main area of focus is commercial property across all sectors, namely, office, retail, industrial, land and hotels. We have undertaken some residential work for clients, but this is not a core specialism. Our client base varies significantly, but historically our largest client profile is institutional, such as pension funds, life assurance companies and banks. We have also acted for developers and occupiers and provide a broad service to everybody in the real estate industry.
From our perspective the advice we give to clients is strategic and consultancy-based. Given that we act for both landlords and tenants and vendors and purchasers, our aims and objectives vary, depending on the instructions, but in any deal we do or any piece of work we perform our duty of care is to the client. As we act for buyers, sellers, occupiers and landlords, we have no vested interest in the performance of the market. We prefer to see a steady performing rising market at the rate of inflation rather than the dramatic booms and busts recently experienced.
Our firm's staff have the necessary academic and professional qualifications to work in the property sector. Most of our staff are members of all relevant professional bodies, including the Royal Institution of Chartered Surveyors, the Society of Chartered Surveyors in Ireland. Various other professional organisations are represented within the office. Being a member of a professional body means that one must adhere to a strict standard and ethic on a daily basis. It is noteworthy that yesterday, for the eighth consecutive year, Jones Lang LaSalle was announced as being one of the world's most ethical companies by the Ethisphere Institute.
I will deal next with the sources and extent of funding in the commercial real estate market in Ireland. It should be noted that we are not directly involved in the funding element of commercial real estate transactions. Our expertise is in real estate and the details of funding acquisitions and developments are left for discussions between our clients and funding institutions directly. While we might introduce parties and provide some background information, specific details of terms and agreements did not involve Jones Lang LaSalle and were not shared with us. Our view of funding conditions relates to what our clients told us and what was common knowledge in Ireland at the time.
Between 2004 and 2008 the largest sources of funding for the commercial real estate market were domestic banks, the UK representatives which had offices here and a couple of European banks. I do not think I need to name them as everybody knows who they are. Each bank had a differing exposure and concentration across all sectors. We were sure at the time that there was a lot of funding available in the marketplace. We were not involved in final loan-to-value calculations between our clients and the banks, but we are aware that loans were available at high value ratios. Funding was also available for almost every type of property transaction, whether for a pure investment purchase or a speculative development. Initially, a significant proportion of the lending was non-recourse, that is, the asset was the only security that the bank held. With the benefit of hindsight, the practice of borrowers giving personal guarantees to secure debt became increasingly common in 2006 and 2007 and led to significant cross-collateralisation of debt. Any further detail of funding and lending during this time would be more accurate coming directly from the banks, lenders and borrowers. Aside from the banks, the market was also awash with a lot of equity, which leads me on to my penultimate comments on the composition of investors in the Irish commercial real estate market.
The major players in Ireland were domestic and accounted for approximately 90% of all investment volumes between 2005 and 2007. They were a mix of private syndicates, private high net worth individuals, institutions and developers. The largest proportion of transactions were undertaken by private Irish individuals or syndicates. These purchasers were backed by funding from banks, with very limited, if any, pure cash purchases. There were also a number of purchasers who were backed by equity. The broad investor profile comes from four sets of investor: private syndicates that used pooled equity and debt; private high net worth individuals who used a mix of equity and debt; and institutions such as pension funds and life assurance companies which purchased with 100% equity. The developers were the final cohort and used equity and significant amounts of debt. Over time it became less certain how much actual cash was employed as opposed to equity release lending. Overseas investors had a limited presence in Ireland during this time, as pricing had intensified significantly and Irish real estate was regarded as too expensive for international investors. Up until the current cycle, the Irish market had traditionally been domestic in nature, with a very limited international input, other than occupiers. It was regarded as an expensive market in the period to 2008 and, as a consequence, there was limited overseas investment in Ireland during this time. I have graphically demonstrated on page 8 of my submission how yields tightened between 2003 and 2006. They compressed from 6% to 3.7% for offices. At these levels, international investors were priced out of the market, with more competitive yields available in other European countries.
A noteworthy feature of the time was that Irish purchasers were not just focused on domestic assets. Significant levels of Irish money were spent across Europe and the world. In particular, it was reported in 2006 that Irish investors had invested approximately €3.5 billion in the United Kingdom and a further €2 billion in the rest of Europe and the USA.
As a real estate advisory firm, it is our job to advise clients on real estate issues. It is, therefore, imperative that we understand levels and impact of risk. Prior to the banking crisis, we were advising our clients on the nature and impacts of the property market and how it was performing. Any advice was informed and reinforced with key primary research data. We collect and monitor research for each property sector, with some of our data sets dating back to the early 1970s. We believe our advice was strategic, using our expert opinion to assess, for example, saleability and letting ability at the time. We would provide details for clients on end-use values based on current market levels, providing strategic advice on sentiment and general market performance. Any valuation we provided for clients was carried out in accordance with the RICS Red Book Guidance Notes and based on evidence of historical market values. It is very important to understand valuation reports are not forward-looking documents; they are a snapshot in time based on current market evidence. It is not within our scope or remit as real estate advisers to put any application to these numbers, particularly in order to generate future projections, unless we are asked to do so. Our clients take our advice and it is their responsibility to apply our recommendations to their models to generate cash flows, repayment models and profit and loss projections for themselves. From this, they can formulate their own inputs and assumptions, but that is not a process in which we are involved. The responsibility for this lies with the property owners and, we assume, their bankers.
I will give an example of how this worked on an almost daily basis. There were numerous development sites sold in Dublin at the time. We would have given numbers to our clients and appraised the value of sites. We would have said to our clients that they could bid X for them. Any number of times developers or clients came back and said, "I am going to bid X plus 20% or X plus 50%." We had no input into these decisions and, frankly, were always unsure as to how they had come to these conclusions.
The strong demand from investors and occupiers essentially was what dictated market performance during this period and drove market activity. It is important to note that a functioning property market is not driven purely by value. Capital values are often used as an indicator to show how a market is performing. Value can be affected by a variety of factors. As well as value, to determine what is a functioning property market we also consider depth. A more reliable method for assessing whether a market is functioning properly is focusing on demand and supply, using market transactions and depth. Having lived through the horrendous recession in recent years we all run the risk of forgetting what the market was actually like in 2005 and 2006. There was enormous depth to it. Any asset for sale had a number of bidding investors in competition with one another. As 2007 and 2008 developed, we saw that there were risks in the market. The warning signs were a shallowing of the depth of bidders in the market, a shallowing of the depth of occupiers and the fact that house prices had started to wobble. We noticed that the number of bidders during the sales process had started to decrease significantly. As a consequence, we advised most of our client base not to participate in the market on the buy-side and, where appropriate, we advised clients to sell. We did this in 2005, which at the end of 2006 had proved to be the wrong decision. Anyone who did not buy at the end of 2005 had lost the opportunity to participate in an additional 40% capital growth. It was only in 2008 that this decision proved to be correct. I can assure the committee that it was not a populist decision and we were not very popular for doing it.
We think our client investors were aware of risks at the time. The market in Ireland is relatively transparent and it would have been impossible not to have been aware of some of these signs, as transaction processes are open.
There is reasonable availability for sharing information and data. Data is a big issue in the Irish real estate market and I will happily talk about it later if necessary.
Jones Lang produced a transparency index in 2006. We were ranked the 15th most transparent market in the world which is a "high" transparency category. We are now in the top ten in the world because there have been improvements in transparency over recent years.
Other participants in the marketplace, such as investors, developers and the banks had the benefit of professional advice, or had significant in-house expertise to assist in their decision-making processes. By 2008, there was a recognition within the property industry that market conditions were over-heating, however, I do not believe that most market participants realised the extent of bank lending to the property market, and second, that we would ever witness the collapse in value that subsequently occurred, which was due to an extraordinary confluence of global macro-economic events, combined with an over-reliance on debt in the property market.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Moran. I will deal with Mr. Moran's concluding comments before calling the first questioner this morning. Mr. Moran spoke about how Jones Lang viewed the market between 2006 and 2007. Does Jones Lang employ or retain its own economists or does it buy in financial intelligence that specialises in property market trends and developments?
Mr. John Moran:
We employ a property researcher. The one we have at the moment has a degree in geography but the one we had during that time had a degree in economics. Their job is to review other economic commentary and to keep us informed of economic trends. They review Central Bank and ESRI reports and advise us on economic conditions at the time.
Ciarán Lynch (Cork South Central, Labour)
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Would they be feeding into the 58,000 employees or are there other intelligence units?
Ciarán Lynch (Cork South Central, Labour)
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What was the global and national position of Jones Lang LaSalle in the lead-up to the crisis period for the development of the banking crisis and the guarantee? Who was it warning or was it aware that warnings were necessary?
Mr. John Moran:
We never anticipated the global financial crisis. I would be lying if I said we did. At that time we felt that values had appreciated so significantly they were bound to have a correction at some stage. We never envisaged the adjustment that took place afterwards. A normal valuation correction that one would expect in a market that had six years of exceptional growth is between 5% and 15% for investment property, perhaps 30% for development land. We told our clients there was no way this would continue forever and if they wanted to take a profit they should get out now. By no means did we foresee what was around the corner.
Ciarán Lynch (Cork South Central, Labour)
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Was Jones Lang advising sellers and purchasers in equal measure?
Ciarán Lynch (Cork South Central, Labour)
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I want to digress. Would it be correct to state that the valuation of a property in commercial terms, for retail or whatever, would be determined by the rent yield that could be acquired over the lease period of the rental agreement?
Ciarán Lynch (Cork South Central, Labour)
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In that context, does Mr. Moran know what a side letter is or could he explain what it would be when a rental agreement is put in place?
Ciarán Lynch (Cork South Central, Labour)
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Am I correct in saying that there was a change in the legislation about the disclosure of side letters around 2009?
Ciarán Lynch (Cork South Central, Labour)
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Prior to 2009 how were side letters impacting on the visible rate of rent?
Mr. John Moran:
It might be important to take a step back to say how a valuation is calculated. This is a circular room so it is not the best example because it would be difficult to measure. When we arrive at a valuation of a piece of property we assess the rental evidence in the market at the time.
Ciarán Lynch (Cork South Central, Labour)
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Does Jones Lang arbitrate as well?
Mr. John Moran:
We do, yes. We assess the rental evidence at the time and apply what we think is the appropriate rent for the piece of real estate, adjust that for size and location, or otherwise, to arrive at what we think is the true market rental value of the property. We then apply an investment yield to that. That is based on whatever transactions are taking place in the market at the time. There is usually a sufficient depth of transactions to allow one to make that comparison. One takes that rental value, capitalises it at that yield, deducts the necessary purchaser's costs which are-----
Ciarán Lynch (Cork South Central, Labour)
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I want to focus on side letters. Let us say, for instance, the revealed rent that is now in the register of commercial leases, prior to 2009, was €100,000 a year for a shop in Dublin. Would a side letter create things such as a fitting cost for the shop?
Ciarán Lynch (Cork South Central, Labour)
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It might contain things such as a rent break in the lease agreement.
Ciarán Lynch (Cork South Central, Labour)
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What other examples are there of things that might be contained in side letters?
Ciarán Lynch (Cork South Central, Labour)
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Prior to 2009 these would have been private and confidential. Is that right?
Ciarán Lynch (Cork South Central, Labour)
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During the arbitration process were those side letters private or were they revealed? If a tenant moved into a shopping centre and went into an arbitration, would that tenant, whose rent was benchmarked on that headline rent of €100,000, have access to those side letters or were they confidential at the time?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Moran would understand what side letters were.
Ciarán Lynch (Cork South Central, Labour)
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Given that the side letters were private, did they give a true reflection of what the tenant next door paid in rent?
Ciarán Lynch (Cork South Central, Labour)
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When an arbitration of a rent was conducted in the bubble period, was full and accurate information available as part of the arbitration process?
Ciarán Lynch (Cork South Central, Labour)
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They are confidential by nature.
Ciarán Lynch (Cork South Central, Labour)
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Was there a potential for side letters to distort the rental market and to create valuations or rent agreements coming out of arbitrations that may not have reflected the true price in the market?
Mr. John Moran:
I do not think so. I do not think they were all that common. We do not take one single aspect into account when we are assessing value. Rental evidence is important. We also draw comparisons with other shopping centres and other retail lettings. Sometimes people think a valuation report is a single piece of paper. A valuation report can quite comfortably on occasion run to 100 pages. It details significant comparable evidence. We do a huge amount of analysis to arrive at our opinions. When we are valuing we are valuing independently.
Ciarán Lynch (Cork South Central, Labour)
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Between 2002 and 2007, was Jones Lang ever engaged in a rent review where the rents went down?
Eoghan Murphy (Dublin South East, Fine Gael)
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I welcome Mr. Moran. When Mr. Moran makes a valuation of a commercial property what are the main factors he takes into account, apart from the potential rent that might be earned for the client?
Mr. John Moran:
It is an opinion of market value on the date of valuation. It is important that it is done on a specific date because property is not a static asset. It changes so it is only a snapshot in time. It is our best assessment of the open market value that would be agreed by a willing seller and willing buyer acting without compulsion. That is the definition contained within the Red Book.
It has to be based on an appraisal of evidence of current sale prices, current rental values, current property yields and real transactions in the marketplace at the time. It must use the most up-to-date and relevant evidence for the specific property involved. We then take that evidence into account. We adapt it for location, the size of the property and the type of the property. In an investment, we will analyse the length of the lease and look at the strength of the covenant. We ask whether it has the ability to pay the rent and the potential for future rental growth. We determine whether the property itself is over rented or under rented. All those components are taken into account, and that will deal with most investment values.
Development land values are slightly different. We use an approach called the residual valuation approach. What we do is estimate what the completed value of the development will be, less the cost to bring it there, and that generally gives the residual value, which should be the land value. We test that against market evidence, which is based on the value per square foot and per acre being paid for sites. That is the general process.
Eoghan Murphy (Dublin South East, Fine Gael)
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What is the position on the fee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Percentage of value in terms of what?
Eoghan Murphy (Dublin South East, Fine Gael)
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That no longer exists.
Eoghan Murphy (Dublin South East, Fine Gael)
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In the one transaction, can one work for both sides?
Eoghan Murphy (Dublin South East, Fine Gael)
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When someone pays in excess of the valuation price provided, does it mean the property has been undervalued or that the purchaser is overpaying?
Mr. John Moran:
It could be either. Without being flippant, obviously when somebody buys for a price in excess of the valuation price, they see something significant in the property that is more valuable to them than perhaps anybody else in the marketplace. It can happen particularly with land value. Perhaps people assume buildings can be constructed on the site at a higher density than one assumed in the valuation. Perhaps they have assumed a lower building cost than the valuer has assumed. Land value per seis volatile and can move around with investment value. One would be disappointed if one’s valuations were being exceeded all the time in sales.
One thing that is important to understand, though, is that valuation is backwards looking; it is not forward looking. Values are based on the most recent previous evidence. Therefore, if a buyer wants to make a market by paying more, he is entitled to do so. It is vitally important that it be understood that we are not market makers.
Eoghan Murphy (Dublin South East, Fine Gael)
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When did this idea of moving to a fixed fee occur? Is that a recent development?
Eoghan Murphy (Dublin South East, Fine Gael)
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Why was there a shift away from percentage of value to a fixed fee?
Mr. John Moran:
It was primarily led by the banks and developers themselves saying they would not pay a percentage and that they wanted to know exactly what they were paying us for. The professional bodies, I think, were happy enough with it because it meant there was absolutely no risk of somebody trying to increase the value to increase the fee, so it suited from everybody’s perspective.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Moran said valuation reports are not forward looking but also said that in 2007 and 2008 he began to advise clients to sell. Was he not doing that based on fear of a future fall in value?
Mr. John Moran:
Not in a valuation. That would be in general property advice that we would be giving to people. Where we would have been talking to them about pricing and the prospects for their assets, or otherwise, we would have given forward-looking advice but a valuation does not give forward-looking advice; it is set at the specific date and time.
Eoghan Murphy (Dublin South East, Fine Gael)
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I seek clarification on this. Mr. Moran referred to a valuation at a particular point in time but he is aware of risks coming down the line. Does that not affect the valuation being set? Does the valuer not have to take that into account in some way, even if it is just looking at future rent yields?
Mr. John Moran:
As I said, that is why valuations are not forward looking. It is really important to understand that. A valuation is set at the particular time. In calculating the investment yield, will we look at the prospects for the future rental growth and for the property and will we look at the duration of the receipt of income? Absolutely, we will, and we will take that yield and start to adjust that yield, but what tends to happen in real estate, in particular, is that it is a lagging indicator. Generally, what happens is that by the time one makes the projections, the transaction will have happened already, and this will have set a new benchmark. One has to take into account the evidence one has and also make judgment calls on how one believes the property will perform. However, that will relate purely to the yield one has chosen.
Eoghan Murphy (Dublin South East, Fine Gael)
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I might come back to that but first I want to consider valuations and the valuer’s relationship to financing, investment and where the money is coming from. Mr. Moran said in page 5 of his submission that, "The practice of borrowers giving personal guarantees to secure debt became increasingly common in 2006 / 2007, and led to significant cross-collaboration of debt". What would his relationship be with the funding of a transaction? He said he introduces parties.
Mr. John Moran:
That might be open to clarification. We do not introduce parties per se to banks or otherwise; that is not part of our role. We have no involvement in the debt markets whatsoever. Obviously, we would know what would be going on when somebody is buying a piece of property. We understand and realise that they go to the banks to seek their funding. What became very clear – some of this is with the benefit of hindsight – is that personal guarantees became quite common in 2006 and 2007, in particular. What that really meant was that the banks started making their lending decisions based primarily on the apparent net worth of the borrower rather than the real underlying value of the security. That is one of the issues that we have. Those personal guarantees meant that the lending practices started to look away from the actual real estate itself and relied-----
Ciarán Lynch (Cork South Central, Labour)
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Could I seek clarification on one point? In page 5 of his statement, under the heading “Sources and extent of funding of the commercial real estate market in Ireland”, Mr. Moran uses the phrase, “Whilst we may introduce parties”. I think this is what Deputy Murphy was referring to. Mr. Moran is on the record as saying he is introducing parties. Perhaps he could clarify that.
Eoghan Murphy (Dublin South East, Fine Gael)
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I am interested in that. In terms of the transaction point, does someone come to Jones Lang LaSalle before he actually has the finances to make an investment in something the company is managing?
Mr. John Moran:
Not necessarily. We provide two services when it comes to investment property: we sell investments and we also provide buy-side advice. Therefore, when somebody comes in to us and wants to buy an investment, he will either be fully backed by equity or will say to us he will use debt as part of the transaction. At that moment in time, we will turn around to them and say that if they are going to use debt, we do not provide a debt advisory service or provide any corporate finance advice and that they need to talk to a bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is it typical that someone would come into Jones Lang LaSalle for a big transaction, which I imagine would happen given the size of the company, and that they would not have negotiated a position with the bank looking for-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Would Mr. Moran’s company or companies like it have had particular relationships with particular institutions or banks before that?
Eoghan Murphy (Dublin South East, Fine Gael)
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When Mr. Moran was talking about the practice of giving personal guarantees, was he expressing a hindsight view? Was he aware of it at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Would he have had particular concerns about individual investors’ exposure given his view of the market in its totality?
Mr. John Moran:
One would have had a concern towards the end of 2007, in particular, when values started to weaken, that if lending decisions were still being made at that time on the basis of personal guarantees underwritten by the personal net worth of those borrowers, perhaps they would become and start to look more risky.
Eoghan Murphy (Dublin South East, Fine Gael)
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What about syndications? Mr. Moran said they were a significant part of the market at the time. Would he be involved in putting together syndicates or helping people to-----
Mr. John Moran:
I will describe syndication so everybody understands exactly how it worked. There was a variety of people. There were private syndicators, private wealth managers, stockbroking firms and the private banking arms of the banks, which effectively pooled together private investors to pool together their equity to allow them to buy larger assets. Those assets would have been out of an individual's reach in terms of their size and scale so the syndicates pooled the equity, put debt in behind it to support those types of transactions and then proceeded to acquire.
They pooled together the equity, put debt in behind it to support that type of transactions and then proceeded to acquire. Coincidentally, that started in the financial services centre in the mid-1990s, where a lot of syndicated deals were put together to benefit from what were quite attractive tax allowances and then continued into 2000 onwards. We do not involve ourselves in syndicates and never put together any syndicates. Our job, with regard to any private syndicate, was to advise it on trying to find opportunities for it. If the syndicate was successful in buying, it then was to do the due diligence for the syndicate on that transaction.
Eoghan Murphy (Dublin South East, Fine Gael)
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I thank Mr. Moran. I will move on to risks and indicators because my time is vanishing for some reason. Jones Lang LaSalle became increasingly aware of risks in the Irish commercial property market. Did the company express or report any of those fears? Did Jones Lang LaSalle discuss this with any other players in the property market or did Mr. Moran speak to the Government about those risks or fears?
Mr. John Moran:
We did not discuss them with the Government. Throughout that entire period, no approach was made to us by anybody from the Government as to what were our views on the market. Again, with the benefit of hindsight, we found that to be slightly unusual. We expressed our concerns on risks with our client base, because we have our duty of care to that base. In or about March 2007, my research team stated publicly that we were cautious about the market and that the market required a significant amount of caution at the time. That is when we started to make statements publicly about it.
Eoghan Murphy (Dublin South East, Fine Gael)
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In 2006, a number of significant sale and lease-back agreements of substantial size were made. What is that telling us at that point in time?
Eoghan Murphy (Dublin South East, Fine Gael)
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While that is how the banks explained it, does Mr. Moran agree with this explanation?
Eoghan Murphy (Dublin South East, Fine Gael)
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At the time. It was not a case of fear over future values and trying to capitalise their position.
Eoghan Murphy (Dublin South East, Fine Gael)
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If I may, I wish to look at a specific interesting case pertaining to Athlone Town Centre. In September 2007, it was valued at €345 million and at the time, The Irish Timesstated it would be the second major shopping mall in the town and had raised questions about whether the local population was large enough to sustain both. In February 2015, it was being valued at €60 million. What has happened there? That is not a small overvaluation but is a significant change in value. Even in 2007, Mr. Moran's company would have been aware that there were risks in the market, as wasThe Irish Timesitself. While people were aware this actually might not have been sustainable as a development, it was valued at €345 million but then, in 2015, it has been valued again at €60 million.
Eoghan Murphy (Dublin South East, Fine Gael)
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Can Mr. Moran remember what the valuation was at the time?
Mr. John Moran:
I am not privy to that and have no idea. At the time in 2007, Athlone Town Centre was being leased up to international occupiers such as Zara, H&M and Marks & Spencer's. These were the type of companies that were going into it. At the time, shopping centre yields probably were trailing in at approximately 3% or 4% capitalisation rates so the valuation probably was sustainable at that moment in time. However, it goes to the fact that it is a snapshot in time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Does something then need to change, if this moment-in-time valuation-----
Ciarán Lynch (Cork South Central, Labour)
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That is it for the present. I will bring the Deputy back in later.
Eoghan Murphy (Dublin South East, Fine Gael)
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----- was seen as sustainable at that point in time, even though a national newspaper was warning about there not being enough demand to use the shops going into the supermarket? One should remember this was in September 2007.
Mr. John Moran:
That is about looking at what journalists say about shopping centres and not knowing in reality what was happening on the ground. In September 2007, that shopping centre was 80% pre-let to international occupiers. These occupiers were stating they were prepared to occupy the scheme for a period of a minimum of ten years and most times agreeing to pay rents. These were the facts of the situation.
Ciarán Lynch (Cork South Central, Labour)
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As I must deal with an in-house procedural issue, I must suspend the committee's public hearings for a short period and in so doing, must clear the Public Gallery. While Mr. Moran may remain in the room, I wish to attend to a matter that has occurred outside of this morning's proceedings as such.
Ciarán Lynch (Cork South Central, Labour)
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I propose to bring the committee back into public session. Is that agreed? Agreed. Senator O'Keeffe has asked to be excused from this morning's session because of illness. This is a procedural issue to which the committee gave consideration during preparation for our work. In such a situation the committee is of the view that it is necessary to proceed with the evidence. Following consideration of legal advice, it may proceed with the meeting where the witness consents to having his evidence heard without that member being present for the session. Mr. Moran, formally for the record, are you agreeable to the committee proceeding in Senator O'Keeffe's absence this morning?
Ciarán Lynch (Cork South Central, Labour)
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With that said I will continue to the business at hand and invite our second lead questioner this morning, Deputy Joe Higgins, who has 15 minutes.
Joe Higgins (Dublin West, Socialist Party)
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In Mr. Moran's opening statement, on page one, he says:
In the period prior to 2008, the commercial real estate market grew strongly, with increasing levels of purchasing, leasing and construction activity. Ireland's economy was performing well, with GDP and employment growth driving the expansion.
Quite a number of witnesses who came in here as well as various reports on the banking crisis have stated that, in fact, it was a credit-fuelled bubble as a result of inordinate amounts of money lent by banks and financial institutions that drove the growth. How does Mr. Moran reconcile his view that it was economic fundamentals with that?
Mr. John Moran:
At no time did we realise the scale and extent of bank lending that existed within the marketplace. If one looks at CSO forecasts, which I happen to have in front of me, the forecast for 2006 was 6% economic growth and the forecast for 2007 was 5%. The forecast was due to tail off in 2008 at 3% to 4% per annum. We took all our economic commentary from a variety of sources. We looked at ESRI reports. We looked at Central Bank reports. At no stage were what I would regard as the pillars of economic commentary, which would be Government-backed organisations or alternatively organisations such as the ratings agencies or otherwise, saying that we were about to witness the cataclysmic crash that we did. We were aware that there was a lot of credit in the marketplace, but it is the oft-used word, that there was an expectation to which I referred earlier, that there would be a soft landing, and that the soft landing would result in an adjustment of prices but never to the extent that actually happened.
Joe Higgins (Dublin West, Socialist Party)
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In that regard, in the research referred to on page 7 of the document he submitted, Mr. Moran said:
As a real estate advisory firm, it is our job to advise clients on real estate issues. It is therefore imperative that we understand levels and impact of risk.
Prior to the banking crisis, we were advising our clients on the nature and impacts of the property market and how it was performing. Any advice was informed and reinforced with key primary research data. We collect and monitor research for each property sector, with some datasets going back to the early 1970s.
Any valuations ... were based on evidence of historical market values. Valuation reports are not forward-looking.
Let us take that on the one hand, and then on the other hand we take an article by a UCD academic called Morgan Kelly in December 2006 in which he stated:
Offering no evidence except wishful thinking, estate agents and politicians assure us that we have nothing to worry about: the Irish housing market can look forward to a soft landing ... If the experiences of economies similar to ours are anything to go by, we may be looking at large and prolonged falls in real house prices of the order of 40-50 per cent and a collapse of house-building activity.
Professor Kelly goes on then to instance research in the property sector in many countries from the 1970s on. His conclusion, by common consent turned out to be absolutely correct. Mr. Moran said he had done the same research, or that he was basing his prognosis on historical research as well. How does he reconcile-----
Mr. John Moran:
It was historical research with regard to the commercial real estate market not with regard to the housing market. I have made it abundantly clear that we are not experts in the residential property market. What Morgan Kelly was talking about was the housing market. Our research relates to property data relating to what happened in the commercial real estate market, namely, how many offices are occupied in a year, how many retail units are occupied in a year, and what pricing has taken place. We also said in Q1 2007 that we had concerns over the state of the residential market. At the time we actually saw developers seeking change of use from residential to commercial opportunities. Effectively, we anticipated price drops. I think I have said that. We anticipated price drops of between 5% and 15%. We certainly did not anticipate price drops of 70% for commercial property and 90% for development land.
Joe Higgins (Dublin West, Socialist Party)
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Does Jones Lang LaSalle deal in development land on which houses will later be built?
Joe Higgins (Dublin West, Socialist Party)
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I am aware Mr. Moran's competitors were involved in significant deals with development land which was earmarked for housing. Was Mr. Moran's company involved in such deals?
Joe Higgins (Dublin West, Socialist Party)
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Does Mr. Moran see a relationship between what happened-----
Mr. John Moran:
Absolutely, I understand completely how development land value is calculated. If one is talking about a housing estate for example, the value will be calculated on what the developer thinks he will be able to get for the houses, the end value of the houses less the cost of getting him there will lead one to the residual portion of the land. I have no doubt developers made significant mistakes in that regard. They were over optimistic in their assumptions. They assumed increasing prices, which we felt were unsustainable. They assumed higher densities than we felt they could probably get and therefore they started bidding the market up accordingly. As a consequence, each time a developer bought a site, he set a new level so the price went up by another 10% and that became the next benchmark for the market to look at.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Moran said also on page 7: "By 2008, there was a recognition within the property industry that market conditions were over-heating, however I do not believe that most market participants realised the extent of bank lending to the property market". Mr. Moran was at the coalface. He saw the size of the deals that were going down and the huge increase in price for commercial properties. Where did he think the money came from if not from the banks?
Mr. John Moran:
We knew there was excessive lending in the marketplace. I do not deny that for one moment. It is very important to make clear that as practitioners we did not know how much equity was going into the deals. We did not know whether equity releases were going into the deals. We were never privy to or involved in any of the negotiations around the terms of those transactions. We did not know what personal guarantees were being given. What became very apparent afterwards, again this is with the benefit of hindsight, is that we did not know the level of lending. We did not know the geographical concentration of it, nor did we know the level of lending to specific borrowers. That is information to which real estates advisers would never be privy.
Joe Higgins (Dublin West, Socialist Party)
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Did developers Mr. Moran acted for not discuss with him how they were going to fund the purchase?
Joe Higgins (Dublin West, Socialist Party)
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On page 6, Mr. Moran said, "Irish yields tightened significantly between 2003 and 2006, compressing from 6.00% to 3.70% for prime offices for example. At these levels, international purchasers were priced out of the market, with more competitive yields available in other European countries". Do I understand that European capitalists became wary of what was going on because they felt that prices were far too high in Ireland and they went elsewhere? Is that how to read this? If that is the case should alarm bells have sounded?
Mr. John Moran:
I would almost read it the opposite way, in so far as what it actually caused was Irish capital to fly out of the country to seek better returns elsewhere. There is no tradition of foreign ownership of Irish real estate going right back to the 1970s when commercial real estate started to get really developed in Ireland. The proportion of foreign owners in the Irish market has always been exceptionally low but that has changed significantly in the past three years.
Joe Higgins (Dublin West, Socialist Party)
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Yes, but if I could interrupt, Mr. Moran, if they thought there were significant yields in Ireland given that capitalists go where there is profit, why were they so wary as to move?
Joe Higgins (Dublin West, Socialist Party)
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Should that not have sounded alarm bells with estate agents and developers?
Joe Higgins (Dublin West, Socialist Party)
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Should that fact have sounded alarms bells with estates agents such as Jones Lang LaSalle and the people they were advising?
Mr. John Moran:
That is what it did, and that is why we turned around to our client base at the end of 2005 and said, "We cannot see that these type of returns are sustainable in the longer term. If you want to take a profit perhaps you should think of exiting now".
As I said at the outset we were proven wrong for two consecutive years because values continued to rise in 2005, 2006 and the first three quarters of 2007. I can assure the Deputy that a number of our clients were less than happy with the advice they received from us.
Joe Higgins (Dublin West, Socialist Party)
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Looking at the period from 2002 or 2003 to 2007, Jones Lang LaSalle and estate agents generally would have been market participants in the huge increases in land prices etc. Presumably, estate agents made good money from that. In a book authored by Shane Ross and Nick Webb, on page 161 they say:
Looking back at that period, you could have advised a developer to pay tens of millions for a field in the middle of nowhere based on valuations that turned out to be nonsensical, but it did not damage your career. NAMA paid hefty salaries to people who had been at the coalface of the crash. NAMA was there to take up the slack and all previous errors were forgotten. It was a bailout for the professional classes.
Is that fair or unfair? Is it an assessment Mr. Moran would agree or disagree with?
Mr. John Moran:
I think it is grossly unfair. As I have said and I repeat, we do not make the market. We give opinions and developers, owners and investors make their own decisions. We do not take their decisions for them. We do not know what their endgame actually is. Did people get it wrong? Absolutely. There is no doubt that was the case, but we do not turn around and say, "You should do this at X". People have their own teams, they are professionally advised and take their own choices. I have never turned around to somebody in my entire career and said, "You should go and buy that for X." I would say, "We think it is worth X" and it is up to them then to decide what they want to do with it or otherwise.
Joe Higgins (Dublin West, Socialist Party)
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Can Mr. Moran tell me a little bit about the syndicates that operated in the market? What was their main field of activity and what was the profile of their participants?
Mr. John Moran:
The profile of the participants in the syndicates ranged from high net worth individuals, professionals - those were generally the syndicate members. The syndicates were put together, as I said, by people who specialised in putting them together so you had specialist companies that were putting syndicates together. There were private wealth managers, the stockbroking houses and the private banking arms of the banks putting them together. The profile was people putting in relatively small - I use the word carefully - amounts of equity so they could participate in significantly larger projects. It would not have been unusual for clubs of ten to 20 people to be put together that would put a certain amount of equity into a transaction which would enable them to buy a property that was significantly larger than if they were trying to buy it themselves.
Joe Higgins (Dublin West, Socialist Party)
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When Mr. Moran says "high net worth" does he mean very rich people?
Joe Higgins (Dublin West, Socialist Party)
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Would they have any expertise in the area they were putting money into?
Joe Higgins (Dublin West, Socialist Party)
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I have seen some deals, for example, concerning doctors, lawyers and such people being involved in syndicates, buying development land. What expertise or interest would those people have in buying development land that was, say, for housing?
Ciarán Lynch (Cork South Central, Labour)
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As Deputy Higgins was interrupted by the inadvertent playing out loud of a podcast just now, I will give him some grace time-wise given the commercial break he had to endure.
Mr. John Moran:
I can only give the Deputy what I would have said to any doctor or lawyer who was trying to participate in a syndicate, buying development land and developing housing. I would have asked, "What in God's name are you up to?" I certainly would not have participated in something like that and did not participate in anything like that because I am not an expert. People are entitled to invest your money any way they want but to my mind, for doctors and lawyers, taking significant development risk on housing developments is not what they should be doing.
Joe Higgins (Dublin West, Socialist Party)
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May I ask whose side estate agents are on? Whose side are the boys on? I ask that in reference to a predecessor of Mr. Moran who, in 2006, made this statement: "Amazingly, the fundamental that is missed by those looking at the property market is that the price of land is high because the price that people are prepared to pay for houses is high, not vice versa." The suggestion there is that young people trying to purchase a home wanted to pay the by any standard inordinate prices that were demanded to put a roof over their head.
Mr. Moran's predecessor finishes by saying, "there is the Chinese proverb which counsels 'be careful what you wish lest your dream come true'". It seems to me that a Government which engineers a fall in house prices in order to pick up first time buyers' votes may not alone be confusing action with progress but may also live to repent at leisure. Is the suggestion by this particular estate agent, that house prices should be kept at the inflated levels they rose to up to 2006, in the interest of young people buying their homes? Does Mr. Moran agree or disagree with this view?
Mr. John Moran:
I would disagree. We are on no side, that is the reality of the situation. We act for buyers and sellers all the time. I think I said at the outset and I passionately believe this - we need a functioning property market. People forget that property is effectively land, which is a factor of production, which is necessary for economic activity to take place. As a practitioner I would much rather see a property market that has increasing values in line with whatever the prevailing inflation rates are at the time. I have no interest in participating in booms and busts, I have no interest in keeping values artificially high. I have to run a business and I can assure the committee running a business in the cyclical industry that is property is not very pleasant. We would rather see slow, steady growth.
As I said, property is a factor of production. Without it people do not have roofs over their heads. They do not have shops to shop in or offices to work in. It is a necessary function of a functioning economy. I believe that slow, steady growth rather than this boom and bust cycle we have seen time and time again is far preferable.
Marc MacSharry (Fianna Fail)
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At the outset I must declare an interest as an estate agent. I have been involved in buying and selling property in the past. I welcome Mr. Moran and thank him for his presentation.
If I were to commission his firm and nine other property valuing companies, would I be likely to get the same answer from all ten?
Marc MacSharry (Fianna Fail)
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Is it fair to say that there are bounds within which there is no wrong answer?
Marc MacSharry (Fianna Fail)
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What kind of percentage?
Marc MacSharry (Fianna Fail)
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If Mr. Moran was commissioned to do a valuation by a developer, a bank or anybody else, would he accept a client brief in advance?
Marc MacSharry (Fianna Fail)
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If I was developing company A, I was buying site B and I wanted bank D to finance that, would Jones Lang LaSalle prepare the valuation that would be required to assist me in securing 70% finance on that?
Marc MacSharry (Fianna Fail)
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Within the bounds of no wrong answer, would it be Jones Lang LaSalle policy to focus on the higher end of that 5% threshold rather than the lower to facilitate the developer in that instance?
Marc MacSharry (Fianna Fail)
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What determines that?
Mr. John Moran:
What we do when we undertake a valuation is give our true, fair and accurate representation of what we think that property is worth in the market. If one consulted my peers, the financial community or the developer community, we would be known for being at the conservative, not aggressive, end of the market and we take our responsibilities very seriously. We also realise that now, in particular, one has a duty of care to the bank or financial institution as well.
Do valuers get pressured by developers to increase their valuation figures? Absolutely, they do. Our policy is we will resign from an instruction, if that happens.
Marc MacSharry (Fianna Fail)
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Was Jones Lang LaSalle above reproach in that regard?
Marc MacSharry (Fianna Fail)
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Did Mr. Moran ever prepare in an application process for a major syndicate for finance of many hundreds of millions of euro?
Marc MacSharry (Fianna Fail)
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Preparing to purchase?
Marc MacSharry (Fianna Fail)
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Would that be in the €200 million to €1 billion category or lower?
Marc MacSharry (Fianna Fail)
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Mr. Moran mentioned in his testimony earlier that syndicates came together to purchase property which, if I am quoting him correctly, he stated were out of reach of the individual. Is that correct?
Marc MacSharry (Fianna Fail)
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As a result of properties being out of reach of individuals, is it Mr. Moran's view that syndicates came together so that they could afford this or to increase the potential of leverage for less collateral from the individual?
Marc MacSharry (Fianna Fail)
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As a result, did syndicates coming together fuel the boom?
Marc MacSharry (Fianna Fail)
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In the 2000-01 era, the then Government was preparing a national spatial strategy. Did Jones Lang LaSalle make a submission to that?
Marc MacSharry (Fianna Fail)
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The national spatial strategy, Mr. Moran may recall, involved a call for public submissions, and individuals, local authorities, auctioneers or anybody else could make one. Then it was prepared, as I understand it, by the Department of the Environment, Community and Local Government with input from spatial planners from Denmark or other such expertise that was procured by the State at the time. I ask the Chair for a little latitude here. The strategy stated that towns such as Sligo, for example, would have to prepare an infrastructure for a population of 100,000 by 2020 and, obviously, that was mirrored in other towns, villages and cities throughout the country. To what extent was this analysis wrong? Why was it wrong? To what extent did it fuel the policy agenda of the day that led to the property boom?
Ciarán Lynch (Cork South Central, Labour)
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I would ask Mr. Moran to comment upon that rather than take the lead of a question. He should give his view on it.
Mr. John Moran:
At the time, everybody in the profession was well aware of the spatial strategy. It enabled towns as gateway towns and it was pro-development to the extent that people were anticipating that population growth. Where the issue arose is it was very difficult. If the Senator will recall, we had a rapidly growing population at the time. We had quite significant immigration and there was a view afoot that the population was going to continue to expand and that we were going to have to provide both residential and commercial accommodation to all these new population centres. Hindsight proves that we were completely wrong. Did it assist in fuelling development in locations where perhaps development was not sustainable otherwise? Absolutely.
One point I will make, and which I feel quite strongly about, is there has been a lot of blame delivered at the doors of the banks, estate agents, developers and various other stakeholders. The town planners in this country are also equally as culpable for fuelling the development boom. Planning policies were extraordinarily lax. They were difficult and virtually impossible, and incoherent in a number of respects. Certainly, in a chase for rates income and in a chase for each town wanting to out-develop each other, they led to completely and totally unsustainable development.
Ciarán Lynch (Cork South Central, Labour)
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This is Senator MacSharry's final question and he should keep it brief.
Marc MacSharry (Fianna Fail)
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Mr. Moran mentioned that Jones Lang LaSalle does not comment on the future. In July 2007, its then chairman stated that while accepting house prices might fall 10%, the prospects for the following year for commercial property look very promising. At the time, did Mr. Moran believe the assessment by the ESRI that there was going to be a soft landing? Did his clients? To what extent does he believe the comments of his then chairman? I do not know whether or not it is the current chairman, but we are not allowed mention names here.
Ciarán Lynch (Cork South Central, Labour)
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I would ask Senator MacSharry to be brief. He is over time.
Marc MacSharry (Fianna Fail)
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To what extent were those comments providing false confidence to the market?
Mr. John Moran:
I reiterate we believed that there would be a soft landing. We thought that values would fall by 5% to 15%, not by, as I stated, 70%. We were aware of all the economic commentary that was in the marketplace but what nobody, certainly in Dublin anyway, was aware of was what was happening globally. We were not aware that Lehman Brothers was about to collapse. We were not aware that there was going to be a credit crunch. We, certainly, were not aware that the banks had over-lent in every aspect of real estate which led to the cataclysmic events that we have endured. What we have just been through in the property market is unprecedented. It has never happened before. We knew there was an adjustment coming, but certainly not of the magnitude that we have currently undertaken.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Moran. I call Deputy John Paul Phelan, who has six minutes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I welcome Mr. Moran.
At the start, I have a couple of questions about loan-to-value ratios in the commercial property sector. First, for the committee and for those from outside watching, what is the purpose of loan-to-value ratios in the commercial property sector?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I refer to page 5, paragraph 6 of Mr. Moran's opening statement, which states:
At the time, there was a lot of funding available in the market place. Whilst we were not involved in final loan-to-value calculations between our clients and the banks, were are aware that loans were available at high value ratios.
Is there any particular emphasis on the word "final"? Was Jones Lang LaSalle involved in loan-to-value ratio calculations at processes other than the final?
Mr. John Moran:
We were never involved in loan-to-value calculations per se. That is the job of the bank, not us. What we would have been aware of, through general market knowledge and anecdotal pieces of people to people, was the level of types of loan-to-value ratios that were available in the market at the time and they could have been, I am sure, in certain circumstances, up to 90%, and, in other circumstances, they were exceeded by that. That, to us, is an exceptionally high level of loan-to-value ratio.
If I compare it to today, which might be a useful benchmark, a very high-quality investment property in Dublin today will get a loan-to-value ratio of perhaps 65% at the outside. One can see where the differentials lay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Referring to Mr. Moran's last answer, was Jones Lang LaSalle involved at the time with financial institutions in their calculation of those loan-to-value ratios?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I refer to page 6 of Mr. Moran's opening statement where he stated that Irish real estate had become too expensive for international investors. In terms of international investors, was that a particular cause of concern? Mr. Moran indicated already that Jones Lang LaSalle gave advice to some of its investors to dispose of assets. In terms of international investors, how did the company express that concern?
Mr. John Moran:
The reality is that most international investors never even looked at Ireland. I think one has to understand as well that the real estate market in Ireland is actually quite small. We have 40 million sq. ft. of modern office space in Dublin, compared to 400 million sq. ft. in London, for example. International real estate investors generally seek markets where there is scale. In the period 2002-07 it was the first time ever that the Irish market had shown any signs of scale. There are a number of international investors who will not invest in a market unless it trades at least €2 billion a year, so it simply was not on their radar screen.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In terms of international branches of Jones Lang LaSalle, was Ireland registering in those offices and were those concerns being expressed in those offices at that time?
Mr. John Moran:
We were registering more as a location for occupiers than investors. We were regarded, at that time, as a pretty good place to do business. We produced a regional growth index across various cities in Europe. Dublin, at the time, was at No. 3 in the regional growth index. That was around 2004-05. It was predicated on things like employment growth, GDP growth, increase in consumer spending, and increase in consumer sentiment. As an investment location, because the yields were so tight, we simply did not feature.
Ciarán Lynch (Cork South Central, Labour)
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Senator Sean Barrett has six minutes.
Sean Barrett (Independent)
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I thank the Chairman and welcome Mr. Moran. Are the fees that Jones Lang LaSalle get in any way related to the amount of the valuation?
Sean Barrett (Independent)
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There is no incentive to talk up-----
Sean Barrett (Independent)
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The evidence to us has been that commercial property is much more volatile than residential and was a cause of the instability we are investigating here. Why does Mr. Moran think that is?
Mr. John Moran:
I think the component of volatility that really impacts, and it relates to both commercial and residential, is land. Land is exceptionally volatile in value and that is because it is open to so many various different interpretations. If there is a one-acre site, for example, and I think I can build 12 houses on that site, I know I can sell them for a certain amount. I know what it will cost to build them. I know what my services and financing costs will be. That tells me what I can afford to pay for the land. However, if somebody beside me thinks that he can build 50 apartments on it, he knows that the end value will be significantly higher. His construction costs may be slightly higher but he can afford to pay a lot more for it.
That pertains through commercial land as well. If I think on an office site I can build a 100,000 sq. ft. of offices to deal with a company of 700 or 800 people and the person beside me thinks he can build 200,000 sq. ft. of offices, different values will arise. That is where the real volatility around value arises. The other aspect of it is in a scenario where there were high loan-to-value ratios. The level of equity that was being put into the transactions was relatively low so when one is operating in a market where values fall by 70% to 75%, everybody's equity gets wiped and I think that is why we are in the situation that we are in where, obviously, loan levels then become unsustainable because the natural buffer that one would expect to be in a normal piece of lending was not adhered to.
Sean Barrett (Independent)
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Mr. Moran told the committee that Ireland had the second highest shopping stock per head in Europe. Was that a bubble mentality?
Ciarán Lynch (Cork South Central, Labour)
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Is that a retail bubble or a shopping bubble or what is it?
Ciarán Lynch (Cork South Central, Labour)
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We over-retailed.
Sean Barrett (Independent)
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If we had a fire sale when this happened rather than NAMA where would be now in terms of Mr. Moran's industry?
Mr. John Moran:
We probably would have incurred even greater losses than we have already incurred. The scale of this was unprecedented. If there had been a fire sale there would have been buyers for it, there is no doubt about that. The same people who had been buying over the previous three to four years would have been active participants but they simply would have paid less. I think, in hindsight, the benefit of holding the assets for as long as we possibly could was probably a wise thing. Also, I do not think - and the members of the committee would be better qualified than me to say this - that the State could have taken the hit, unless we dealt with in the way that we did. It is arguable that the State has not been able to take the hit. The scale of this is that €74 billion worth of loans were transferred into NAMA, or €74 billion worth of face value. That does not take into account the other hundreds of billions that the banks had on their balance sheets that were not put into NAMA. It is mind-blowing in its magnitude.
Sean Barrett (Independent)
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Did tax breaks exacerbate the situation?
Mr. John Moran:
The original tax breaks that existed around the IFSC and the designated areas achieved what they were supposed to achieve which was urban rejuvenation. As a firm, we had been involved with the IFSC since its inception. I doubt without the tax benefits, either the capital allowances or the double rent allowances, it would have been successful because it was a location the people simply did not want to go to. Those tax breaks became a little less attractive after 2002 when the cap was brought in on the amount of income that could be used against them so they did not feature as much. I believe that the other array of tax allowances that were provided for holiday villages and all the various other hotels, in particular, led to a proliferation of development in some fairly obscure locations where there was obviously no end user demand. So I think latterly those types of allowances were ineffective and led to overdevelopment. Also, the preponderance of the Government to say at the time that the allowance would be gone at the end of the following year and then suddenly extending it again exacerbated and fuelled developers trying to take advantage of those allowances.
Sean Barrett (Independent)
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With the bargains that were available until fairly recently, did we need to get involved in real estate investment trusts and the fiscal privilege attached to them?
Mr. John Moran:
I think we do because I think we need liquidity in our marketplace. We need people to buy all these distressed assets which are now being re-sold back into the market place. Therefore, in order to widen the potential buyer pool I think REITs were a good idea. I also think they will play a role in future development. They are allowed to develop 35% of their portfolios so they will become important providers of space which should help us to respond to the supply side issues that we have in the marketplace at the moment for both residential and office accommodation.
Pearse Doherty (Donegal South West, Sinn Fein)
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Cuirim fáilte roimh Mr. Moran. I was looking at The Irish Timespiece that Mr. Moran had in 2008 looking forward to 2009, when the podcast went off. I am not being paid by The Irish Timesto do that deliberately. It is the second time it has happened, so my apologies.
Mr. Moran has said that in 2005 he suggested to his clients to sell and not buy at that point in time. Clearly they ignored his advice, given that levels of investment by Irish investors increased dramatically in the 2005-06 peak year, and 2007. Why does Mr. Moran believe that they ignored his advice?
Mr. John Moran:
That advice would have been delivered to what I would regard as our core client base, which would have been the pension funds and life assurance companies. We, as a firm, did not have an enormous involvement in the private investor market. We were considered, and probably still are, the institutional firm in town, for want of a better expression.
Most of them adhered to our advice. Some 90% of the buying activity at that time was private investor led. Quite frankly, it was stoked by a lot of people. Private syndicators were making a great deal of money out of it so it was in their interests to try to continue to push property acquisition and investment as an asset class.
Pearse Doherty (Donegal South West, Sinn Fein)
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If we consider the peak year of 2006, some €3.6 billion worth of transactions took place in Ireland. How many individuals or syndicates were involved in those transactions?
Mr. John Moran:
I would have to carry out an analysis but I can provide the Deputy with a broad sense of the number of transactions which took place that year. In that context, some 121 transactions accounted for the €3.6 billion. Of these, 39 involved amounts of less than €2 million so one would assume that they related to private individuals. A further 23 involved amounts of between €2 million and €4 million, so they probably also related to private individuals. Above that, some 20 involved amounts greater than €40 million and I would say 90% of these were probably syndicated transactions. Out of the total of 121, one could probably argue that 40 or 50 were syndicated transactions.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Moran stated that people were interested in stoking up the property market. The figures he provided indicate that a small number of individuals or syndicates were involved in the transactions in question. How could it have been in their interests to continue to invest when the suggestion was that the market was overheated?
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Moran mentioned the fact that very little, if any, purchasing was done through the medium of cash and that lending was very much bank led. We know that €3.6 billion was spent here by Irish investors in 2006. However, large multiples of that amount were invested outside of the jurisdiction. Will Mr. Moran outline the type of investments involved in that regard?
Mr. John Moran:
As I alluded to earlier, that type of investment was driven by two considerations. First, and believe it or not, with €3.6 million being traded, there simply was not enough opportunity in terms of supply in the Irish market in 2006. There was still a lot of cash washing around the system at the time so people were starting to seek better returns. There were better returns available in other countries, so people opted for them. People were also perhaps seeking to "de-risk" their strategies to some degree and said, "I do not need complete exposure of my property investment strategy to Ireland and I would like to take some exposure in London or elsewhere". In that context, people invested money in all sorts of God-forsaken places. There was an element of that involved and a certain proportion of it was fuelled by the same syndicators to whom I referred earlier and who needed to continue to build their businesses. As well as being active in Ireland, most of those syndicators were also active overseas.
Pearse Doherty (Donegal South West, Sinn Fein)
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Am I correct in stating that Irish investors invested approximately twice as much in the UK property market as they did in the Irish property market?
Pearse Doherty (Donegal South West, Sinn Fein)
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In Mr. Moran's experience, would that have been funded by Irish-based banks?
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Moran referred to his firm's responsibility to its clients and also to the financial institutions. What is his opinion regarding the financial stability update issued in 2007 which stated that when loans relating to commercial properties fall into arrears, banks expect to write off 60% of the money involved whereas the level of write-off in the context of residential properties is 18%? That update also highlighted the risk of investing in commercial property. Was Mr. Moran aware of the update to which I refer, which, I believe, was written by Marie Hunt? Was his firm aware of the risks the banks were undertaking as a result of the huge level of investment to which I refer?
Mr. John Moran:
We would have been concerned. However, as I stated at the outset, we were surprised - we remain surprised to this day - that very few people came and spoke to us about any of our concerns. Where one could see things were becoming unsustainable, one would say it to people but they did not necessarily seem to want to listen or, alternatively they did not ask.
Pearse Doherty (Donegal South West, Sinn Fein)
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To whom in official circles did Mr. Moran's firm offer its opinion?
Mr. John Moran:
We did not offer it to anyone in official circles. There was no contact whatsoever between ourselves and anyone in official circles. Again, I found that surprising. We would have fed some of our views into our professional institute, which presumably was in contact with those in official circles. As a firm, however, we did not speak to anybody.
Pearse Doherty (Donegal South West, Sinn Fein)
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I thank Mr. Moran.
Michael D'Arcy (Fine Gael)
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I welcome Mr. Moran and thank him for coming. He seemed to suggest earlier that he would prefer if we did not have boom-bust cycles and that it would be better if a much less volatile structure held sway. Am I correct in stating that?
Michael D'Arcy (Fine Gael)
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Do certain high-profile sites contribute to boom-bust cycles?
Michael D'Arcy (Fine Gael)
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The Irish Glass Bottle site.
Mr. John Moran:
They can contribute to the boom-bust cycle in the manner in which they set a new price level. When the next site becomes available, the market knows exactly what was paid for the previous site. Prices are recorded and they are accurate at the time but then, and as already stated, property is not a static asset. Values change all the time.
Michael D'Arcy (Fine Gael)
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Was Jones Lang LaSalle involved in the deal relating to the Irish Glass Bottle site?
Michael D'Arcy (Fine Gael)
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Jones Lang LaSalle's website states that "The achievement of the almost record-breaking €412 million sale price would not have been possible had it not been for the Jones Lang LaSalle team’s significant time investment in devising a range of innovative strategies aimed at maximising value on what was quite a complex site". Was the company involved in a deal relating to a boom-bust site in that instance?
Mr. John Moran:
Our job, in the context of that particular sale, was to maximise the value for the two stakeholders, namely, South Wharf plc and the Dublin Port Company. As I said at the outset, our duty of care is to our clients. So, yes, we tried to show the site in its best benefits and we tried to tell people what we thought they could build on it. I do not apologise for that for one moment.
Michael D'Arcy (Fine Gael)
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Did the high-profile nature of the site contribute to the creation of the boom-bust cycle in respect of commercial property?
Ciarán Lynch (Cork South Central, Labour)
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Did it set a benchmark?
Michael D'Arcy (Fine Gael)
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An official from the Department of the Environment, Community and Local Government gave evidence to the Committee of Public Accounts to the effect that the sale value of the site doubled in the space of one month.
Ciarán Lynch (Cork South Central, Labour)
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Is that correct?
Ciarán Lynch (Cork South Central, Labour)
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Let us ask the witness.
Michael D'Arcy (Fine Gael)
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A lot of things do not make any sense.
Michael D'Arcy (Fine Gael)
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I wish to read the following into the record, "A former Dublin Docklands Development Authority board member, who was also a senior Department of the Environment official, has expressed “deep regret” at the failure of the Irish Glass Bottle development."
Ciarán Lynch (Cork South Central, Labour)
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What is the Senator citing?
Michael D'Arcy (Fine Gael)
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I am citing evidence given by a person who attended a meeting of the Committee of Public Accounts.
Ciarán Lynch (Cork South Central, Labour)
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So the Senator is quoting from the minutes or the transcript of proceedings of that meeting.
Michael D'Arcy (Fine Gael)
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The individual in question, who I will not name was, and I quote, "head of the department’s planning division, said she did not tell then Minister for the Environment [who I also will not name] when the price of the Ringsend site almost doubled from €220 million to €412 million in just over a fortnight".
Ciarán Lynch (Cork South Central, Labour)
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What date was that?
Michael D'Arcy (Fine Gael)
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Will Mr. Moran outline his fees in regard to it? Had he moved from a percentage of the valuation?
Michael D'Arcy (Fine Gael)
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Mr. Moran says he was not aware that the banks had over-lent, yet Jones Lang LaSalle Ireland is an international section of a company that has access to specialist analysis of the commercial property market and also international comparators. I have two questions. The previous record, €1.2 billion in 2005, was trebled in 2006. Is there any other sector or jurisdiction in which the previous record was trebled? Mr. Moran has said he was not aware banks had over-lent. Should he have been aware of this? I assume an analysis of the banks was available-----
Ciarán Lynch (Cork South Central, Labour)
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The Senator should conclude.
Michael D'Arcy (Fine Gael)
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I might not get a chance to complete my questions.
Ciarán Lynch (Cork South Central, Labour)
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The Senator should put his questions because he is already over time.
Michael D'Arcy (Fine Gael)
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Should Mr. Moran have been aware that the banks had over-lent?
Michael D'Arcy (Fine Gael)
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The balance sheets of the banks were available year on year and showed extraordinary growth.
Michael D'Arcy (Fine Gael)
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Just nobody within.
Ciarán Lynch (Cork South Central, Labour)
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There is no "just" about it. If the delegate gives an answer, there is no "just" about it.
Michael D'Arcy (Fine Gael)
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Is it correct that nobody within his organisation was aware of it?
Kieran O'Donnell (Limerick City, Fine Gael)
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I wish to take up the issue of the Irish Glass Bottle site. Mr. Moran has said the sale went through when the market was at its peak and that it did not have any impact. However, is it not clear from his company's website that it was involved with the site from 2000 onwards? Is that correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was it not involved in putting together a development plan? The company has a case study on its website.
Kieran O'Donnell (Limerick City, Fine Gael)
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No, but the company was involved in coming up with a strategic plan. It was one of the consultants that had been brought in.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but Jones Lang LaSalle was involved.
Kieran O'Donnell (Limerick City, Fine Gael)
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There is a case study on the website dealing with it.
Kieran O'Donnell (Limerick City, Fine Gael)
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The company claims in the case study that it was involved in coming up with an intricate strategic structure to maximise the value of the site. The point I am making, therefore, is that it is fair to say property agents such as Jones Lang LaSalle were directly involved in maximising the value of particular sites, this site in particular, which was over €400 million.
Mr. John Moran:
That was our job; that was what we were being paid for. Our duty of care was to the vendor of the site. Our job was to get the maximum value for him. That is no different from selling a three bedroom semi-detached house, something we do not do, on behalf of a private individual. That is my job.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Mr. Moran believe estate agents have a moral or prudent responsibility where assets are being sold on behalf of a vendor and where clearly the price does not stand up?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. Moran saying we are relying on the buyer beware principle?
Mr. John Moran:
Absolutely. It must be understood the property market is primarily about supply and demand. It is about the general state of the economy. The market, buyers in particular, was not populated by people who did not take advice, who did not have internal advisers or who did not take external advice. People made mistakes and if they paid too much money for a property, they did so with their eyes wide open.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. Moran will appreciate that the consequence of many of these transactions was that the ordinary man in the street ended up taking much of the burden.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Mr. Moran believe agents had a duty of care? Reading back, he says the property market was supported by the economy. In our case, it was driving the economy. It accounted for some 25% of GDP when it should have been only 8%, 9% or 10%. He says it peaked on 30 September 2007, but it is now generally acknowledged that it peaked around July 2006. Jones Lang LaSalle is one of the main estate agents and puts itself forward as such. However, the ordinary person would have to ask this question. How can it state the property market peaked 14 months after the time we now know that it peaked, in July 2006?
Mr. John Moran:
In terms of commercial property investment values, as measured by our index, which goes back to 1973, the market peaked on 30 September 2007. I did say values tend to lag in the market, so activity levels had started to fall off. That is why I said there were two reasons for looking at the property market. We look at the property market in terms of value appreciation, but we also look at the depth of and activity in bidding. I contend that the depth of and activity in bidding had started to wane towards the end of 2006, but that is a matter of opinion.
Kieran O'Donnell (Limerick City, Fine Gael)
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On page 7 Mr. Moran said that, as a consequence, they had advised most of the client base not to participate in the market on the buy side and, where appropriate, advised clients to sell. When specifically did the company start to advise clients to sell?
Kieran O'Donnell (Limerick City, Fine Gael)
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When did it advise people not to buy?
Kieran O'Donnell (Limerick City, Fine Gael)
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Therefore, by the end of 2005 the company's internal reviews were advising that the market had peaked or was peaking at that time. However, page 1 tells me the market did not peak until 30 September 2007.
Kieran O'Donnell (Limerick City, Fine Gael)
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Based on Jones Lang LaSalle's expertise, could we have another property bubble in the current market?
Mr. John Moran:
There are a couple of things we need to take into account in answering that question. Much of the investment taking place is with equity rather than debt. The general financial circumstances of the global market - it is not often we use the term "global market" in Ireland's case - are that there are significant amounts of equity seeking homes and a yield in the absence of decent returns elsewhere.
The occupier market and the general economic fundamentals support a reasonably performing property market. Should these factors change, should there be an economic shock or significantly increased interest rates, for example, values will decline. Are we at the bubble stage? Not just yet. Am I concerned that we might be getting there? Quite possibly.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Mr. Moran and thank him for his time. When was the peak and when was the trough in the price of commercial property and development land?
Michael McGrath (Cork South Central, Fianna Fail)
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Mr. Moran mentioned a percentage drop in commercial property values, from peak to trough, of 70%.
Michael McGrath (Cork South Central, Fianna Fail)
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Reference was made to the lack of a price register for commercial property. We now have such registers for residential property and commercial leases. Would the existence of a national register of commercial property prices have made any difference in what happened and should we have one now?
Mr. John Moran:
There should be such a register. If we compare ourselves with other economies in Europe, some countries centrally fund their data collection and these data are available to everybody to assist them in making business decisions. In this country data are opaque and not necessarily always shared. The industry generally would welcome far better data provisions. It is not just down to the availability of a commercial property register or the residential property price register; it goes much further than this, into some of the issues on which I have touched, including concentration of risk for banks and the geographics and borrowers to which they are lending. To use a favoured expression currently, the information we can access needs to be far more granular than it is to allow us to undertake a proper, rigorous analysis.
Michael McGrath (Cork South Central, Fianna Fail)
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In Mr. Moran's view, we should have a national register of commercial property prices.
Michael McGrath (Cork South Central, Fianna Fail)
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What toll did the collapse have on Mr. Moran's firm in Ireland in terms of a reduction in head count, for instance?
Mr. John Moran:
Our turnover halved. From a point where we were employing more than 90 people at the beginning of 2007, we ended up back at 63. Fortunately for us, as we were not overstaffed in the boom, a lot of it was natural attrition rather than having to let people go. However, we did have several redundancies.
Michael McGrath (Cork South Central, Fianna Fail)
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Was it Mr. Moran's experience during the boom that there was a lot of competition among the banks to lend to the commercial property and development land sector? Did clients who were buying have a choice of banks and was there intense competition among banks for that business?
Michael McGrath (Cork South Central, Fianna Fail)
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Part of our remit is to look forward and make recommendations. Where do we stand today in terms of the availability of high quality office accommodation, where there is a demand for such, in Dublin and other cities, and in terms of our competitive position when it comes, for instance, to rent per square foot?
Mr. John Moran:
There remains an acute shortage of good quality spaces in the locations where people want to occupy such spaces. The vacancy rate for what we describe as grade A accommodation, the best space in the best location in the city, is sub 3%. I understand there is only one building of over 100,000 sq. ft. available in Dublin city at this time. It is a serious issue which has led to very significant increases in office rents. We do a lot of work for foreign occupiers and it is now a major concern in terms of our FDI competitiveness. People look around Dublin and think certain postal districts compete against each other. Our experience, however, is that Dublin, when trying to attract foreign investment, is competing against Birmingham and Berlin. We are at a stage where our rent prices are getting to the level of being unsustainable. A rental price in the order of €50 to €55 per square foot is sustainable in Dublin, given that it is an international capital and the amount of technology companies based here.
Michael McGrath (Cork South Central, Fianna Fail)
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What is the current price per square foot?
Michael McGrath (Cork South Central, Fianna Fail)
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Are we facing a serious risk of Ireland losing out on certain investments because of the lack of affordable office accommodation?
Mr. John Moran:
It is a combination of two factors - lack of affordable office accommodation and, probably even more importantly, a lack of affordable residential accommodation. The latter is as serious an issue as the non-availability of office accommodation. Unfortunately, real estate is a little like a super tanker - it takes a long time to stop it and a long time to start it. Until such time as we get our supply side organised which will probably not be until 2017, we are going to see these inflationary pressures in the office market.
Michael McGrath (Cork South Central, Fianna Fail)
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Has Mr. Moran done a lot of work for the private equity funds which have been investing so much in Ireland in recent years?
Michael McGrath (Cork South Central, Fianna Fail)
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Has he any view on the consequences for Ireland of, for example, the National Asset Management Agency selling 90% of its commercial property to private equity firms? We are looking at a different landscape in terms of the ownership of very important commercial property in Dublin and around the country. What impact might this huge shift in the ownership dynamic have in a context where the investment decisions these firms make are typically not long-term ones?
Mr. John Moran:
That dynamic will change and will continue to do so. Any property recovery has three phases and we are only starting to enter the third phase. We then have the private equity houses or other investors that come in to take it out. People think these companies are all vultures and have been coming here to steal all of our assets and everything else, but I regard their involvement as probably the greatest amount of foreign direct investment we have ever seen in this country in capital terms. That is what it is - people investing their money. Yes, they are here to make money, but they are also investing.
Michael McGrath (Cork South Central, Fianna Fail)
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However, is it long term-investment?
Mr. John Moran:
No, it is not long-term investment. That is the next phase, which is starting to happen, where these properties will end up being recycled and sold to new investors. That is why things like real estate investment trusts, REITs, are beneficial for us because we will need people to buy these assets.
Ciarán Lynch (Cork South Central, Labour)
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As Deputy Michael McGrath noted, part of the committee's work is to look to the future, consider policy matters and make recommendations based on the evidence presented to us. Mr. Moran has referred to the current rental cost per square foot in Dublin. How does it compare with prices in other urban centres such as Cork and Limerick? How far ahead is the cost in Dublin?
Ciarán Lynch (Cork South Central, Labour)
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Is the issue at this time one of supply rather than demand or a mixture of both?
Ciarán Lynch (Cork South Central, Labour)
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At what point during what might be called the bubble years, 2002 to 2007, was the cost around €50 per square foot in Dublin?
Ciarán Lynch (Cork South Central, Labour)
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There was an escalation to the peak when the figure was at about €50?
Ciarán Lynch (Cork South Central, Labour)
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Would Mr. Moran say, therefore, that there is a warning signal flashing?
Ciarán Lynch (Cork South Central, Labour)
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I have another question which brings us back to the 2002 to 2007 period.
From our testimony a witness came here and said red lights were flashing in other areas, such as if a bank's profitability was growing so fast, questions would need to be asked as to why that profit is growing so fast. The consumer price index between 2000 and 2007 was running at about 30%. Research carried out by Colm McCarthy for Retail Excellence Ireland showed that commercial rents increased by 240% in that period. So the CPI was running at 30% and commercial rents were running at 240% - was that a red light or not?
Ciarán Lynch (Cork South Central, Labour)
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We will split the difference.
Mr. John Moran:
It does not matter anyway. One way or the other they were ahead of where inflation was. Should it have been a warning signal - yes absolutely. There was a lot of catch up going on. We had started from a very, very low base but at the same time, one does not look just at the CPI as one of the metrics, one also had to look at what was happening with consumer spending which was increasing rapidly.
Ciarán Lynch (Cork South Central, Labour)
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The consumer price index was at 30%. If one divides 30% into 240%, or into 120% by the witness's reckoning, one still comes out with percentages that do not really match. They are severalfold what they are.
Ciarán Lynch (Cork South Central, Labour)
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One of Professor Nyberg's reports talks about the bonus culture and incentivisation that took place in the financial and banking sector. Mr. Moran explained earlier how the valuation model works. Are fees for estate agents, valuers and agencies like Jones Lang LaSalle derived from a percentage of the overall sale?
Ciarán Lynch (Cork South Central, Labour)
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So, for example, if the site sells for €1,000 and the agency is on 1%, then the agency gets €10. Is it still a percentage driven industry?
Mr. John Moran:
It is a combination of both, depending on what service level one offers. Valuations are done for fixed fees, so there is no incentive there whatsoever and nor should there be. Sales fees are still a percentage of the ultimate sale price - or fixed fees depending on which the client wants.
Ciarán Lynch (Cork South Central, Labour)
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Are there bonuses on top of the fees?
Ciarán Lynch (Cork South Central, Labour)
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Senator D'Arcy mentioned the Irish Glass Bottle site earlier. Is there a bonus for sales people, if they were to "land a whale" like that, as they say in Las Vegas?
Ciarán Lynch (Cork South Central, Labour)
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I wish to ask the witness about the broader regulation of the industry. Is the regulatory structure representative of the regulator and the representative body - both sides of the house in the one organisation?
Ciarán Lynch (Cork South Central, Labour)
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That is okay. Who regulates or who gives oversight and monitoring to the industry?
Ciarán Lynch (Cork South Central, Labour)
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Is there a potential for conflict of interest there or not?
Eoghan Murphy (Dublin South East, Fine Gael)
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Can I clarify with the witness about the Irish Glass Bottle site? His company provided the valuation for the sellers of that site?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was Mr. Moran at any point involved in the valuation for that site?
Eoghan Murphy (Dublin South East, Fine Gael)
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There were significant difficulties and costs when it came to clearing that site that were not expected. Would site clearance have been a factor when coming to a potential sale value for the site?
Mr. John Moran:
Again, if one used the approach I outlined earlier on when one is working out what the cost is to develop this site, and if remediation was necessary, one would have estimated the costs of remediation as part of the overall costs. If enormous remediation costs were required, the natural assumption would be that one would pay less for the actual land value, because there were additional costs over and above normal.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would Mr. Moran work those costs into a sale price in order for the purchaser to calculate?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did Mr. Moran at any point in time provide a valuation or a change upwards in valuation during negotiations?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Moran's company was aware there was a risk long-term regarding the Athlone Shopping Centre site and he was advising clients not to buy. Earlier the witness said that if he was talking to a barrister involved in a syndicate he would be telling him or her to not get involved in investing at that point in time.
Eoghan Murphy (Dublin South East, Fine Gael)
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But the witness was advising on the Athlone Shopping Centre.
Eoghan Murphy (Dublin South East, Fine Gael)
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In advising a client to not invest -----
Eoghan Murphy (Dublin South East, Fine Gael)
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But Mr. Moran also talked in public, and on record, about why it was a good investment deal.
Mr. John Moran:
It was good investment deal. It touches perhaps on the issue of capital allowances, that it was a tax-led deal - there were significant capital allowances available to any of the investors in that transaction. That is what made it attractive rather than its longer term property fundamentals.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would Mr. Moran consider that going on record in public and talking about the attractiveness of the investment, even from a tax point of view, is stoking the sector? Mr. Moran himself was advising clients to not invest in it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Moran talked about the Government extending tax schemes year on year and how it exacerbated things. Can he explain exactly how?
Mr. John Moran:
There would be an announcement about whatever relief scheme was available that year. There were so many of them it is quite difficult to encapsulate them all, but take holiday home villages for example. There would be an announcement that the tax incentive for building these schemes was going to be finished by 18 months or by six months time. There would be a surge of development activity responding to that. Then in the next budget the tax incentive would be rolled over again, so instead of finishing it and completing it, which I believe would have been the preferable thing to do, it just caused people to think "There is that tax incentive, I'll utilise that again". If one drives around parts of the midlands or parts of the west, there are developments that have no reason to be there, other than they were tax based.
Eoghan Murphy (Dublin South East, Fine Gael)
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Why roll it over, why extend it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Would Mr. Moran's real estate industry or company have been involved in those questions?
Joe Higgins (Dublin West, Socialist Party)
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The witness said he began to advise clients towards the end of 2005 to sell and to be cautious. Those clients included syndicates, people he himself described as high net worth individuals or very rich people.
Joe Higgins (Dublin West, Socialist Party)
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Jones Lang LaSalle had nothing to do with syndicates.
Joe Higgins (Dublin West, Socialist Party)
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What was Mr. Moran advising syndicates to do?
Mr. John Moran:
So that members understand how syndication works, syndicates generally came with the property already acquired and our role at that juncture was primarily to underwrite the property, doing the due diligence to make sure what they were buying was what it was supposed to be. We were an institutional and pension fund house and we had very few syndicated clients we were buying property for.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Moran said that former clients did not want to listen, in his words. Did greed for profits play a role in skewing their judgment?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Moran advises NAMA in certain aspects. Quoting again from the book by Deputy Shane Ross and Nick Webb:
Jones Lang Lasalle was able to keep afloat through hefty fees from NAMA [after the crash]. In September 2011, John Moran said that the company's work for NAMA was relatively good for us in 2010. He was putting it mildly. The former firm was the biggest recipient of valuation fees from NAMA, as noted above [in the figures given]. That figure represented only a portion of Jones Lang Lasalle's income from NAMA. The company also earned €2.8 million for portfolio management fees over the same period.
Is it unfair that someone thinks estate agents in general, including Jones Lang Lasalle, cleaned up in the bubble and prices were going well and were cushioned in the crash while many ordinary people who suffered had no such lifeline? Is that unfair or fair?
Mr. John Moran:
It is unfair. Our revenue halved and we did not earn €2.8 million in portfolio fees from NAMA. That is inaccurate. We do not segregate where we earn our money from and we report normally. Our accounts are publicly available. No one who wrote that book consulted with us about the level of fee income we earned. Like every other agent in Dublin, we earned fees from NAMA. We are not advisers to them and NAMA takes its own advice and has its own team. At the moment, our role is now is to implement what it asks us to do.
Joe Higgins (Dublin West, Socialist Party)
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Was the firm----
Joe Higgins (Dublin West, Socialist Party)
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Was it cushioned by being engaged with NAMA?
Mr. John Moran:
It depends on what we define as being cushioned. Did we earn valuation fees from NAMA? Yes, we did.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Moran approved of the real safe investment trusts, bringing in foreign investment into a distressed market, as I understand it. He said that such people were sometimes referred to as vulture funds. Is it socially beneficial that tenants are at the mercy of vulture funds, in Mr. Moran's view as an estate agent who sees various aspects of the situation?
Mr. John Moran:
Socially beneficial is a wide-ranging term. The benefits of having professional owners of real estate, as opposed to one of private investors, can be beneficial in that they give the opportunity to provide professional management. Rapid rent increases in residential accommodation, which we witnessed, are wrong. If I were creating Government policy, which I am not, I would look to change leasing structures in residential investment to have something that is fairer for both landlords and tenants.
Joe Higgins (Dublin West, Socialist Party)
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Is it inevitable that vulture funds, so-called, coming in for short-term periods will increase rents? Does Mr. Moran favour rent control legislation?
Mr. John Moran:
I do not necessarily favour rent control legislation in the manner of the Rent Restrictions Act but I favour when a market rent is set, it is set for a reasonable duration and escalates by the inflation rate. That is fairer for everyone and creates a more sustainable model. Putting on my foreign direct investment hat, which we wear because we are trying to encourage business into the country, ultimately that will be beneficial for occupiers and ultimately beneficial from the ownership perspective because people know the kind of income they would receive.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Moran is already into the space of final comment on policy recommendations for the future. This can refer to both broader recommendations and for the sector. Does Mr. Moran have anything to add in that regard?
Mr. John Moran:
These are answered from the property perspective rather than from the policy perspective and some are with the benefit of hindsight. There is a key lesson to learn about regulation of bank lending. There should always be detailed central knowledge of the volume and nature of bank lending, including risk concentration in a sector, a location or to borrowers. Development lending should include a detailed assessment, not only of the land value, which is a snapshot in a volatile sector, but a detailed assessment of how the money will be paid back. We did not feel that happened and there should be sensitivity analysis contained within that. When preparing a development land valuation, one can turn around and say that if it goes right there is likely to be one outcome and if it goes wrong there is likely to be a different outcome. That did not happen and it is still missing in the industry.
All valuations for bank lending should be commissioned by the bank, paid for by the bank and with the duty of care exclusively with the bank. The practice of borrowers commissioning bank valuations should be ceased.
Ciarán Lynch (Cork South Central, Labour)
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On valuation, should it be regulated or should regulation be put in place by the Central Bank?
Mr. John Moran:
There should be regulation from the Central Bank. There have been some improvements in the past number of years but it is not at the stage it needs to be. Banks should have more in-house qualified property professionals as a key part of decision-making or take proper external impartial advice. There was not a property professional to be found in any of the banks between 2002 and 2007.
Valuation should be more frequent on security because property is not a static asset and changes. If zoning changes, the value can change. Valuing it and not looking at the file for five or six years is unacceptable. The planning system needs a serious overhaul in how it links up and how it gives clear guidance to the development community. It does not so people make mistakes based on incorrect assumptions. I have spoken about data sharing, which is something we would welcome
The final point is the limited interaction between the regulatory side of the Government and experts in the industry. I am open to correction but I do not think there is a property professional in the Central Bank, which I find astounding given the amount of property lending that goes on. I would welcome the introduction of an expert panel from experienced practitioners to advise the Government on an ongoing basis.
Ciarán Lynch (Cork South Central, Labour)
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With regard to a property professional in the Central Bank, is that someone who-----
Mr. John Moran:
Someone who has a surveying background and who understands how real estate really works. Real estate is exceptionally complex and, to the best of my knowledge, no one of that qualification works there.
There should be an extra panel, not necessarily of the regulatory bodies like the Society of Chartered Surveyors, the PRSA or other professional institutes. The CEOs of the main estate agencies, like myself, or of REITs can give really valuable insight to Government as to what is happening on the ground. If we see overheating - and it is in nobody's interests to have an overheated market - we can tell Government we think we have a problem. The Government can then introduce a policy to deal with it. Where we see supply-side issues, like we see in offices and residential at the moment, we can also make that known. We have been banging the supply-side drum for the past 24 months and saying there are simply not enough offices in this city. NAMA has taken up the ball and run with it to an extent but nobody seems to be really listening to our calls for policy interventions to be put in place as quickly as possible.
Ciarán Lynch (Cork South Central, Labour)
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I will bring this morning's proceedings to a conclusion. The meeting with Mr. Moran has been very valuable and informative and has assisted the committee's understanding of factors leading up to the crisis. I also thank him for his co-operation and assistance with matters earlier this morning and for his flexibility in that regard. We are running late so we will suspend and return at 12.25 p.m.
Ciarán Lynch (Cork South Central, Labour)
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We are now in public session. The second session of today's hearings is a discussion with Ms Marie Hunt of CBRE. We are focusing on issues related to the nature and functioning of the commercial real estate market in the period prior to 2008 in the context of the banking crisis in Ireland.
I welcome Ms Hunt. CBRE group is the world's largest commercial real estate service and investment firm, with more than 52,000 employees, and serves real estate owners, investors and occupiers through more than 370 offices worldwide. In Ireland, CBRE is the country's largest commercial real estate services company, employing over 140 employees with offices in Dublin and Belfast. CBRE Ireland is a multi-disciplinary property services company, offering a full range of property services including property sales and acquisitions, leasing and management, investment sales and acquisitions, corporate services, project management, consultancy, valuations and research on behalf of a range of different client types, including vendors, purchasers, landlords, tenants, developers and investors as well as third party service providers including banks, solicitors, receivers, planners, accountants, etc.
Ms Marie Hunt is a fellow of the Society of Chartered Surveyors in Ireland and a member of the European Society of Property Researchers. Almost 20 years ago, Ms Hunt established the research department of the Irish business of CBRE, which is now regarded as one of the most authoritative sources of commercial property information in the Irish market. A regular conference participant and commentator in the Irish media on property matters, Ms Hunt produces many property market publications on all sectors of the Irish commercial real estate market and carries out specialist consultancy work on behalf of a broad range of institutional, private and public sector clients.
Before we begin, I advise that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the Chairman to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and, as they have been informed previously, the committee is asking them to refrain from discussing named individuals in this phase of the inquiry. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I invite Ms Hunt to make her opening comments.
Ms Marie Hunt:
I thank the committee for inviting me to attend to put in context the nature and functioning of the commercial real estate market in the period up to 2008. Members have my submission so I will not read it verbatim but will highlight some of the key points.
Commercial real estate breaks down into a lot of markets and sub-markets such as office, retail and industrial occupier markets, the investment market, the development land market and the hotel and licensed markets. All these different sub-markets operate independently of one another. Commercial real estate volumes are considerably lower than in the residential property sector but the value of commercial real estate transactions is considerably higher. In the absence of a national census or register of commercial property it is quite difficult to do as the committee asked and precisely quantify the size of the market, though some sectoral estimates on stock figures and transaction activity are collated by firms such as ourselves.
Commercial property tends to break down into three distinct elements, which are the development piece, the occupier piece and the investment piece. What happened in Ireland in the period up to 2008 is that the three distinct sectors effectively merged and real estate developers began to develop accommodation, let it out and hold onto the property for investment purposes. Invariably they then used it as collateral for other investments and developments.
Commercial property is, by its nature, a long-term investment. In general, commercial property is significantly more complex than other forms of investment and much less liquid. By virtue of the typical size of transactions it is not really a sector that is accessible to all - one needs a lot of money to be able to invest in commercial real estate. However, the emergence of the syndicate model in Ireland in the late 1990s did enable a larger cohort of investors to get into commercial property.
CBRE is a Fortune 500 and S&P 500 company with headquarters in Los Angeles. It has 52,000 employees and its Irish firm is the largest property firm in Ireland. CBRE Ireland is a multidisciplinary firm and is involved in everything to do with commercial property, be it property sales and acquisitions, leasing, investment sales, corporate services, project management, consultancy or anything else. In the same vein, we do not act for a particular type of client. We act for vendors, purchasers, landlords, tenants, developers, etc. In addition, under the property industry umbrella, we act for significant numbers of third-party providers, such as accountants, solicitors, banks, receivers and so on.
The research function at CBRE Ireland has the same platform as we have in every CBRE office across Europe, in that we have systems, databases and processes in place. Our main role is to track transactions and market information. We track transaction volume, land sales, hotel and pub sales, office and industrial leasing statistics and supply and demand to whatever degree we can. We also comment on issues such as rents, yields and capital values. All of this information is inputted into global databases and this enables us to produce pan-European publications and to compare Ireland with other jurisdictions. It is important to stress that the research function at CBRE operates independently of the rest of the business. Therefore, my team is not involved in transactional activity on a day-to-day basis. We observe what happens on the ground and we are charged with giving impartial and unbiased observations and commentary based on our interpretation of market trends from the perspective of property market specialists operating in the business.
I am not an economist. This is quite unusual because many of those on research teams working within property come from an economic background. I come from a surveying background. I am a chartered surveyor by profession and I am a full member of the Society of Chartered Surveyors Ireland, SCSI, I have completed all my postgraduate qualifications and I am a fellow of that society. Over the past 20 years, I have been a regular commentator on the commercial real estate sector in Ireland and I produce a range of publications on the market and across all of the sectors. We produce a significant number of statistical publications on the office, industrial and investment sectors, just as CBRE does worldwide. The publication we are best known for is our bimonthly report, which is more of a newsy report that provides an update or snapshot every two months in terms of trends and transactions happening on the ground.
The most significant challenge I have faced in my 20 years doing this job in trying to track the size and scale of activity is the scarcity of data. Unlike in many jurisdictions across Europe where I have colleagues working, we do not have a national property register. This has created huge issues, because it is down to private firms like ours to carry out research. Invariably, when we publish that research, it is claimed we have a vested interest. Therefore, our research has been a thankless job. I believe the Government should have established a national property register or system to enable us to track the market better. Perhaps we can discuss that later.
The understanding of risk is related to the issue of available data. Again, we do not have the luxury of a long-time series. The only independent source of data on the Irish market is produced by a private company, Investment Property Databank, IPD. I do not know whether members are familiar with the work of IPD, but since the mid-1970s, all institutionally owned properties in Ireland must value their assets quarterly. These quarterly valuations are what make up the IPD data. Therefore, the data are not representative of the entire market because the valuations relate purely to institutional assets. However, the data do give us a good barometer of trends in the market. As members can see from figure 1, the commercial real estate market in Ireland, for the period for which data are available, has demonstrated a highly cyclical pattern. This demonstrates the fact that commercial real estate is a long-term investment. According to this index, the average total return is 16.4% per annum which one would agree is a decent level of annual return. However, looking at it on an annualised basis, this is hugely cyclical. Figure 2 shows a table for the years from 2001 to 2008 where this cyclical pattern is clearly evident. In 2002, we had a total ungeared return of 2.2%. Four years later that was 24.4%.
Roughly, each cycle has tended to be of ten years duration. In the period up to 2007, considering the fact that interest rates were rising and we had built a significant amount of property in the preceding years, primarily as a result of the ready availability of cheap and plentiful debt and Government tax policy in place at the time, which incentivised real estate investment and development, it was predictable that the market would turn and we would enter the downward phase of the cycle.
If we look at what drives property, this can be broken down to four key drivers: the economic backdrop; the balance between supply and demand; funding; and sentiment. If the cycle had followed its normal or expected pattern, as we considered it would at the time, Irish commercial property values would have gradually fallen from peak levels, dipped close to or slightly into negative territory, plateaued and ultimately the cycle would have kick-started again. For the period from 1976 for which we had data, that was the pattern and what we anticipated would happen. We did not anticipate the extent of the crash that happened, and the extent to which Irish investors and developers were leveraged exacerbated their losses.
I will run through each of the four drivers individually, beginning with the economic backdrop. We are a real estate firm, not economists. Therefore, our economic projections and assumptions, both from a micro and macro level, came from outside the organisation. We would have paid huge credence to the ESRI, the ECB and the IMF. Also, as an S&P 500 company, we would have been very mindful of the ratings agencies, none of which downgraded their projections for Ireland until the third quarter of 2008.
In regard to the supply-demand balance, I know the committee had someone before it in recent weeks who said the supply-demand balance does not have a bearing. However, it is critical. Consider the double-digit house price rises we have seen in Dublin over recent times and the 50% increase in office rents in the past 18 months. This is due to the under-supply situation we are in. It was obvious to us in the period up to 2007 that an imbalance was starting to come through in supply and demand. Cheap and plentiful bank debt and Government tax policy fuelled a construction boom and encouraged the development of both residential and commercial property, much of which occurred in the wrong parts of the country. Extensive rezoning of land for development across many different local authority areas and the absence of a national planning strategy exacerbated this trend. In simple terms, we were building too much accommodation, much of which was in the wrong locations. The pace of development was unsustainable and needed to be curtailed.
As a firm, we began to warn in 2005 about the potential for oversupply and we welcomed signs that development was beginning to slow down. Against the backdrop of development continuing to slow down and domestic economic activity remaining strong, as we believed to be the case based on the commentary being provided by the IMF and the ESRI and so forth, a soft landing was plausible in our opinion. In fact, this was the most likely scenario according to a range of market advisers and participants at that time.
The third factor, one critical to the committee's deliberations, is funding. In the context of property, when we worried about funding, all we ever considered was whether interest rates were going up or down. The likelihood of a global banking crisis removing debt from the equation completely did not enter our thinking. We believed that the banks were stress-testing borrowers. A scenario where the global banking system would completely implode and where domestic debt funding would completely disappear, which exacerbated the pace and severity of collapse experienced in the Irish commercial property market, just was not envisaged.
The fourth influencer, probably the most difficult to measure, is sentiment. Herd instinct plays a part in the property market and the market is heavily influenced by sentiment. We took our role seriously and understood that commentary, positive or negative, can influence sentiment to a large degree and that this could influence activity levels and, ultimately, pricing. As an organisation, CBRE is very mindful of its role. Any commentary or observations made about the market were made objectively and without influence. Consider the client base we had and have today. Talking the market up or talking it down was not on our agenda, because we had clients on every side.
We believe our commentary always has been open, honest, based on the information available to us and based on our perspective as property specialists. From our perspective and as I stated, the information up to 2007 suggested that a soft landing was the most likely pattern. We found that a property market tends to follow the same pattern and we refer frequently to a chart, shown as figure 3 in our presentation, which comes from a book written more than 100 years ago by a man called Homer Hoyt. It follows a study of 100 years of land values in Chicago, in which eight different cycles were followed and monitored, including the gold rush, the arrival of trains and so on. Hoyt came to the conclusion that a property cycle always tends to follow the same pattern. CBRE used that graphic a lot in presentations to clients to demonstrate the cyclicality of the market and in turn, to demonstrate risk to some degree. As members can see, figure 3 typically follows the same pattern but what took everybody by surprise in the crash in 2008 is that it did not follow the normal pattern. Effectively, we jumped from stage 7, where the real estate market was peaking, to stage 12, where the banks reversed their boom policy on loans overnight. We skipped all the other stages and that led to the crash being significantly more severe. Certainly for the period for which data were available, we had never experienced anything of that magnitude.
Moving on to some of the analysis we do locally, we maintain property databases and again, these follow the same definitions and methodologies as does CBRE worldwide. We have been tracking what Irish people were spending on investment property and we track every single transaction over €1 million in value. We can then put that into a global system and look at it on a pan-European basis. According to our research, Irish investors invested more than €46.35 billion in income-producing assets with a value of more than €1 million in the period between 2001 and 2008. Were one to add properties that were below €1 million in value, that figure would probably be closer to €50 billion. I should state that more than 50% of this investment during the aforementioned period occurred in the United Kingdom and 23% in Ireland. The volume increased year on year from 2003 to 2006, peaking at more than €11 billion in 2006. Unusually, 100% of investment expenditure in Ireland in the period between 2001 and 2008 was by domestic investors. At the peak in 2006, 30% of Irish investment occurred in Ireland, with 55% in that year occurring in the United Kingdom.
To put into context how severe was the crash, at peak in 2006 there were more than 98 transactions of more than €1 million in the Irish market while two years later in 2008, there were only 26 transactions totalling less than €500 million. These data were publicly available and were produced in all CBRE research publications at the time. Anybody who went looking for it could have found it and I suppose it marries the data that were coming out in respect of the amount of lending that was going on. I have just looked at the peak of the market in the year 2006 to give members a flavour but according to this research, 36% of the investment spend in Ireland was attributable to developers, 26% to syndicates, 20% to private investors, 10% to institutions and the remainder to a combination of different investment funds, pension funds, occupiers, etc. Outside of Ireland, the proportions were quite similar. It also is important to note in respect of the types of assets people were buying that Irish investors tended to have a preference for office and retail properties.
As for development land, we also maintain a database tracking all development land in which we stripped out all agricultural sales and counted everything else. As members can see, according to that research, which is shown in figure 5, a total of almost €12.5 billion was invested in just shy of 1,000 individual development land transactions between 2001 and 2008. It is significant to point out that while much of the focus on commercial property tends to be on the land piece, four times that amount was being spent on investment property when one adds it up cumulatively. It also is important to note that while they will not be included in these numbers, members might remember that in the period between 2001 and 2008, there was a notable increase in the volume of hotel and pub sales in the Irish market, many of which effectively were land sales. One could also include petrol stations in that regard. The volume of expenditure is dramatic and increased more than ninefold between 2001 and 2006, according to our data, when more than €4 billion was invested in development land. In addition to the increases in land values in the period, there was a notable increase in transaction volumes recorded with 59 in 2001, rising to 260 individual transactions in 2006.
In both figure 4 and figure 5, I will point members to the year 2006 because that was the peak of the market based on transactional information. Towards the end of 2006 and early 2007, it was obvious that transactional activity had started to slow down. Members will have seen this in excerpts from various reports from that time. In respect of funding specifically in respect of the various transactions I have demonstrated to members on these charts, CBRE was involved in some capacity in many of these transactions, be they in Ireland or overseas. We were also involved in many of the transactions involving Irish buyers overseas and we carried out valuations for lending purposes for many of the purchasers and indeed all the Irish lending institutions. However, we were not privy to detailed information on how these specific transactions were being funded. Anecdotally, we were aware that a large proportion of transactions were debt-funded compared with other countries. We knew that from talking to colleagues in other jurisdictions. We also were aware of commentary on increases in property lending by the Irish banks and individual financial institutions. However, we were not privy to the specifics of how particular transactions were being funded, how banks were financing themselves and we certainly were not aware of the extent of cross-collateralisation that was occurring. Perhaps naïvely, we presumed that a central register of commercial lending activity tracking borrowers' exposures across different lending institutions existed. We were not aware of particular banks' exposure to specific individual borrowers. As I stated at the outset, we are not banking experts and so we had regard to assertions from the Central Bank, the Financial Regulator and others that the banks were sufficiently well capitalised and robust. We were cognisant of ratings given to Ireland by ratings agencies such as Standard & Poor's, Fitch and Moody's. Based on this, we believed that the Irish banks were well funded and appropriately regulated and that the borrowers were being sufficiently stress-tested. We had no reason to suggest otherwise and we did not have specialist training or insight or any knowledge that would have enabled us to question this.
As for lessons for the future, in the period up to 2008, to my knowledge we were not contacted by the Government, the Central Bank, the Department of Finance or the Financial Regulator at any stage for our view on property market trends from our perspective or to ask us for any of the data we were collecting on transactional activity or property market performance. In general, Government intervention in the property market was largely done without any engagement whatsoever with the property industry and certainly not with firms such as ours. In the future, we recommend engagement with such organisations that have access to reliable information on trends and transactions, as well as the ability to cross reference this with other jurisdictions and geographies because we believe this would give a valuable perspective to decision-makers and those in authority. It is encouraging that in its recent Construction 2020 report, the Government has acknowledged the need to improve data collection and analysis to ensure that the real estate sector in the future is evidence-based and underpinned by the best available data. Had reliable, honest, timely and accurate data been collected historically and reviewed in the context of a national planning framework, the scale of the downturn in the most recent cycle may have been somewhat less severe. That is my submission in which I have made every effort to address the specific items the joint committee has asked me to address. I will be happy to take any specific questions.
Ciarán Lynch (Cork South Central, Labour)
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I thank Ms Hunt for her opening statement. I will get matters under way immediately and invite Deputy Pearse Doherty to lead off. The Deputy has 15 minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Cuirim fáilte roimh an tUasal Hunt chuig an coiste. I believe that at the previous meeting, I may have taken her name in vain when I was talking about the financial stability update in 2007. It was of course authored by Ms Maria Woods and not by Ms Hunt. In her statement, Ms Hunt mentions that 100% of the investment spending in Ireland in commercial property for the period between 2001 and 2008 was comprised of domestic investors. Would this be normal for a domestic market?
Ms Marie Hunt:
In simple terms, no, because we have access to data for everywhere across Europe and right throughout that period, we would have seen that typically, 25% to 30% of investment in any jurisdiction came from outside. In the case of Ireland, there were probably several reasons for this, the main one being that many investors simply deemed Ireland to be too small, that the size of opportunities that were brought to the market were quite small. In the current market, we have lots of portfolios changing hands that are sizeable and this is attractive to investors.
At that time, however, we were selling individual assets and they were just deemed to be too small.
We also had a much higher stamp duty regime in Ireland. For example, one could have invested in the United Kingdom and paid a stamp duty rate of 4% relative to 9% that had prevailed in Ireland, so that was off-putting. Also, pricing was more expensive so if we looked at yields or cap rates relative to other jurisdictions, Dublin stood out because it was more expensive so obviously investors were not going to invest on that basis.
Pearse Doherty (Donegal South West, Sinn Fein)
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How many investors are we talking about over that period?
Pearse Doherty (Donegal South West, Sinn Fein)
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For example, information for 2006 was provided to the committee indicating that there were 121 transactions, which equated to €3.6 billion of investment. Some of those transactions may be the same individuals or they may be syndicates. Is any information available as to the number of investors? Would it be fair to assume that some who invested in 2004 are the same individuals who may have invested in 2006?
Pearse Doherty (Donegal South West, Sinn Fein)
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Over what period?
Pearse Doherty (Donegal South West, Sinn Fein)
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It is a small market. For 2006, therefore, and this is Ms Hunt's guesstimate, of the 121 transactions we are talking about 50 or 60 individuals or syndicates.
Pearse Doherty (Donegal South West, Sinn Fein)
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In Ms Hunt's experience is the 50 or 60 investors in 2006 the same or what portion of them were the same investors in 2005 and 2004, for example?
Ms Marie Hunt:
I would have to go back and check transitional activity to verify that. In some cases they would have been the same investors. It is fair to say they were using one investment to cross-collateralise against another. We would have data breaking that down year by year because we are tracking every single transaction and every single buyer, so it is possible to-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Can Ms Hunt provide that data to the committee?
Pearse Doherty (Donegal South West, Sinn Fein)
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That would be appreciated. Ms Hunt mentioned there was a lack of knowledge on the part of her organisation of how they were funded. Were there any conversations or suggestions as to whether they were funded by equity, debt or cash?
Ms Marie Hunt:
There were no conversations. As I said, we were never privy to the funding situation. We were there to buy or sell the assets. We were never involved. I suppose to some extent our valuations team would have been asked by various banks to fund and, anecdotally, we were hearing that there was a lot of debt funding, but we had no way of proving that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Ms Hunt mentioned leverage in her opening statement and stated that the ability to leverage is one of the key attractions of investment in the commercial real estate market. Will she explain the reason for that to the committee? Why is commercial property attractive to leverage?
Ms Marie Hunt:
In terms of different forms of investment, if someone is buying stocks and shares, for example, they cannot go to the bank and borrow to buy whereas with commercial real estate they can do that. When someone is in the upward part of a cycle and using leverage, it enhances their returns but the opposite of that is also true. When the market crashes, they are severely exposed but unlike other forms of investment, they can borrow. That is what I am saying.
Pearse Doherty (Donegal South West, Sinn Fein)
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What is Ms Hunt's understanding in regard to leverage? Is it 70% or 80% debt funded? What is her understanding in terms of the average?
Pearse Doherty (Donegal South West, Sinn Fein)
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Would Ms Hunt be surprised to learn that the leverage was in the region of 70% or 80%?
Pearse Doherty (Donegal South West, Sinn Fein)
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That would mean that these investments could be debt funded up to that level.
Pearse Doherty (Donegal South West, Sinn Fein)
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Half the Irish investment in commercial property in the period 2001 to 2008 was in UK property. What were the investments being made in the UK?
Ms Marie Hunt:
The rationale for going to the UK in the first place is that it is quite a similar market to our own, so not only is it English speaking but the covenants and the lease structures are quite similar, unlike going to the rest of Europe where the lease structures are radically different. It was a market that was easy to understand and from a banking perspective also it was quite similar, so it was the natural progression for people to go into. Also, there was much more produce available compared to the small Irish market. If we consider the types of assets the Irish investors bought, as I said, they tended to buy office and retail properties in preference and they tended to buy very high quality so they bought Bond Street retail properties and West End offices. They did a little bit of investment in regional UK but most of it was focused in central London.
Pearse Doherty (Donegal South West, Sinn Fein)
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In terms of how they were funded, is it Ms Hunt's view that they would fund them the same way they would fund Irish investment properties?
Pearse Doherty (Donegal South West, Sinn Fein)
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Ms Hunt stated in a paper that in 2006 there was €7.4 billion of investment in the UK by Irish investors and suggested that would be 158 transactions. Would that be correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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It is a quote from The Irish Timeswhich states: "Figures compiled by Marie Hunt, director of research at CB Richard Ellis, show that the Irish were involved in 111 investment transactions and 47 sales". That is in regard to €5.5 billion that was invested in 2006, and property sold at a further €1.89 billion. Would that figure be correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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The figure of €7.4 billion correlates with the chart Ms Hunt has provided.
Pearse Doherty (Donegal South West, Sinn Fein)
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In terms of the number of investors, if we take it that the figure of 158 transactions is accurate, how many individuals or syndicates would we be talking about for that number of transactions? Is it the same type of proportion?
Pearse Doherty (Donegal South West, Sinn Fein)
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From Ms Hunt's experience was there much crossover from the 50 or 60 Irish investors that year with the investors investing in the UK?
Pearse Doherty (Donegal South West, Sinn Fein)
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That is fair enough. When did the downturn in the UK commercial property market begin?
Ms Marie Hunt:
Again, I would have to check that. When we look at the market we are using IPD, which is the only source available for Ireland. We would tend to use IPD for the UK as well. Their index is on a monthly basis as opposed to our quarterly one. I seem to remember that it was six to eight months prior to our own downturn, but I would have to check that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Was Ms Hunt concerned at all about the exposure of Irish commercial property speculators to a UK downturn?
Pearse Doherty (Donegal South West, Sinn Fein)
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Is Ms Hunt aware of the UBS investment report in January 2008?
Pearse Doherty (Donegal South West, Sinn Fein)
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The UBS investment report was the report that led to a 30% share price fall in some Irish banks overnight. The newspaper reports from that time indicated that the report issued warnings in regard to Ireland's commercial property sector. It states:
We believe that the risk to the value of retail shopping centre space in Ireland is on the down side in the near to medium term due to three factors. Firstly, rents are already the second highest in Europe. Secondly, available shopping centre space is the third highest in Europe and is forecast by the Bank of Ireland to increase by another 60% in the next five years. Finally, retail spend is likely to be falling due to commercial confidence.
Is Ms Hunt familiar with that report?
Pearse Doherty (Donegal South West, Sinn Fein)
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It was in January 2008.
Pearse Doherty (Donegal South West, Sinn Fein)
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To help Ms Hunt, the report put forward a sell recommendation for both AIB and Anglo Irish Bank to its investors. Obviously, that was to those who sign up to its reports, and it predicted a 30% fall in Irish commercial property prices.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. The report was rubbished by CBRE in its March 2008 bi-monthly report, which Ms Hunt said in her evidence is the best known report. It states:
... we fundamentally disagree with flawed analysis issued by UBS in recent weeks which suggested that total returns in the Irish commercial property market have the potential to decline by 30%.
Unlike the UK market, where institutions dominate, the bulk of investment property, in Ireland it is privately held and unlikely to be offered for sale unless market conditions improve.
Can Ms Hunt remember the bi-monthly report that rubbished the UBS report?
Pearse Doherty (Donegal South West, Sinn Fein)
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Ms Hunt is also quoted as stating: "While economic and property market fundamentals are still basically sound, the big issue in most sectors is the scarcity and cost of debt-funding."
Ms Marie Hunt:
It goes back to the four drivers of the market, the economic, the sentiment and, as I said, we firmly believed the fundamentals of the market were solid at that point. We believed the economy was growing and although we knew house prices were coming down, we did not expect they would crash significantly. We firmly believed that. If we were commenting on a particular report from someone such as UBS, we had firm reasons for doing that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Who does UBS issue its reports to? What type of individuals would be reading UBS reports?
Pearse Doherty (Donegal South West, Sinn Fein)
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The UBS report suggested a 30% decline in property prices and CBRE claimed that was flawed and fundamentally disagreed with the analysis. What was the decline in Irish property prices from peak to trough?
Ms Marie Hunt:
As I showed in my submission, the downturn was much more severe than that, but it was a totally unanticipated outcome because in every other cycle for which we had data, values fluctuated. They fell by up to 30% in some cycles and then went back up again. They actually fell by somewhere between 57% and 60% peak to trough according to the Investment Property Databank, IPD. The downturn experience was much more severe but no one could have anticipated that because based on the information we had at the time, it was just not on the horizon.
Pearse Doherty (Donegal South West, Sinn Fein)
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When Ms Hunt says no one could have anticipated it, I put it to her that UBS issued a report to its investor clients to sell on AIB and Anglo Irish Bank because of the concentration of lending and because they believed commercial property prices were going to drop by 30%, which her firm said was fundamentally flawed. Is it not the case that UBS and others saw a decline in the commercial property market but CBRE dismissed that evidence publicly?
Ms Marie Hunt:
I think a lot of the other contrarian views concerned the residential property market, which was not our area. We were commenting specifically on commercial property. As regards UBS, I would need to have a look at the report to remind myself why we came out with that conclusion at that point.
Pearse Doherty (Donegal South West, Sinn Fein)
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The UBS report was based not on residential but on commercial property. The sell recommendation for AIB and Anglo Irish Bank was because of their exposure to that sector.
In March 2008 Fitch downgraded its ratings for Irish Nationwide Building Society, citing the bank's high exposure to a small number of commercial property developers. Did Ms Hunt take any cognisance of that report or change her opinion about the concentration of lending?
Pearse Doherty (Donegal South West, Sinn Fein)
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It was March 2008, at the same time as CBRE was saying that the economic and property market fundamentals were sound.
Pearse Doherty (Donegal South West, Sinn Fein)
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Did CBRE pay any attention to the Fitch report? Did it take on board the fact that Fitch had said in the document: "International credit rating agency Fitch last month downgraded its rating of INBS, citing concerns over the outlook of property in Ireland and Britain and the society's high exposure to a small number of heavyweight lending customers."
Ms Marie Hunt:
Again we would have had regard to it in the same way we read the newspapers and listened to what was out there. We would have been aware of it. We went back to the fundamentals of the market as we saw it, the economic drivers, the supply-demand balance, and based our views on what we were seeing on the ground and the data available to us at the time.
Pearse Doherty (Donegal South West, Sinn Fein)
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With the benefit of hindsight, does Ms Hunt believe that analysis was flawed?
Pearse Doherty (Donegal South West, Sinn Fein)
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Is CBRE not the expert on commercial property?
Michael D'Arcy (Fine Gael)
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Did Ms Hunt's company or industry contribute to the banking crisis?
Ms Marie Hunt:
The property industry was, I suppose, contributing to the crisis that ultimately happened. Usually when real estate crashes happen, they happen as a consequence of an economic downturn, and this was an unusual one in that the real estate downturn was the cause of the crash to some degree, because of the over-lending that was going on prior to that period. So yes, along with a myriad of other different things, the property industry was complicit.
Michael D'Arcy (Fine Gael)
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Figure one in the paper Ms Hunt provided suggests that if it had been in keeping with a similar time schedule for cycles, shortly after 2006 there would have been a reversal. She has said in previous evidence that the expectation would be similar to previous reversals, with a reduction of perhaps a maximum of 30%.
Michael D'Arcy (Fine Gael)
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CBRE has data going back to the 1970s from IPD. At what stage did Ms Hunt change her view that a reverse was likely?
Ms Marie Hunt:
When we look at reversals, we would be looking at two things. The first would be on the transactional side, and clearly the Senator can see from figures four and five that the transactional activity had begun to show signs of slowing down from late 2006. If one reads any report from that time, there was comment to suggest transactional activity was down year on year. The peak from a transactional point of view was 2006. Because of the way it is compiled, IPD does lag the market so it was some time later that it began to come through in those sorts of indices. Again, if the Senator reads all of our reports from 2007 onwards, in every single sector we were pointing out concerns that the market was in the downward phase of the cycle.
Michael D'Arcy (Fine Gael)
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The person who gave evidence just before Ms Hunt was from Jones Lang LaSalle and he provided us with information that the record €1.2 billion investment of 2005 was trebled in 2006. Would that be a normal data set for a record year, on the basis of an international remit allowing one to look at comparative jurisdictions?
Michael D'Arcy (Fine Gael)
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No, trebling, sorry, a trebling of the previous record.
Michael D'Arcy (Fine Gael)
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We had that going back to 2001, 2002 and 2003.
Michael D'Arcy (Fine Gael)
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In 2005 there was €1.2 billion invested. That was the record then. In 2006, year on year there was a trebling of that amount to €3.6 billion invested. What I am asking is, in other jurisdictions that Ms Hunt's company would have had an opportunity to view, would it be unusual to have a record investment year trebled the following year?
Ms Marie Hunt:
It would not be unusual. Again I would need to go back and check but we track right across Europe, every single capital city. We track a quarter-on-quarter increase and a year-on-year increase, so if there was something glaring, it would have stood out. When significant increases of that magnitude occur year on year, if one goes to other markets at the same point in time, there will probably be a similar trend because of capital flows.
Michael D'Arcy (Fine Gael)
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May I pursue a line that Deputy Pearse Doherty also pursued? When there is trebling from one year to another, Ms Hunt said IPD tends to have a lag. Surely the lag should have been obvious by the time the UBS report was produced 15 to 18 months later and surely it should have been available for CBRE as a research group?
Ms Marie Hunt:
IPD does not track transactional activity, it is tracking performance, which is a radically different thing. A trebling of investment activity would not have come through in IPD data at all. IPD is just tracking institutionally owned property and the change in valuation quarter-on-quarter or year-on-year.
Michael D'Arcy (Fine Gael)
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Ms Hunt said that IPD requires a quarterly valuation. Does her company participate in those valuations?
Michael D'Arcy (Fine Gael)
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There are currently 140 staff at her company.
Michael D'Arcy (Fine Gael)
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How many staff were within the company at the peak of its performance?
Ms Marie Hunt:
I think the 140 is between Dublin and Belfast. Our company at the peak would have been about 150 staff. We went all the way down to 115 staff. Our company turnover fell from €30 million to €8 million.
We had significant pay cuts right across the company. In the same way as everybody in Ireland suffered to some degree, our firm went through the pain when the commercial property market crashed.
Michael D'Arcy (Fine Gael)
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Would the firm have been hired by property developers to perform for them?
Michael D'Arcy (Fine Gael)
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For property-related matters.
Michael D'Arcy (Fine Gael)
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In terms of the valuations CBRE would have provided for developers, did the firm get sight of the actual price that was achieved? Did it get an opportunity to put that research together and examine its valuation versus the actual sale price achieved?
Ms Marie Hunt:
They are two distinct functions. As I said, the research operates quite independently of the rest of the business. Our job in putting together charts such as chart 5 on land is tracking transactional activity across all agencies, tracking pricing and putting that into an index. Our valuers operate quite separate to that. However, in doing valuations they obviously have to adhere to the market value definition under the professional Red Book that they are working under and, in that, they would have had to have had regard to comparable evidence. They would be looking at the transaction data we were collating, and that was used as comparable evidence in order for them to arrive at market value.
Michael D'Arcy (Fine Gael)
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Is that a "Yes" or "No"?
Michael D'Arcy (Fine Gael)
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I refer to the valuation provided by Ms Hunt's company to a developer.
Michael D'Arcy (Fine Gael)
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When the actual deal was concluded and the price was concluded, did CBRE have analysis between the valuation provided - the professional valuation-----
Michael D'Arcy (Fine Gael)
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Ms Hunt did not find out if CBRE's valuation was underpriced or overpriced.
Michael D'Arcy (Fine Gael)
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So Ms Hunt is not aware of the difference in the price that was achieved potentially.
Michael D'Arcy (Fine Gael)
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For an asset, yes.
Michael D'Arcy (Fine Gael)
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If X number of valuations were provided, did CBRE determine whether it was correct or incorrect by a percentage, or did its valuation overprice an asset or underprice an asset by comparison with what it actually traded at?
Michael D'Arcy (Fine Gael)
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Is it correct that CBRE did not have sight of the final price paid by the client?
Ciarán Lynch (Cork South Central, Labour)
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I will just reframe it. Ms Hunt was valuing assets with regard to prospective purchases. Those purchases had a final price afterwards. Was there a comparative analysis done between the valuation price of the asset and the sale price of the asset of property to determine the accuracy of the valuations?
Michael D'Arcy (Fine Gael)
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Is Ms Hunt's firm currently retained by NAMA for works?
Michael D'Arcy (Fine Gael)
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Does the firm work for NAMA?
Michael D'Arcy (Fine Gael)
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Could I ask Ms Hunt for her view on the private equity firms in Ireland that are trading at the moment? Are they a good thing or a bad thing?
Ms Marie Hunt:
I believe it has been a very good thing for the market because the biggest lesson we have learned is that having a market that is wholly reliant on domestic bank funding and 100% domestic is clearly not sustainable and not a good model. Therefore, we have now created a market where over 50% of investment activity is coming from other jurisdictions, and that is a much healthier place to be. Equally, it is not all debt funded anymore. We have equity involved and that is a much more stable environment.
Michael D'Arcy (Fine Gael)
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Ms Hunt is quoted in an article in the Financial Timesentitled “Buyout group picks up Irish bargains”.
Michael D'Arcy (Fine Gael)
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Is she aware of the article?
Michael D'Arcy (Fine Gael)
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It was in November 2012. Are the bargains associated with the assets in question optimal or suboptimal in relation to the sale by NAMA to the private equity funds?
Michael D'Arcy (Fine Gael)
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Are the bargains giveaways to the firms?
Ciarán Lynch (Cork South Central, Labour)
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Are they below value or above value, or on value?
Ms Marie Hunt:
It depends on what one's definition of "value" is. A lot of these funds came into the market at the absolute lowest point when there were no other buyers there, and they paid a price. Going back to the whole issue of data, I think that had we access to reliable data, particularly on historical-----
Michael D'Arcy (Fine Gael)
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Time is very limited. I believe Ms Hunt has stressed that already. Could I ask her for her opinion-----
Ciarán Lynch (Cork South Central, Labour)
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The Senator will have to allow the witness to answer.
Michael D'Arcy (Fine Gael)
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The view of Dr. Peter Bacon in previous evidence was that NAMA had not acted as a professional property investment company but more like a debt collection agency. Could I ask Ms Hunt for her view on that considering that she conducts substantial market research?
Ms Marie Hunt:
I would disagree with that. I think NAMA has done a very good job. It has a thankless task, to some degree, because no matter what it does, it is regarded as wrong. It had a huge amount of loans that it had to dispose of. It is in wind-down mode. It has been deleveraging at a very strong pace. It has attracted lots of new investors to the Irish market. It is doing quite a good job.
Michael D'Arcy (Fine Gael)
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What is the likely outcome of the activity of those new investors and private equity firms? Are they here for the long haul or short haul?
Ms Marie Hunt:
It is hard to generalise. I think some of them are here for the long haul and some of them did not understand the Irish market, but now that they have come and seen it on the ground, they are much more comfortable and may well stay. Some of them are moving up the risk curve now. They are not investing in the types of assets they initially came to buy and are now moving into the development sphere. In some cases, they are providing development funding.
Michael D'Arcy (Fine Gael)
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And the short-haul investors?
Michael D'Arcy (Fine Gael)
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For the bargains.
Michael D'Arcy (Fine Gael)
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Ms Hunt was very critical of the change in the upward-only rent reviews. She denounced them. In February 2010, it was stated:
According to Marie Hunt, Director of Research at CB Richard Ellis, “This has come as a huge surprise to the industry. We understood that the Government had decided not to implement this measure. While no one is disputing the fact that tenants in many sectors of the property market have come under huge pressure in recent months and many are struggling to meet rent payments, the reality is that this move will not do anything to improve the plight of retailers and office occupiers who are currently in such difficulties.
Could Ms. Hunt explain why she was so opposed to the change in the upward-only rent reviews?
Ms Marie Hunt:
It is a very complex issue but if one buys an asset and buys it on the basis of a 20-year lease with upward-only rent reviews, that is a contract and one has an understanding of what is going to happen with the income. Therefore, if somebody comes in overnight and says the contract is to be torn up and one is no longer entitled to those upward-only rent reviews, it undermines confidence. In the period 2009 to 2012, we had a huge amount of uncertainty about this issue and on whether the reviews were going to be amended or not. If one looks at transactional activity, one sees virtually no transactions happened as a result. The minute it was announced in the budget in December 2011 that this was taken off the table for constitutional reasons, international investors began to engage and, indeed, NAMA began to release assets to the market. Nobody was going to buy anything in Ireland, regardless of what price it was, if there was uncertainty about the income flow or the potential of that income to grow over time.
Michael D'Arcy (Fine Gael)
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Ms Hunt has chosen to leave out the benefit, the tax break, that was available for commercial property if it was sold before a certain period.
Michael D'Arcy (Fine Gael)
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I will just finish up.
Ciarán Lynch (Cork South Central, Labour)
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I do not think Ms Hunt left out the information about tax breaks. If the Senator wants to ask her questions about tax breaks, he can do that.
Michael D'Arcy (Fine Gael)
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The tax break was in the same budget and was in respect of -----
Michael D'Arcy (Fine Gael)
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Was that not a contributing factor also?
Ms Marie Hunt:
There were three things in that budget. There was the decision not to proceed with a change in upward-only rent reviews, a CGT change and a reduction in stamp duty. It was a combination of all three that ignited the market at that point in time. If I were to pick the factor which was most significant, it would be the clarity on the upward-only rent reviews.
Michael D'Arcy (Fine Gael)
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On talking up or talking down the market, given that she works in a section of the largest commercial real estate property firm in the country, is Ms Hunt satisfied that she is independently objective?
Eoghan Murphy (Dublin South East, Fine Gael)
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I want to clarify something. We heard earlier that 90% of investment volumes in the period 2002 to 2007 were from Irish buyers. Do we know what the percentage is today?
Ms Marie Hunt:
We do. We now have a map of Europe with dots for every jurisdiction. I am trying to remember the numbers off the top of my head but, roughly speaking, it is about 50-50 at this point. Quite a bit of that is coming from the US because there are US firms which are now domiciled in Ireland. The Irish piece would also be split 50-50, between Irish REITs and Irish investors. For example, the money going into the REITs is invariably not Irish but they are Irish entities. They are listed on the Stock Exchange. We would tend to count them, but separate that figure out because it is Irish but the money is coming in internationally.
Eoghan Murphy (Dublin South East, Fine Gael)
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In terms of other countries, would it be normal to move from a figure of 10% to a figure around the 30% mark? Has the pendulum swung in the other direction?
Ms Marie Hunt:
The pendulum has probably swung a little bit more because, as I said, if one looks right across Europe, it tends to be about 30%. It is probably 35% now. Something we have seen with global capital flows over the past 12 months is that there is money coming into European real estate from lots of different jurisdictions. Our sense is that, going forward, the jurisdictions might change and we might get more Asian money coming into the Irish market, particularly from Asian investors who are now familiar with London and are seeing good opportunities in the Irish market. We could attract some of that money to Ireland.
Eoghan Murphy (Dublin South East, Fine Gael)
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In what way is the money which is flowing into Europe at the moment and over the past 12 months qualitatively different to the money flowing in at the beginning of the last decade?
Ms Marie Hunt:
It is radically different in that it is not debt-funded. It is primarily equity and it is coming from lots of different jurisdictions. Invariably it is coming from types of investors who have not historically invested in real estate. What is particularly attractive about real estate at the moment is the unique interest rate environment we are in. Ten-year bond rates have sub-1% rates and real estate is throwing off 5% or 6%. Comparatively, real estate looks attractive. There is then the ability to leverage on it. Real estate right across Europe is booming at the moment. We are at a unique juncture because of the low interest rate environment.
Eoghan Murphy (Dublin South East, Fine Gael)
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I want to move back to the period before 2008 and the CBRE reports. We have excerpts from those reports. Did Ms Hunt author those reports?
Eoghan Murphy (Dublin South East, Fine Gael)
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On page 5 of the document containing the excerpts from the reports, Ms Hunt states, under the November 2006 heading, "Sale and leaseback transactions including those by the country’s two main banks which have dominated the headlines in recent weeks have between them totalled €1 billion, which is in excess of the total size of the Irish investment market only 3 years ago". What is Ms Hunt saying and to whom is she saying it?
Eoghan Murphy (Dublin South East, Fine Gael)
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What does a sale and leaseback agreement indicate about the health of the market?
Ms Marie Hunt:
I would not relate it to the health of the market. At that particular point in time, when we look at who was doing the sale and leasebacks, invariably some of it was coming from the domestic banks. I do not think it was a conscious decision to get out because the market looked like it was turning. I think it was simply an effort to generate more liquidity which, in turn, they rolled out into more lending. I do not think it was a conscious decision. Some people will speculate and say it was the banks getting out of the Irish market because they could see what was coming down the tracks. I think it is clear that that is not correct and that it was simply a decision to get out of real estate and to get equity in and to concentrate on their core business.
Eoghan Murphy (Dublin South East, Fine Gael)
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Is what Ms Hunt wrote a value-free statement? Is she writing a fact or is she sending a warning signal to people within her own company or to the market in general?
Eoghan Murphy (Dublin South East, Fine Gael)
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Below it, under the January 2007 heading, it is stated, "It is now the duty of the development community in Ireland to adopt a realistic approach and put the brakes on the quantum of annual housing completions to avoid oversupply occurring in the medium term". Ms Hunt refers to the duty of the development community. The development community is a series of individual actors acting in their own interests. However, Ms Hunt thought they had a duty to restrict what they were doing. What duties did her industry have at the time?
Ms Marie Hunt:
We are a multidisciplinary firm. We are buying and selling property. We are acting for clients. It is not our duty to tell the market what to build or where to build it. From a research or commentary point of view, we were simply pointing out that we were building too much and that we needed to rein it in because, if we were to go into the normal cycle, there was potential to exacerbate the situation by continuing to build at the same pace. It was not sustainable.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did Ms Hunt feel that developers had to rein themselves in rather than another actor?
Eoghan Murphy (Dublin South East, Fine Gael)
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Is Ms Hunt's organisation not an integral part of that community?
Eoghan Murphy (Dublin South East, Fine Gael)
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Does it not value sites?
Eoghan Murphy (Dublin South East, Fine Gael)
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Does Ms Hunt think her professional body had a duty to go to the Government and to inform it of the kinds of things that she and other companies in her industry were reporting?
Ms Marie Hunt:
It would not have been down to individual firms such as ours to do it. People like the Society of Chartered Surveyors Ireland or other member firms may well have gone to Government. I would have thought Government should have gone to them. That possibly happened, but our firm was never asked for its opinion or view.
Eoghan Murphy (Dublin South East, Fine Gael)
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My final question relates to Ms Hunt's opening statement. On the first page, underneath "OVERVIEW OF THE IRISH CRE MARKET", Ms Hunt states, "In Ireland's case, in the period up to 2008, these three distinct elements effectively merged ...". I am wondering what the significance of the three pieces coming together means for the property market in terms of a change and the dangers associated with that.
Ms Marie Hunt:
From an international perspective, there tend to be three very distinct sectors. There are developers who provide the product, occupiers who occupy it and professional investors who come in and buy the income-producing asset to throw off returns. In Ireland, because there was an availability of debt, many developers built the stock, got it let up, and then held onto it for their own personal investment. That would be quite unusual. We would have been asked consistently why there were not more shopping centres trading in Ireland given the amount we were building. In most other markets, they would be built, let up and then sold on. In Ireland, they were built, let up and then the developer held onto it as a personal investment and invariably used it to borrow and develop again. That was quite unusual and that was what I was pointing out.
Eoghan Murphy (Dublin South East, Fine Gael)
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When did the merging of those elements begin to take place?
Ciarán Lynch (Cork South Central, Labour)
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Is it a unique phenomenon that the developer of a shopping centre would then become the landlord as opposed to developing it and selling it on?
Ciarán Lynch (Cork South Central, Labour)
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In the European context-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I may have missed this point earlier. Was the fee structure which CBRE would have applied, in terms of its work for its clients whether from a buying or selling point of view, a percentage-based fee or a flat fee?
Ms Marie Hunt:
It would have been a mixture of the two. I am not involved in day-to-day transaction activity but I think it would have been a mixture of the two. In many cases, it is a fixed fee.
Certainly, that would be the case in valuations. Regardless of what the final valuation figure is, the fee is the same.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Following on from that, were there any incentivised bonuses for staff, in particular, as was mentioned by a previous witness, with substantial sales? Was there an incentivised bonus scheme for employees, if those schemes came to fruition?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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On page 6 of Ms Hunt's opening statement, she states: "Unusually, 100% of investment spend in Ireland in the period 2001-2008 comprised domestic investors." Although she may not be able to provide us with the information, to the best of her knowledge was that a change from the figure pre-2001 or would the 100% figure stretch back further than that?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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How would that figure of 100% have compared with other countries, for example, in the EU?
Ms Marie Hunt:
As I said, from recollection, at that time in Europe about 30% in any of the European markets would have been international and we stood out because we were different in that respect. We were spending a huge amount of money in other jurisdictions but there was nobody investing here.
That is not to say we did not have firms looking at Ireland from time to time if a particularly attractive asset became available for sale but they were usually out-bid by the local buyer, who was invariably bank-funded or debt-funded. The pricing looked expensive relative to other cities. The stamp duty was more than twice what it was in the UK, for example. Invariably, they ruled it out and they went to other jurisdictions instead.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In response to Senator Michael D'Arcy's questions, Ms Hunt stated that there was no analysis of valuations versus actual prices paid. I do not know how to ask this without appearing to be leading. Would it be part of the service provided by a company such as Ms Hunt's that there would be an ongoing analysis as to whether the valuations corresponded to the values that were paid?
Ms Marie Hunt:
I misunderstood Senator Michael D'Arcy. When a valuation is instructed, a professional valuer, working under the red book, can only value using the market value definition so they have to have regard to comparable evidence. They would come to us to get the comparable evidence because we were tracking every single transaction. It worked in that way.
I understood the Deputy's question was, after the event, when the valuation is complete and submitted, did they then go back and cross-check and see, compared to subsequent transactions, whether that was fair. My answer is, when a valuation is done, it is done, it is submitted to the client, the file is closed and one moves on. One does not pick up the file and retrospectively check the valuations unless the client subsequently comes back and asks one to revisit that valuation for whatever purposes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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If valuation is a significant part of Ms Hunt's business, is there not a necessity on her in that capacity that she would check to ensure that the valuation was reflected in the ultimate price? Is there not something of a contradiction?
Ms Marie Hunt:
I think Deputy John Paul Phelan misunderstands. When we are asked to do the valuation, the price has already been paid. They have bought a piece of land and they need a valuation subsequently. Again, I am not a valuer. They go back and get a valuation instructed and that valuation is fed into the bank, and that is the end of that job. One does not retrospectively open the file and go back and check the valuations after the event based on transactions that happened subsequently. One's valuation is based on market evidence at that point in time based on recent historic comparables - transactions that have already happened.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Furthermore, in response to Senator Michael D'Arcy's question about the 2005 figures for commercial property in Ireland, how it was a record year and it trebled in 2006, Ms Hunt stated that "it would not be unusual" for such a trebling. Why would it not have been unusual? Surely, a record year such as 2005, and a trebling of that the following year, would have provoked some thought?
Ms Marie Hunt:
Senator Michael D'Arcy's questioning was in relation to Europe, if I picked it up correctly. I am saying, when one has a big jump in one country, invariably, if one looks across lots of different countries, it would not be unusual to see a similar pattern emerging because it is a global market. Capital flows are global. If it was a trebling in Ireland and that trend was not coming through in any other jurisdiction, it would have raised alarm bells, but if the entire market in lots of different countries was growing at a similar rate, it certainly would not have.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Finally, I have a brief question. The previous witness was at pains on several occasions to point out that from the end of 2005 his company was recommending to some of its clients to disengage from the commercial property sector in Ireland. Was there any such efforts by CBRE in terms of its clients in the Irish commercial property market?
Ms Marie Hunt:
I cannot comment for my colleagues; I can only comment for myself. It would not have been my job because I am not directly dealing with clients and not involved in transaction activity. My role would have been to comment objectively and, as the committee will see from the reports, to issue warnings or concerns if it was merited to do so. I cannot comment for what my colleagues were or were not telling their clients to do at that point in time.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I thank Ms Hunt.
Ciarán Lynch (Cork South Central, Labour)
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I call Senator Marc MacSharry, who has six minutes.
Marc MacSharry (Fianna Fail)
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I welcome Ms Hunt and thank her for taking the time to be here. With the benefit of hindsight, and given what Jones Lang LaSalle's representative stated earlier and what Ms Hunt stated in her own testimony here in terms of relying on houses such as the IMF and ESRI, is there a need in the bigger firms, such as her own, Jones Lang LaSalle, DTZ, for more self-generated research as opposed to reliance on determining research from the average of all those houses that she and Mr. Moran mentioned earlier?
Ms Marie Hunt:
As somebody involved in data analysis on a day-to-day basis, we just clearly do not have an independent source and with the best will in the world, private firms, such as ourselves, do it themselves. We all use different definitions. There is huge duplication of effort. We would love a central clearing system where we all supply our data into one source, it is cleansed and we get the aggregate back because it would avoid us engaging in a huge amount of duplication of effort. As I said, invariably, when we issue our research, regardless of what we say, we are deemed to have a vested interest and it is thrown back at us. It has been a completely thankless task.
The UK market is miles ahead of us, in terms of the amount and the quality of data available, yet their investment property forum recently stated that if they are to prepare for the next property slowdown, they need access to better quality data and that should go across the lending institutions, the regulations, etc. They say that, and they are light years ahead of us in terms of the quality and access to data that is available there.
Marc MacSharry (Fianna Fail)
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Is it Ms Hunt's belief that there needs to be a forum of data sharing between various bodies of the State and the commercial world?
Ms Marie Hunt:
I think that would be great. There have been, I suppose, some efforts to improve it recently. We have had provisions such as the property price register on the residential side which is hugely helpful. We have the residential property price index now. Both need some modifications to improve them even further, but they are a step in the right direction.
We have a commercial lease database, created by the Property Services Regulatory Authority, PSRA, but it is not really fit for purpose. It does not really help us, from a transactional point of view. What we need is a central clearing house where all the big firms supply their transactional information into one clearing house and the aggregate is brought back. There are models for that right across Europe. My colleagues in Paris tell me that they have a very good system working, for example, in the Paris region. It would be quite easy to do. It would avoid all of the major firms counting the same numbers and coming up with slightly different results because of definitions.
Marc MacSharry (Fianna Fail)
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In terms of property syndicates, Ms Hunt had a table which showed that, in a large amount of the investment, they were the biggest players as the market developed. Is that correct?
Ms Marie Hunt:
I would not say they were the biggest players but they certainly were one of the biggest players. Ironically, the syndicate model came out of Government tax policy. When the first tax schemes were developed in the late 1990s, the syndicate model emerged and we began to see wealth management firms putting the syndicate model in place. They were invariably to avail of tax reliefs in the first instance.
What happened is that some of those tax reliefs were subsequently removed or ring-fenced. The syndicate model worked well because it was deemed that ordinary individuals who maybe did not have €1 million to buy a commercial property in their own right could put money into a fund and through a pooled fund of money could get access to commercial real estate. Otherwise it would have been too big a leap for them in their own personal capacity to get into commercial property.
Marc MacSharry (Fianna Fail)
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As Ms Hunt is on the research side, in her objective view, did it add any element of recklessness to the market? Individuals could involve themselves at very minimal risk because of the numbers of people in a syndicate. They could get involved in a small way in what happened to be a big syndicate and were therefore driving a market without any identifiable direct impact on themselves.
Ms Marie Hunt:
What I would say to that is if one thinks back to the 1970s and 1980s, the commercial real estate market was an institutional market. There was then a situation where lending became much more readily available and there was the emergence of the syndicate model. So it brought a whole new pool of investors into commercial property that did not really know a lot about property. It widened the cohort and it brought a lot of new players into the market. We are now back at a situation where we are a more institutional market again so it is almost as if the cycle is coming through but it was very much fuelled by the debt situation, the availability of debt, the cost of that debt and, I suppose, access to opportunities overseas as well.
Marc MacSharry (Fianna Fail)
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Was its impact reckless or positive in Ms Hunt's view?
Ms Marie Hunt:
I suppose it was positive from a liquidity point of view because it brought a whole new cohort of different types of investors in and it gave investors access to commercial real estate that they would not have had historically. There was no listed vehicle so if they wanted to get into commercial property the only route they had was through an Irish Life fund or one of the various retail funds.
Marc MacSharry (Fianna Fail)
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Were syndicates in other countries regulated?
Marc MacSharry (Fianna Fail)
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Is there regulation of syndicates in Ireland today?
Ciarán Lynch (Cork South Central, Labour)
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The next questioner is Deputy Michael McGrath. He has six minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Ms Hunt and thank her for participating in the inquiry. She has spoken quite a bit about having accurate data and the amount of effort that she and others put into compiling data based on the sources they have. Does she think that having a national commercial property price register similar to the residential one that we have would be beneficial?
Ms Marie Hunt:
I think it would be excellent but I think quite a bit of collaboration with the industry would be needed first to make sure to get it right. The residential one is certainly a lot better than what went before but it could be a lot better. The commercial lease database shows what rent somebody paid but not what size building they have so it is meaningless in that respect. I think there are modifications that could be made.
I think the other-----
Michael McGrath (Cork South Central, Fianna Fail)
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What would the benefits be of having such a centralised register of commercial property prices?
Michael McGrath (Cork South Central, Fianna Fail)
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Apart from saving Ms Hunt a lot of work.
Ms Marie Hunt:
Saving us a lot of work. We are now an international market. We have lots of international investors coming in. They are used to going to the US or the UK, wherever it is, pressing a button and getting decades of data. They come to Ireland and it is patchy, to say the least. It is quite good for Dublin but pretty much meaningless for the rest of the country.
Michael McGrath (Cork South Central, Fianna Fail)
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So a reliable credible source of information is needed?
Ms Marie Hunt:
We need a reliable and independent source because, as I said, with the best will in the world, no matter how good our data is we are deemed to have a vested interested. If there is an independent source it will always stand up to scrutiny much better and it could well lead to higher prices being paid by some of these entities because they can underwrite the decision much easier if they have good quality data.
Michael McGrath (Cork South Central, Fianna Fail)
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On page 8 of Ms Hunt's opening remarks, she said, "In general, Government intervention in the property market was largely done in the absence of any engagement whatsoever with the property industry." Has that changed?
Ms Marie Hunt:
Again, I am only speaking on behalf of our own firm. There could well be engagement with some of the representative bodies but in terms of our firm, no, we are not asked. I would say, in the most recent Article 4 report that the IMF carried out, they did consult us and ask for our data and it is included in the report but I think that was the first time we have ever been asked for that.
Michael McGrath (Cork South Central, Fianna Fail)
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From any body such as that-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----or any organisation?
Michael McGrath (Cork South Central, Fianna Fail)
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Ms Hunt has also said that she and many others would have relied on the assertions of the authorities in terms of the health of the banking system. For example, she said, "we believed that the Irish banks were well funded and appropriately regulated and that borrowers were being sufficiently stress-tested". Is that just a broad assumption that was made by perhaps Ms Hunt and many others at the time whose job was not to get into the details of those issues but to take note of what the authorities were saying. Is that what she means by that?
Ms Marie Hunt:
That is exactly what I mean by that. We are a Fortune 500 company so when I am entering my data and forecast for Ireland, including GDP growth and other economic factors and I am quoting the ESRI, the OECD, or the IMF as my source, that is fine. I cannot come up with numbers myself. I am not an economist and even if I was, only internationally recognised data will be used.
Michael McGrath (Cork South Central, Fianna Fail)
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Did the nature of lending to the commercial real estate sector during the boom years, and the emergence of non-recourse lending, which limited the risk of the borrower to the underlying security of the property itself, and then perhaps subsequently personal guarantees coming to the fore, fuel the demand for more credit, if it was being offered on those terms that no additional security was being required by the institutions?
Michael McGrath (Cork South Central, Fianna Fail)
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I asked Mr. Moran from Jones Lang LaSalle earlier on about the current state of the market in terms of commercial real estate in particular from the perspective of the availability of quality office accommodation in the areas where demand exists and I think it is fair to say that he painted a pretty sobering picture. I would be interested in Ms Hunt's observations, as a major player in Ireland, on our ability to attract investment to the country, the issue of the availability of office accommodation, and the rent per square foot in Ireland vis-à-visour competitors. Has Ms Hunt any observations to make on those issues now?
Ms Marie Hunt:
The first thing I would say is that right throughout the downturn, if one looks at occupier activity office take-up in Dublin, one would not know there had been a recession in Ireland because it has held up consistently well right throughout. We have continued to see FDI flowing in largely because of our corporate tax rate but I suppose what is unusual about Ireland is that for five years we built nothing so we now have this scenario where we have a huge surge of FDI flowing in and effectively very little office stock for them to locate in. There is office availability but it is dotted in different places and most of these occupiers tend to want to be in Dublin 2 or Dublin 4 and the big issue is the scarcity of grade A stock, i.e., brand new stock that could be physically moved into in the morning. The vacancy rate at the moment is about 2%. Rents troughed out at about €27.50 per square foot. They are at €47.50 or €50 per square foot today.
Ciarán Lynch (Cork South Central, Labour)
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Deputy McGrath has a final question.
Michael McGrath (Cork South Central, Fianna Fail)
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I am okay with that.
Ciarán Lynch (Cork South Central, Labour)
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In her opening address, a number of times this morning, and again with Deputy McGrath, Ms Hunt spoke about an independent data source for the sale prices. Does she have a view as to who the independent agency should be? Should it be Government, an NGO or something set up by industry?
Ciarán Lynch (Cork South Central, Labour)
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I understand the sentiments that Ms Hunt has expressed because even in the house price database at the moment it does not record whether it is an apartment or a house or whether it has two or three bedrooms.
Ciarán Lynch (Cork South Central, Labour)
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Does Ms Hunt see the industry as having a role in assisting the funding of this database, given that the industry would be a beneficiary of it in terms of having clear and transparent information for the customers that it works with?
Ms Marie Hunt:
I am not sure how it is funded in other jurisdictions. I seem to recall that the Paris model that I have heard quite a bit about is solely funded by the Exchequer. I do not think there is independent influence at all. Everybody would have to agree to provide data to it and that could possibly be a challenge. I am sure that all of the major top five firms that are spending time and efforts collating data would be delighted to pool it into one central source.
Ciarán Lynch (Cork South Central, Labour)
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Does Ms Hunt have a view one way or another on the industry's contribution to that being put in place?
Ciarán Lynch (Cork South Central, Labour)
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Senator Barrett has six minutes.
Sean Barrett (Independent)
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I welcome Ms Hunt and thank her for the material that she sent us.
At the end of the first paragraph on page 3 she stated. "Irish CRE generated average ungeared total returns of over 16.4% per annum in the period 1976 to 2006 (proving that commercial real estate is a long-term investment)". A percentage of 16.4% was sustained for 30 years which leaves me wondering did we bailout the wrong sector. We had a hugely valuable commercial investment for 30 years.
Ms Marie Hunt:
The point I was making is as follows. When one invests in commercial real estate one must be prepared for the long-haul. It is not something one invests in only to divest in two or three years but over the long-term property performs well. The difficulty we had in the Irish scenario is that the banks were funding on a short-term basis to effectively fund a long-term investment. Possibly that contributed to the issue that we had.
Sean Barrett (Independent)
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Should we have been talking to pension funds and not banks? Is that the implication of what Ms Hunt has said?
Sean Barrett (Independent)
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Let us take a look at figure 2 in Ms Hunt's statement. One can see they doubled their money between 2001 and 2007 and then lost one third which meant they were still two thirds up. Should that have been pointed out to the sector when they sought a bailout?
Sean Barrett (Independent)
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Yes, figure 2 of Ms. Hunt's presentation shows a gradual percentage increase of 8%, 2%, 12% and the remainder of increases. In the last year there was a loss of 34% but it had doubled its money in the previous spell.
Ms Marie Hunt:
I am back to a data issue again. This is just IPD data so this is just a barometer of the market. It is a barometer only of institutionally-owned property and is not the market as a whole. The reason I included the table was to demonstrate that if one looks at property, on an annualised or quarterly basis, there are huge fluctuations.
Sean Barrett (Independent)
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The information for figure 3 was sourced from Mr. Hoyt.
Sean Barrett (Independent)
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Ms Hunt mentioned how quickly the adjustment took place. Is the model, which has been built over 100 years, far too slow? Figure 3 shows that when real estate peaks at stage 7 it takes five more stages before the banks reverse their boom policy on loans. That means what happened in Ireland was a quicker reaction than the 100-year study.
Ms Marie Hunt:
The way we would have used this particular chart was to demonstrate that its a cycle and what goes up will ultimately come back down again. What we always would have said, in presenting this, is what one never knows is how quickly one will move around that cycle or how long one will be at any particular stage because in real estate things happen. It could be a geopolitical issue or a financial issue that will trigger the crash or downturn in each case but it usually follows this pattern. I think what would normally happen is that the market would begin to slow down, business in general would start to decline which one would see in the stock market and then, in reaction to that, the banks would make a move.
Ciarán Lynch (Cork South Central, Labour)
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Like-----
Sean Barrett (Independent)
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Figure 4 shows about a quarter of the investment took place in Ireland and three quarters overseas which means no assets were created, within the territory of this State, as a result of what happened in that peak year. Is my interpretation correct ?
Ms Marie Hunt:
That is a correct interpretation. To some degree, one could say, the single currency aided this because all of a sudden one could compare pricing in other jurisdictions. People could see that there was better pricing to be had. Also, the stamp duty regime here was extremely expensive so it was cheaper to go to other locations. People like investing in property but there was very limited opportunity in Ireland to buy so by going to other jurisdictions they had access to product.
Sean Barrett (Independent)
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On the last page of Ms Hunt's presentation she stated, "We believed that the Irish banks were well funded," a point which she has covered, "and that borrowers were being sufficiently stress-tested". What would she put into a stress test, by an Irish bank, of its borrowers?
Ms Marie Hunt:
It would depend on the underlying real estate. If it was an income producing asset one would have to stress test to see, if rent falls by 15%, 20% or 50%, what is the likely impact on the value. One would take many different factors into account in the same way one does for an evaluation.
Sean Barrett (Independent)
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The last section of Ms Hunt's presentation is entitled lessons for the future. She stated that government intervention in the property market was largely done in the absence of any engagement whatsoever with the property industry. Our evidence would be that the property industry never stops lobbying and tops the list seeking tax breaks, along with farmers. In fact, the property industry received three tax breaks in 2011. Let us remember the Galway tent and all of those kinds of things.
Ciarán Lynch (Cork South Central, Labour)
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I urged the Senator to hurry up. That is his last question which brings his contribution to an end.
Ms Marie Hunt:
Invariably, when changes were brought in that affected the property industry, we found out about them on budget day when they were announced but prior to that we would have had no inkling. When some changes were brought in it was only after the event that it was realised they had unintended consequences and they were subsequently repealed. The point we are making is, had there been intervention with property experts, initially, we might have been able to point out that if one removes a mortgage interest rate the likely impact is that rents might start to go up. There was no engagement in testing the unintended consequences of some of these interventions. Some of them were brought in and subsequently brought back out again when it was found that they were not working.
Ciarán Lynch (Cork South Central, Labour)
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I call Deputy Kieran O'Donnell. He has six minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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I thank the Chairman and welcome Ms Hunt. I wish to make a couple of points, having read her presentation. Does she believe the collapse was brought about by domestic or global factors?
Ms Marie Hunt:
I think it was a myriad of lots of different things. The extent of lending in Ireland certainly exacerbated the Irish scenario. It was the global banking crisis that pulled the rug under, in terms of overnight funding disappearing so we could not get funding internationally but we could not get it domestically either and that was the position.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Ms Hunt believe, by extension, that if there was not a problem with securing international funding we would have had a soft landing?
Ms Marie Hunt:
I think we would have had a normal market cycle - there was every possibility. I think the penny had dropped with developers that we were building too much. We were beginning to see that being reigned in. The economic backdrop was strong. We could well have had a normalised landing, be it plateauing, going possibly into negative territory and then starting again.
Kieran O'Donnell (Limerick City, Fine Gael)
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Even with the level of debt from the Irish banks?
Ms Marie Hunt:
I think it was still possible but what exacerbated that was the global financial crisis. I suppose we went into the single currency and were in a new paradigm where we now had the availability and access to this international credit. We presumed this was the new normal and never envisaged a scenario where funding would, overnight, disappear.
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Ms Hunt believe, in the current climate and with from her expertise, that we could have another property bubble?
Kieran O'Donnell (Limerick City, Fine Gael)
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Does Ms Hunt believe nothing can be done to prevent a property bubble? Does she think it is a natural market cycle?
Ms Marie Hunt:
I disagree. There are possibly interventions that could be made at Government level, be it tax policy or whatever, that might be able to ease the cyclicality. I think we will always follow a pattern because there will always be financial, political or geopolitical events that will shape cycles.
Kieran O'Donnell (Limerick City, Fine Gael)
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Earlier Ms Hunt made reference to the lack of proper independent data. When she compiles reports and bulletins, does she consult her colleagues in the CBRE organisation?
Kieran O'Donnell (Limerick City, Fine Gael)
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Does she consult them on how the property market operates and so forth?
Ms Marie Hunt:
The methodology for compiling my bimonthly is I would sit down with every single division of the business. On a bi-monthly basis, I would listen to what they see happen on ground. As I said, we are a multidisciplinary firm so we have people acting for landlords and tenants. I feel, in talking to everybody, I would get an overriding sense of what is going on.
Kieran O'Donnell (Limerick City, Fine Gael)
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From Ms Hunt compiling her reports, when did she feel that the market was in a downward trajectory?
Ms Marie Hunt:
From late 2006 to early 2007. What I found at that point in time was that not every sector moves at the same pace and, invariably, one will see the downturn happening in some sectors before others. The office-occupier market did not really go through a downturn because FDI kept coming in. Retail, I suppose, experienced the slowdown later because, as a result of the fiscal crash, there was rising unemployment and less consumer spending and so that suffers at a later degree.
Investment and development land transactions are probably where one sees it first.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. John Moran of Jones Lang LaSalle spoke earlier about the Irish Glass Bottle Company site, which was one of the single largest transactions ever in this country, and development land at the time the sale was transacted. Ms Hunt's company was commissioned by the Dublin Docklands Development Authority in June 2005 to make an independent valuation of the site and the figure it came up with was €240 million. In 2006 a consortium came together under the name Becbay Limited and purchased the site for €412 million. When CBRE was commissioned to come up with a valuation report for the banks in respect of Becbay Limited's offer, the company came in with exactly the same valuation of €412 million for the site. This is part of the Comptroller and Auditor General's report. Ms Hunt is saying she would have seen the market as having peaked, yet here we have a transaction that was the mother of all transactions. Did it feed into her overview? She wrote in her review in January 2007, "It is now the duty of the development community in Ireland to adopt a realistic approach and put the brakes on the quantum of annual housing completions to avoid oversupply occurring in the medium term." Will she comment on that evaluation?
Kieran O'Donnell (Limerick City, Fine Gael)
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CBRE gave the exact same valuation as the sale price.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy should allow Ms Hunt an opportunity to respond to the question.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did this not feed back at the time into Ms Hunt's bimonthly report?
Kieran O'Donnell (Limerick City, Fine Gael)
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Ms Hunt has said she consulted all of the divisions. I am asking whether that transaction fed into her reporting?
Ms Marie Hunt:
I am not involved on the valuation side of the business. The valuers would have had regard to the market comment or house view at that point of time, but they make their valuations according to the definition of "market value"; therefore, they must have regard to comparable evidence. They obviously had comparables on the file which justified that pricing. I cannot comment further as I was not involved in the valuation.
Joe Higgins (Dublin West, Socialist Party)
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On page 2 of Ms Hunt's written submission, she states:
The research function at CBRE Ireland that I head up is modelled on the research platform in CBRE offices worldwide ... Having access to accurate and timely market information on trends and transactions is vital to CBRE in being able to accurately assess the commercial real estate market and provide the best qualitative and quantitative information to our clients.
On 31 July 2006 Ms Hunt was quoted on the businessworld.iewebsite as saying:
The second hand housing market is showing signs of price stabilisation but some new home buyers are getting nervous because of interest rate movements. This is more indicative of a steady transition to more stable conditions than a sign of a crash or bubble bursting.
On 17 April 2007 CBRE released a press statement that was highly critical of RTE's programme "Future Shock", calling it "irresponsible journalism" and stating we should not be entertaining "negative speculation and unfounded, worst-case doom and gloom scenarios when all that is being experienced is a levelling in the extraordinary pace of growth we previously experienced". It went on to state the programme "should be dismissed as fiction and a soft landing for the housing market is still possible and is the most likely scenario". Ms Hunt stated at the time:
It is simply technically incorrect to assume that Irish house prices will decline significantly simply on the basis that this has occurred in other economies where the fundamentals were so different. It is also irresponsible to suggest that the "negative equity" scenario that occurred in the late 1980s in the UK could occur in Ireland...
Did CBRE get it so wrong because the international research platform it had used was flawed? If there were other reasons, what were they?
Ms Marie Hunt:
In my submission I mentioned how important sentiment was. We were not selling houses, but our reaction to "Future Shock" was as strong as it was because the tenor of the programme was based on a number of "What if?" hypothetical scenarios. We had already acknowledged in our reports that transactional activity had started to slow down, that development volumes were slowing down and that we were moving into the downward phase of the cycle, but we felt it was irresponsible to scaremonger, for want of a better word, by putting forth hypothetical scenarios.
Three individual scenarios were posited on the RTE programme. One was that Ireland was going to see a complete collapse of foreign direct investment, with no further multinational investment and many of the existing multinationals leaving. We were very active in that space - it was a core part of our business - and did not see that scenario playing out and it did not happen. The second scenario was that we were going to have a major collapse of construction activity in the economy. That did happen, but it happened as an outcome of the downturn that occurred; it was not the reason house prices fell. The third scenario was that there would be a very significant increase in interest rates. While I would say the "Future Shock" programme was right in that it predicted there would be a crash, it did not predict there would be a global financial crisis which would lead to a crash.
Joe Higgins (Dublin West, Socialist Party)
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Was Professor Morgan Kelly also scaremongering, to use Ms Hunt's word, in December 2006 when he said in an article in The Irish Times, "If the experiences of economies similar to ours are anything to go by, we may be looking at large and prolonged falls in real house prices of the order of 40-50 per cent and a collapse of house-building activity"?
Joe Higgins (Dublin West, Socialist Party)
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Professor Kelly cited several historical examples, dating back to 1970, of cycles of housing booms and busts. Did Ms Hunt remark on the studies he had carried out such as the one for his report for the ESRI in 2007?
Joe Higgins (Dublin West, Socialist Party)
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If Professor Morgan Kelly could base his very accurate prediction on historical precedents and cycles, why did CBRE not get it?
Ms Marie Hunt:
As an international firm, we must have regard to international, credible economic houses that presumably have access to larger research budgets than an academic sitting in one country. We would have been aware of these views, but, equally, there had been similar contrarian views issued in the late 1990s and early 2000s which had proved unfounded. That coloured our judgment to some extent.
Joe Higgins (Dublin West, Socialist Party)
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In Ms Hunt's research report of March 2005 on the development land market she said: "The landmark sale by CB Richard Ellis Gunne in late 2004 of the 11 acre Grange Castle site in Stillorgan for approximately €87 million ended what was a very busy year". That site was bought by a syndicate of rich people and Ms Hunt's company had organised the sale. After the syndicate had held on to the site for four years, CBRE sold it on its behalf for a speculative gain of €53 or €54 million. That speculative gain probably added €100,000 to the price of each of the apartments built on the site, which would have had serious implications for first-time buyers. It might well be the case that ten years of a 40 year mortgage will be spent paying for that speculative gain. Does CBRE have a moral criterion or compass as to the social or ill effects of that level of speculation and profit seeking during the bubble which was facilitated by the company in a professional sense, with the associated stresses for young people and so on?
Did that enter into CBRE's considerations?
Ms Marie Hunt:
We are a property services firm. We are in the business of selling land. That is our job. We do not have a moral responsibility. Land speculation happens in every single boom. It is not down to firms such as ourselves to fix that because only government can do so. It has been an issue since 1972, when the Kenny report was published. We need to put a system in place that shares the benefit of rezoning decisions and speculation with the wider community and not just for the benefit of the owner of the land. It is about time such a structure was put in place. However, the political will has not been there to do so. The only time we saw one step towards that was in the early 2000s when the rate of capital gains tax on land was effectively halved and that brought a lot of supply of land onto the market. There was a threat that it was going to go up to 60% two or three years hence and that never happened. There was a step towards doing something about it and then it was reined in, for whatever reason. However, we are now at a critical juncture. We are in the midst of a public consultation about site value tax and I think the opportunity might be there to revisit this issue.
Ciarán Lynch (Cork South Central, Labour)
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Before I bring in the lead questioners for the final questions, I have some questions for Ms Hunt. I refer to several references in her submission to the necessity for a commercial property database. The committee will consider this proposal when we come to make our recommendations. I refer Ms Hunt to the commercial lease database which is in existence. I ask her to expand on how that informed her work in the periods before 2009 and post-2009. Has it made a difference to how she does her job? Does she think there are weaknesses in the current structure? For instance, we discussed the property database earlier.
Ms Marie Hunt:
I do not use it because it is meaningless as far I am concerned in terms of what I am trying to do. I am trying to follow CBRE methodologies and definitions and that database does not give me the information I need. It is like the example of knowing that house X sold for whatever price but not knowing whether it is a three-bed, four-bed or whether it has a garden. On the commercial lease database it is completely irrelevant for me to know that CBRE are paying whatever rent if I do not know what size of a lease, what size of a take they have in terms of square foot, what is the length of the lease, the terms and conditions of that lease, if there is a user clause, etc. None of that detail is available. In some cases it might be. I think there is also a reluctance on the part of certain people with a remit to give information to provide it to the database. The form is cumbersome in that it needs three different entities, the actual landlord, the tenant and the solicitor, who all have to fill in a section of the report and nobody is quite sure who has the ultimate responsibility to send it in to the PSRA. There is a lot of uncertainty about it. It has not been user-friendly when I have logged on and tried to use it and it certainly has not given me results that I have been able to analyse in any meaningful way.
Ciarán Lynch (Cork South Central, Labour)
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Does Ms Hunt agree with the concept? Does she agree with the need for a more robust database?
Ms Marie Hunt:
We need a robust system and it needs to be modelled on the residential one in that every single transaction is recorded. We cannot have a scenario where it is optional to provide data or if the penalties for not providing data are tiny because somebody will just pay that fine as opposed to having their data recorded. This has repercussions for things like rent reviews where one needs reliable comparable information.
Ciarán Lynch (Cork South Central, Labour)
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As I asked Mr. Moran this morning, is Ms Hunt familiar with side letters in rental agreements?
Ciarán Lynch (Cork South Central, Labour)
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Is CBRE involved in the arbitration process?
Ciarán Lynch (Cork South Central, Labour)
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CBRE is involved in the arbitration process which means that members of that organisation would-----
Ciarán Lynch (Cork South Central, Labour)
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-----have an intimate familiarity with side letters.
Ciarán Lynch (Cork South Central, Labour)
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I ask Ms Hunt to explain to the committee what is a side letter.
Ms Marie Hunt:
It is not something I am comfortable with explaining because it is completely outside my area of expertise. I know roughly what it is. A person doing an arbitration is aware of everything; one is aware of the actual lease and the side agreement. There is nothing hidden from one's view.
Ciarán Lynch (Cork South Central, Labour)
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I will refer to the crisis period. Prior to 2009, side letters were confidential. Is that correct?
Ciarán Lynch (Cork South Central, Labour)
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I refer to the confidential nature of side letters. We have already discussed the inaccuracies or the deficiencies of a database. Would Ms Hunt agree that this can create a distortion or inaccuracy in terms of trying to read what is the market rate per square foot in County Cork or County Dublin?
Ciarán Lynch (Cork South Central, Labour)
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Given that the side letters were confidential in general and were not in the public domain, does Ms Hunt think they gave a more accurate or a less accurate reading of the rental market?
Ciarán Lynch (Cork South Central, Labour)
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I will move on. Colm McCarthy carried out research in the period 2000 to 2007 on rental data. During that period the consumer price index rose by 13% while rental income rose by 240%. How would Ms Hunt regard this as an indicator to the market?
Ciarán Lynch (Cork South Central, Labour)
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It was prime in 2000 and it was still prime in 2007. It was always prime.
Ms Marie Hunt:
Sorry, 2007. What I mean by prime is that we are comparing apples with apples. That was a prime unit on Grafton Street at that point in time and we tracked that headline rent over time. It was a period in time when a significant number of UK multiples were coming in to the Irish market and invariably they all wanted to be on Grafton Street so there was more demand than supply. It is a limited street so they were paying higher and higher rents. It got to the point when we were at €10,000 per square metre zone A we were not dissimilar to the Champs-Élysées. At that point we began to realise the benefit of being part of an organisation like CBRE is that one can compare and contrast apples with apples across different jurisdictions and it was obvious to us that this was overly expensive. However, people were willing to pay that. It is like the valuation argument in that once one or two tenants come in, they pay a very high rent and that becomes the new market rent for that street. It is self-perpetuating.
Ciarán Lynch (Cork South Central, Labour)
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Was there a concern in CBRE that rents were hitting a peak and may have been becoming unsustainable?
Ms Marie Hunt:
We were very aware that there was very little room for further growth. If I remember correctly there was probably a two or three year period when they stayed quite flat at that level because that was obviously the peak. They then began to taper off and they came back towards €7,500, €8,000 zone A. Then they dropped like a stone and they fell all the way down to €4,000 again.
Ciarán Lynch (Cork South Central, Labour)
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Does CBRE operate on a percentage of the deal when it arranges a sale of a property or a rental agreement?
Ciarán Lynch (Cork South Central, Labour)
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Is it a flat fee or a percentage?
Ciarán Lynch (Cork South Central, Labour)
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Are bonus payments paid to staff if they deal in major projects or even minor projects?
Ciarán Lynch (Cork South Central, Labour)
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Is there a performance bonus at the end of the year?
Pearse Doherty (Donegal South West, Sinn Fein)
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I want to return to the "Future Shock" issue. Can we agree that the housing market and banking are not within Ms Hunt's core areas of expertise?
These are core areas. Ms Hunt mentioned that the programme covered three issues she disagreed with, foreign direct investment, FDI, the construction downturn and interest rates. Can we also agree that in her press release, which called this irresponsible journalism, Ms Hunt did not mention FDI or interest rates and focused on construction, the housing market which she said she has no expertise in?
Pearse Doherty (Donegal South West, Sinn Fein)
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I understand that and Ms Hunt has made that clear. In her statement, which described the programme as irresponsible journalism, dramatic and incorrect predictions, technically incorrect and so on and so forth - there is quite a bit of interesting language in the statement - she addressed her concerns only to the housing market.
Pearse Doherty (Donegal South West, Sinn Fein)
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Let me deal with the sentiment because Ms Hunt states that the sensationalist approach to the programme in CBRE's view was irresponsible as property is a very important issue and ultimately the general public would take the sentiments expressed on board when deciding whether or not to make what is essentially the biggest financial decision of their lifetime. Would that first-time buyer in April 2007 have been better off taking on board the sentiment expressed by "Future Shock" or the sentiment expressed by CBRE in Ms Hunt’s press release?
Ms Marie Hunt:
With the benefit of hindsight, "Future Shock" absolutely, but based on what we knew at that time we held the view we had. We based it on the fundamentals of the market and the economic backdrop as we understood them. We were also mindful of the huge cohort of people who had just bought a house. If one's building is on fire, one needs to get everybody out in an orderly manner. One does not want everybody panicking. We had already said the market was beginning to slow down, things were levelling off.
Pearse Doherty (Donegal South West, Sinn Fein)
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I appreciate that. Ms Hunt went on to say in her statement that would-be first-time buyers who had heeded equally dramatic and incorrect predictions in the past had lost out significantly, which would suggest she was saying they could lose out again. I am struggling to understand why, from the point of view of CBRE, which is not involved in the housing market and has no expertise in that area or in respect of the stress testing by the Central Bank for negative equity that the press release mentions, it came out as one of the most vocal critics of "Future Shock", which predicted correctly a property crash, negative equity and problems in the housing and banking sector. What was the driving force behind issuing such a strong press statement?
Ms Marie Hunt:
The driving force was that even though we were not in the business of selling houses, we were in the business of commenting on what was happening with land and ultimately that is all related. We felt very strongly that affecting sentiment or panicking people based on hypothetical scenarios that might ultimately arise was irresponsible. That was the justification for our reaction. In retrospect, what we now know is that they were right in the programme but they were not predicting a crash on the back of a global banking crisis. They were predicting it for reasons that ultimately did not materialise.
Pearse Doherty (Donegal South West, Sinn Fein)
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Was CBRE’s soft landing prediction also a hypothetical approach, like all predictions of that nature?
Ms Marie Hunt:
My prediction of a normal landing was following the normal pattern based on the information available at that point in time. As I said, hindsight is a great thing and we now know that the programme was correct. The programme did not, however, say there is going to be a global financial crisis and debt funding in Ireland will disappear completely and as a result house prices will be halved.
Pearse Doherty (Donegal South West, Sinn Fein)
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Evidence has been provided to this inquiry before, and we have met the authors of reports that were commissioned, which suggests that the global financial crisis only precipitated the crash. The crash was going to happen regardless because of the increased prices in commercial property and housing property and it was only a matter of time before the bubble burst. The drying up of debt brought that on and some suggest that was to the benefit of the Irish State because investors would have continued to invest if that did not happen. Ms Hunt seems to hold the contrary view that the reason for the crash was a global financial credit crunch.
Ms Marie Hunt:
I believe there would have been a crash anyway because the market is cyclical. That is the point I am making. What exacerbated it was the global financial crisis because that was what completely removed debt from the market. In retrospect "Future Shock" was right but it did not identify what ultimately caused the crash.
Michael D'Arcy (Fine Gael)
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In doing property analysis, would Ms Hunt's company also analyse a change of zoning on a particular site?
Michael D'Arcy (Fine Gael)
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In the earlier presentation by Mr. Moran of Jones Lang LaSalle, the Irish Glass Bottle site came up. What was the largest site that CBRE participated in?
Michael D'Arcy (Fine Gael)
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Did CBRE have an active or passive role in that development?
Michael D'Arcy (Fine Gael)
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Which particular sites in Ballsbridge were involved?
Michael D'Arcy (Fine Gael)
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Did it include Hume House?
Michael D'Arcy (Fine Gael)
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In his presentation this morning, Mr. Moran told us his company no longer has a fee structure based on the percentage of the valuation. CBRE does.
Michael D'Arcy (Fine Gael)
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Would that be based upon percentage?
Michael D'Arcy (Fine Gael)
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Has CBRE taken on any staff from NAMA?
Ciarán Lynch (Cork South Central, Labour)
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I shall now bring matters to a conclusion. Is there any further information that Ms Hunt would like to put before the committee? This might include examples of good practice here in Ireland or international ones that could be developed here. The committee’s work is as much about looking into the future and coming up with recommendations as it is about examining the past.
Ms Marie Hunt:
I have a couple of things to point out. The first lesson is that having a property market that is wholly dependent on domestic investors and developers and primarily debt-funded by a small cohort of domestic banks is not sustainable and I hope we have moved away from those days. In terms of Government intervention, there should be consultation with the industry before implementing policies to tease out the unintended consequences. We have mentioned data on numerous occasions. We need comprehensive data from an independent source and interaction with firms such as ours, which are tracking useful information because if we have that we might be able to spot trends and possible threats at an earlier juncture.
I have been watching closely work done by the Investment Property Forum in the United Kingdom, UK. It is a cohort of people involved in the property industry and they are doing a piece of research examining the next commercial real estate crash in the UK and how that might affect financial viability. It has come up with some very interesting suggestions which we could possibly adopt here, one of which is giving consideration to setting up a central lending register whereby if borrower A goes to bank A the bank knows that borrower is also exposed to other banks-----
Ciarán Lynch (Cork South Central, Labour)
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Cross-collateralisation and personal guarantees.
Ms Marie Hunt:
Exactly. Having such a system in place might be quite useful. The final recommendation is to go back to having no property specialists or chartered surveyors working in the banking industry, and no qualification that crosses the divide. In my training as a chartered surveyor, I had no training whatsoever in banking and people doing banking and financial qualifications have no specialist training in commercial property.
They could well end up in a bank where their primary business is lending into commercial real estate without really understanding it. As the committee will find from today, it is quite a complex area. That could be a recommendation for the future, namely, that we put some sort of banking qualification in place where one can get training if one will be working in purely the area of providing funding to commercial real estate, which is quite specialist.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Ms Hunt. I thank you for your participation with the inquiry today. It has added informative and valuable information to our meeting and has added to our understanding of the factors leading to the crisis in Ireland.
I would also like to note that today is the last of the Context Phase hearings, the objective of which were to frame the broad context for the inquiry, set out the background for the banking crisis and prepare the ground for the further public hearings after Easter. We will commence the Nexus Phase hearings starting with witnesses from NAMA and AIB on 22 and 23 April, respectively. I would like to thank Ms Hunt for her assistance today, and also Mr. Moran.
With that I would like to now suspend briefly so we can go into private session to deal with one matter, to excuse the witness and to clear the Gallery.