RATHER WORRYINGLY, THE Central Statistics Office has reported that property prices in Dublin have dropped by 46 per cent whilst those outside the capital are down by 36 per cent. That’s a fairly frightening hit for anyone to take, more so for those who own more than one property.
It reminds me of my first property purchase in the late 1980s – buying at or near the top, interest rates at record highs above 15 per cent and negative equity the norm, not the exception. Thankfully there weren’t any 100 per cent mortgages at the time, certainly nothing bigger than that, but reversing yourself out of the gloomy situation is very difficult.
Many reports have recently stated that the market has hit a bottom. Nothing could be further from the truth. Housing markets are not unlike the stock market – a bottom will only be formed when there is an increase in activity. There is no clear sign of this and there certainly won’t be when the banks continue not to lend.
The decline in house prices is not slowing! Many apartments are only worth 53 per cent of their peak price in 2007. An auction on July 7 lists a six bedroom house on Ailesbury Road with a reserve of €1.45million when a similar house on the same road changed hands for €8.5million in 2007. The massive disparity not only highlights why the economy has come to a shuddering halt but gives an idea of the difficulties that many people are facing.
It is now cheaper to buy than to rent. This hasn’t been the case for many decades, the only problem is that the banks are not lending to the people that are looking to buy. When will we see the bottom of the market? There is no magic wand to be waved. Auctions such as these being held in Dublin are beginning to set the basis for a floor. Unfortunately the sheer quantity of distressed properties available means that the market is still very fragile.
I’ve always thought that private equity would have a significant part to play in the recovery in Ireland. Whether the money flowed in from the UK, US or any other country wasn’t important – what was important was that it flowed. I know of many funds that showed interest and then baulked at some of the value that owners are looking to draw out.
Most of the really successful Irish property developers have built their property portfolios in the UK and further afield. Most have very limited if any property in Ireland. Why? Because they knew that it was massively overvalued, they never flinched when stories became legend of the profits that were being made at home. They knew that if the values were not sustainable 10-15 years ago, they certainly weren’t any time since. It’s usually very easy to enter a market, not so easy and often nigh-on impossible to exit when a market is overvalued.
Private equity will still have a part to play to kick-start the economy and find the bottom of the property market. My experience has been that Irish people tend to view private equity with a certain amount of disdain. That may not be a bad thing; stories emanating from the UK in recent week show the very rough edge of the sword. Many Irish companies are now looking towards private equity to solve their problems, but it is important to choose carefully.
In 2007 a UK care home company, Sedgemoor, that looked after sexually-abused and autistic children fell into administration. It was owned by a private equity firm, ECI Partners. It barely made a headline at the time, even in the financial pages. But it was a disturbing indication of how badly things can go wrong when private equity firms stretch their tentacles into every corner of society.
Right now, Southern Cross Healthcare, which provides care homes looking after more than 30,000 frail and elderly people in the UK, teeters on the brink of financial ruin. Private equity firm Blackstone, which owned Southern Cross from 2004 until 2006 when it was floated on the stock market, denies it is to blame for its plight, saying that Southern Cross’s controversial sale-and-leaseback business model was already in place when it bought the nursing homes.
Whoever is to blame, Southern Cross is now unable to pay a crippling Stg£250million year rent bill and its frightened residents face an uncertain future.
The activities of the private equity firms can play an enormous role in the economy and economic recovery but this needs to return to its original beneficial and constructive function. Its original purpose was to supply capital to entrepreneurs who needed more money than they could get from their local bank manager – and right now we all know how much they are lending.