Sunday, 15 August 2010

State of the Nation Address...

When property prices in a leafy corner of Dublin 4 hit world-record heights, the signs were all there for catastrophe...

Four years ago, property editors of leading international newspapers just could not believe what they were hearing. Homes on Shrewsbury and Ailesbury roads in the Dublin suburb of Ballsbridge, which had long set the record as Ireland's most expensive, were reaching new peaks, rivalling some of the most expensive properties in Manhattan or Paris.

Prices of a country's most expensive residential properties are a useful early indicator for economies facing economic trouble. Prices of top-end Irish properties at their peak were signalling that the Irish economy was heading for a crash, because residences on Ailesbury and Shrewsbury roads were not only the priciest in Ireland, but were also arguably the most expensive in the world.

In 2006, high-end properties, selling for an equivalent €4,450 per square foot, in a London economy fuelled by bankers' multi-million-pound bonuses, were considered the dearest on the planet. Prime properties in New York, at over €4,100 per square foot, were not far behind. Yet sales in a leafy corner of Dublin 4 were breaking all sorts of Irish and international records too.

In early 2005, 'Walford' on Shrewsbury Road, famously selling for in excess of €55m, or €13,750 per square foot, was three times more costly than the world's most costly properties. Walford's potential for development was evidently the lure, but other 4,000 square foot properties selling on Shrewsbury Road for €30m and for €15m on Ailesbury Road were also challenging international benchmarks.

Prices and transactions multiplied. During one week in May 2006, four properties on Ailesbury and Shrewsbury roads quickly attracted offers.

Four years later and the market is dramatically different. The history of housing markets around the world suggests that the longer prices rise in a boom and the higher average national house prices rise, the longer and steeper the subsequent bust will be. Research also suggests that the higher prices rise at the top end, the steeper the crash.

Ailesbury Road homes at 4,500 square feet, selling for between €10m and €13m at the height of the boom, are now probably worth €4m to €5m, say valuers. Shrewsbury Road properties that were valued at €30m in 2006 are now worth between €8m and €12m. Nothing on the two roads has sold for the last two years. "There have been no transactions and the market has to be tested," said David Bewley, director at Lisney.

Simon Ensor, director at Sherry FitzGerald, predicts prices on Shrewsbury and Ailesbury roads will ultimately fall 65% from their peak prices, indicating price falls will be steeper than almost anywhere else in the country.

Other experts say that a price slide on the two wealthiest roads is understandable: a mortgage bank would now require a prospective buyer to put up hefty amounts of cash to finance any purchase. Rumours continue to surface that a handful of distressed sellers along the two roads will formally put properties on the market this autumn. That will be the first big test of the market for the priciest properties in Ireland since the crash.

What goes up must come down

The IMF report on the Irish economy published last month put it simply: what goes up fast, comes down hard. Irish house prices and those in Britain and Spain went up rapidly, but Irish house prices went up more than most.
Prices here soared by more than 350% in the 10 years before the 2007 crash. The pain here, as in Spain, will be even sharper because a house-price boom was accompanied by a construction boom.

It is not as if the government had not been warned. In 2006, the head of the Ireland desk at the Organisation for Economic Co-operation and Development said the housing market here was in danger of "boiling over". Since the crash, much academic effort has been focused on researching global experiences of housing busts.

Just how long does it take to recover after a huge house-price blow-out? In research published last month, TCD's Agustin Benetrix and University of California professor Barry Eichengreen, along with TCD economics professor Kevin O'Rourke, showed that Finland experienced the deepest peak-to-trough drop yet recorded when prices, accounting for inflation, fell by 51% from their 1989 peak. Finland's house-price slump lasted more than six years. In 1978, the Netherlands experienced a similarly large drop in prices but its slump lasted even longer. In Britain's most recent crash, in 1989, prices took seven years before rising again.

Ireland's prices fell 32%, accounting for inflation, in the country's last big housing crash in 1979 and took eight years to recover. The severity of this bust is greater and therefore will likely last much longer.

Neil Callanan meets the neighbours

Derek Quinlan

Lionised during the Celtic Tiger years, Quinlan set up private wealth advisory service Quinlan Private which ended up acquiring assets worth €11bn. But much of the spree came as the market peaked and his clients are now sitting on significant losses on a number of the properties. Quinlan has become one of the poster boys for the dangers of highly leveraged property spending and has offloaded a number of assets, with others likely to follow. Quinlan bought three houses on Shrewsbury Road as well as a number of other houses in the area and at least some of these will now be sold off.

Niall O'Farrell

Dragon's Den's O'Farrell is best known for founding Blacktie, but has other retail and property interests. O'Farrell said Blacktie made a solid profit last year after accounts for the end of June 2009 showed it, and other retail businesses O'Farrell owns, made a loss of €2.7m for that financial year. O'Farrell said he had restructured the business. O'Farrell put his Shrewsbury Road house on the market last year, asking €14m. He also lodged plans to demolish the property, which is next to the home of developer Sean Dunne, and replace it with a house more than double the size.

Sean Dunne

Dunne received planning last week for the redevelopment of Hume House, an office block in Ballsbridge. It lies close to the Jurys-Berkeley Court site which Dunne acquired for €370m but is now worth a fraction of that. The banks behind the purchase of that site took a majority stake in its development earlier this year. He also bought part of AIB Bankcentre and is currently awaiting a decision on whether he can develop offices on the site. The New York Times reported months ago that Dunne said he could be "considered insolvent" if the banking crisis continued. Dunne denied the comments.

Larry O'Mahony

Polo-playing O'Mahony made millions from property development but has since seen property go into receivership and a number of judgments entered against him. He received a boost recently, however, when he and business partner and former IRA hunger striker Tom McFeely won a case taken against them by rival developer Noel Smyth in relation to land next to the Square shopping centre in Tallaght, west Dublin.

Carl McCann

McCann chairs Blackrock International Land, the property company spun out of fruit importer Fyffes, which has shed 45% of its value this year. The shares last week were valued at 25c, a long way off the 40c that they were worth at the end of their first day of trading on the stock exchange back in May 2006. McCann is still involved in Fyffes through the Balkan Investment Company, which owns 10% of Fyffes.

Paul Coulson

Coulson made a fortune from selling the Irish Glass Bottle site in Poolbeg, Dublin, at the top of the market for €412m. The site, 26% owned by the state, is now worth about €50m. Coulson's main business interest is glassmaker Ardagh, which saw sales and earnings fall nearly 10% last year, resulting in a net loss of €52m. Trading this year has been stronger, he told bondholders in April, adding that both revenue and volume were up year on year. Coulson put his house on Shrewsbury Road on the market in 2008 with an asking price of €27.5m. He had bought the home a decade earlier for a reported €1.3m.

Dermot Gleeson

Barrister Gleeson is best known for being chairman of AIB when it went on a property-loan lending binge. Last year he said he regretted the bank's lending to developers and apologised for the "anxiety and distress" shareholders had suffered. He is non-executive chairman of Travelport, which pulled a planned €1.45bn flotation earlier this year following market uncertainty. Gleeson has invested in a number of properties around Dublin. He is a former attorney general.

Paul Anderson

Cinema mogul Paul Anderson has been less affected than most by the recession, as cinema audiences have largely held up. The family's Omniplex Holdings recently opened a cinema on top of its Swan shopping centre in Rathmines, south Dublin, and is seeking planning permission for a €9m cinema on top of the St Stephen's Green Shopping Centre in central Dublin. Anderson's house is regarded as the best on Shrewsbury Road by many.

Denis O'Brien

O'Brien bought his house on Shrewsbury Road for a reported €35m – sources close to O'Brien have said it was less than that – from IT and property entrepreneur Tony Kilduff, but was subsequently denied permission to demolish it and replace it with a 21,500 square foot home. O'Brien made about €250m earlier this year when his Caribbean-based mobile phone group Digicel bought the majority of Digital Pacific. He will make a further €250m at a later date when the sale of the rest of the Pacific company is completed. O'Brien had already realised a profit of about €600m after refinancing Digicel in 2007. His investment in Independent News & Media proved less successful, with losses standing in the hundreds of millions.

Paddy Kelly

Kelly has moved off Shrewsbury Road, renting out his house to the Chinese embassy and relocating to Morehampton Road, itself one of the most expensive addresses in the capital city. He has admitted that he is broke and €350m in debt and now conducts his business from the bar of a five-star hotel in Dublin city centre. He has been here before, having sold his house after huge losses as one of the Lloyds names in 1987. But he retained the garden and built his current house there when his financial situation improved. Kelly tried to diversify into hotels and leisure but those sectors were also hit during the property downturn. "I'm 66, so what do I care if they make me bankrupt?" he recently declared.

Report by Eamon Quinn - Tribune Property.

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