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| Preasráitis
In this chapter we explore the role of the property sector in the crisis. We examine the evidence of developers and valuers in relation to their processes and behaviours, and look at interactions between the property sector and financial institutions, political parties and government. Finally, we briefly examine relationships between the property sector and the media.
Developers played a major role in the economy during the 1990s and 2000s. Property prices during the period skyrocketed, and construction-related output accounted for 23% of GDP at the peak of the boom in 2006, as compared with 12% today.1 In 2007 the construction sector accounted directly for over 270,000 jobs2 , which represented over 13% of all those in employment in the country3 and an increase of over 100,000 in just seven years.4
As the property sector grew, more and more developers with access to cheap money entered the market. The sector began to crowd out other sectors of the economy, through a combination of increased speculative construction and rapidly rising property prices.
A very significant proportion of the sector was concentrated in a small number of developers; of the €74.4 billion worth of loans taken over by NAMA, €33.7 billion was concentrated in only 29 commercial borrowers.5
When the bubble burst, the sector was left in a sundered state, its most visually impactful legacy being ‘Ghost Estates’ across the country.6
During the boom, there was an excessive reliance on property-related activity, income and taxes. In her evidence to the Inquiry, Mary Harney, former Tánaiste, said that:
“…spending was allowed to increase too rapidly as the economy overheated with continued growth and the exchequer finances becoming over-dependent on construction.”7
The Joint Committee received evidence from nine of the country’s largest developers and property investors, four of whom gave evidence in public hearing and five by written statement.
During the boom, the business models of developers differed greatly depending on the nature and scale of the business.
As evidenced in public hearings and from written witness statements, some of the more established, long-standing individuals and firms in the industry had robust and easily adaptable business strategies. The evidence indicates that, while they tended to diversify activity and investment by asset type, geography and income stream within Ireland, some developers diversified by investing in the same asset type in different regions outside of Ireland. The evidence suggests that the business was supported by highly qualified professionals, such as surveyors, economists and accountants, to assist with risk assessments and business planning.8 The evidence further suggests that they invested time and money preparing to bid on assets or submitting proposals to financial institutions.9
However, as will be seen later in the report, there was an increasing use of drive-by valuations and computer-generated valuations while other developers made bids on so-called “trophy chasing.”10
When signs of a slowdown in the Irish property market were becoming evident around the mid-2000s, some developers began to deleverage by, for example, selling their land and development assets while, at the same time, retaining income-creating assets to generate cash flow. Other developers increased their concentration and bought at the height of the boom.11 However, the sheer scale and suddenness of the downturn caught out even the most experienced developers. The property market disintegrated and the loans of most developers who had total exposures over €20 million were transferred into NAMA.12
In the lead up to the crisis, many developers had become completely reliant on bank debt to fund their developments. Brendan McDonagh noted that “the majority of debtors were, in effect, sole traders and they were totally reliant on bank debt.”13 Sean Mulryan and Michael O’Flynn both said that there should be less reliance on bank funding in the future and more emphasis placed on equity from professional investors.14
It was not uncommon for 100% financing to be advanced, or when developers’ equity was required, for it to be made up by paper equity;15 each case would ultimately result in the bank taking all of the risk.16 In his evidence to the Joint Committee, Eugene Sheehy advised that while it was not part of AIB’s business model, this method of increasing the bank’s exposure by releasing funds on the basis of an uplift in the valuation of another secured asset did happen and it would have been better if the lending structure for property in Ireland had included more private equity.17
In his evidence to the Joint Committee, Sean Mulryan said that one weakness in the Ballymore Group’s business model was its overwhelming dependency on Irish financial institutions. Having had long-standing relationships and built up a level of trust with a particular financial institution, some developers were slow to diversify and spread the risk across international banks.18
Evidence to the Joint Committee suggests, however, that some large developers sought to avail of loans from a number of financial institutions. Gerard Gannon advised that it was a way of introducing an element of competition and therefore of reducing costs.19 Sean Mulryan gave evidence that spreading the risks across banks would have allowed the Ballymore Group to mitigate its level of dependence or overreliance on any one financial institution. Despite that, Ballymore Group borrowed 50% of their loans from one financial institution as a result of the long-standing relationship they had built up over twenty years.20
A syndicated loan was another form of multi-bank lending, but normally instigated by the bank to mitigate risk arising from a large development and to manage the concentration limits set by the regulatory authorities. However, the Joint Committee heard evidence that property syndicated loans were not common in the Irish market.21 Eugene Sheehy stated in his statement to the Joint Committee that “arising from the lack of syndicated lending we had a poor sight of how leveraged the sector had become.”22
In contrast, John Moran of Jones Lang La Salle gave evidence that syndicated loans were relatively common. He said that in the peak year of 2006, “Out of the total of 121 [commercial property transactions], one could probably argue that 40 or 50 were syndicated transactions.”23
Gerard Barrett commented that his company, Edward Holdings, was required to provide up-to-date positions to each of their banks vis-à-vis their other banks.24 This was also reiterated by Tom Browne, Head of Lending Ireland, Anglo, in his evidence to the Joint Committee. He stated: “…with our bigger clients, the top ten, top 20. We would have … in the latter years been looking at … their total banking obligations across all their banks.”25
Pat McArdle, Group Chief Economist in Ulster Bank, told the Joint Committee: “It was only when the loans were transferred to NAMA in 2010 that it was revealed that the big developers had multiple exposures to the different banks.”26
A Department of Finance summary of the initial business plans of the six covered financial institutions undertaken in late 2008 commented that Anglo’s lending model was “driven off the back of established relationships with net worth individuals predominantly in the property sector.”27
According to Frank Daly of NAMA, a relationship was the predominant driver of a lending decision in some instances, rather than an impartial assessment of the viability of the business proposal.28
Brendan McDonagh of NAMA also gave evidence that:
“… €34 billion of the €74 billion that came to NAMA was borrowed by 29 people … and while it was spread around by banks, there was certainly a concentration of lending around one institution. So I think the issue really comes down to the fact that … relationship lending was a big part of it.”29
In some cases, they became the developer’s business partner in a joint venture.
Michael Fingleton, former Chief Executive, INBS, referred in evidence to joint ventures between INBS and Ballymore Properties, the first such venture having been in 1992:
“In 1992 the Society acquired 70 acres of land in Lucan with planning for 650 houses for £1.4 million. It then entered a joint venture with Ballymore Properties for the development of these lands, which was successfully and profitably completed.”30
Sean Mulryan said that with this joint venture, the project was “100% debt funded” by INBS, who would “charge an interest rate of about 2.5% over the Libor and …for … putting up all of the capital, they would take 50% of the profits.”31
Michael Fingleton said that INBS:
“continued to provide finance for such ventures [as with Ballymore] right through the 90’s and expanded into the UK London market with some of our own customers and later UK-based customers.”32
In joint ventures with financial institutions other than INBS, Sean Mulryan said in his evidence that the financial institutions’ capital investments varied: “70%, 80%.”33
In his evidence to the Joint Committee, Michael O’ Flynn, O’ Flynn Group, stated that with regard to property acquisitions:
“a mix of our own cash and bank borrowings was generally applied with the exception of joint venture arrangements where a lender sought a much higher return based on profit share. In such cases funding was provided by the lender and time, skills and expertise were provided by us and profits were shared.”34
The IMF observed in 2012 that “rapidly rising property prices was a key factor that drove high fixed investment in commercial and residential property.”35 On the commercial side specifically, the Department of Finance recognised as far back as 2003 that commercial property prices presented “…a potential source of vulnerability for the Irish banking system.”36 These observations are supported strongly by the body of evidence presented to the Joint Committee.
Taken as a whole, the Irish bank sector was excessively and disproportionally exposed to commercial property lending by 2008.
AIB’s business became increasingly dependent over time on commercial lending. Eugene Sheehy acknowledged in evidence that at the peak of the boom the bank had “650 customers who had property and construction loans of over €1 million.”37 In the case of Bank of Ireland, it was acknowledged that:
“…while property lending as a proportion of the Group’s balance sheet was not considered disproportionate; the actual quantum of property lending was too large…”38
By mid-2008, Anglo had a “sizable degree of exposure” to the commercial investment property market39 and INBS sought to fill what was perceived as a void “…by expanding its activity in the commercial lending market.”40
EBS – originally a building society for funding of mortgages for teachers – had moved into this form of lending, with commercial property loans having grown from €460 million in 2001 to €2.3 billion by 2008.41
In the case of IL&P/PTSB, commercial lending expanded as well such that, by 2008, it had grown to almost €2 billion.42
Ulster Bank also had an exposure to commercial lending. In his evidence to the Joint Committee, Robert Gallagher, CEO Corporate Markets Division, said:
“On my arrival into the business [in 2004], Ulster Bank already had a well developed and long-standing property division. The commercial property loan book was then approximately 60% of the corporate loan book. On joining, a key objective of mine was to diversify the portfolio.”43
The Construction Industry Federation (CIF) - the main representative body for the construction industry in Ireland - played a major role in lobbying the Government on taxation policy, public capital spending and other issues affecting the construction sector. Its responsibility was primarily to represent the needs of members.44
Membership subscriptions varied with 10 to 12 firms paying the largest membership fee of €30,000 per annum at the peak.45 The CIF’s annual budget was in the region of €5 - €6 million.46
90%47 was spent on services, such as health and safety expertise, industrial relations & employment advice, advice on payment disputes and planning & development advice for their members. When asked by the Joint Committee if the CIF had undertaken or commissioned research into the construction or property sector in 2007, Liam Kelleher responded: “The short answer is no, to the best of my knowledge.”48 The CIF relied heavily on the research of others, which was taken at face value; Liam Kelleher also told the Joint Committee that he wished he had paid more attention to contrarian views.49 The CIF continued to actively pursue property-based tax incentives and income tax incentives, even in light of the evidence that house prices were beginning to fall.50
From the late 1990s and well into the 2000s, a large variety of tax incentives were introduced which greatly benefitted developers. From 2000 to 2007, developers enjoyed a reduced tax rate on the sale of land for development purposes, which was halved from 40% to 20% by the former Minister for Finance, Charlie McCreevy.51
Over the ten year period from 1997 to 2007, Fianna Fáil received an average of €54,600 and the Progressive Democrats received an average of €8,900 annually in disclosed donations from the property and construction sector. Other parties did not disclose any donations from property interests.52 In the opinion of Elaine Byrne “…the property barons of the 1990s and 2000s had replaced the beef barons of the 1980s.”53
We raised the issue of personal contacts between larger developers and senior politicians. Several politicians said that they were not influenced by developers on policy matters. We learned of some personal friendships between politicians and developers.54 In response to a question on the issue of relationships between developers and politicians, Elaine Byrne said:
“often … it is indirect and is a case of doing someone a favour and thereafter, down along the line, that person will return the favour in an indistinct way. Were one intent on committing corruption, one would no longer be doing it the old-fashioned way. I mean giving money for a favour committed because these things can be traced. What the Moriarty tribunal in particular exposed was benefits in kind through different land transactions that may have arisen. Decisions were made and perhaps down along the line, certain benefits were conferred on individuals. Corruption is not black and white and is not direct. It is indirect and these relationships are very difficult to examine.”55
The journalist, Simon Carswell, said:
“I would characterise the relationship between the major players in the property sector, the construction industry, government, certain elected representatives and the banks, as well as the relationship between the Government, the banks and the financial supervisory authorities, as extremely cosy in the period leading up to the 2008 banking crash. To take a phrase from former Finnish civil servant Peter Nyberg’s thorough report on the causes of the banking crisis, the various players, including politicians, builders, bankers and regulators, displayed 'behaviour exhibiting bandwagon effects both between institutions (herding) and within them (groupthink).' Nothing I came across in my research would contradict that statement.”56
He went on to say:
“These relationships appear to have been too cosy to have allowed any one of these collective groups, be it banks, government, builders or regulators, to shout stop and offer the kind of critical dissent that might have changed the behaviour of all and the direction in which the country was heading. If one of these groups had had the courage to put its head above the parapet, I believe there might not have been the crisis we had or at least it might not have been as severe as it was. For these parties, it was too comfortable and self-serving for some to stay in the crowd and stick with the consensus, particularly when so many were making so much money. The result was that contrarians were ridiculed, silenced or ignored to ensure the credit fuelled boom continued for years as their past warnings did not come true. These cosy relationships would prove extremely costly. While the cost of the banking bailout to the Irish people stands at €64 billion, excluding recoveries coming from the sale of shares in the banks or better than expected returns from the National Asset Management Agency, it is worth stressing that the overall losses and capital wiped out by the crash amount to far in excess of this sum. The losses on loans, mostly to the property sector, across all of the banks in Ireland came to well in excess of €100 billion, including tens of billions of euro covered by the UK Treasury. This is sometimes forgotten.”57
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