It seems that there’s hope yet for the future. The Judiciary has stood up for the contractual rights of a foreign-owned company and defied the resistance of the Establishment. “What?!?”, you must be thinking. We can’t be talking about Ireland here. But yes. The rule of law in Ireland has prevailed. All that’s necessary is persistence (and a rather large budget for legal expenses). But is there more to it?

The background was a high-stakes gamble on property that Liam Carroll made with borrowed money, systematically channelled into the black hole known as Zoe Group (the parent company of Vantive Holdings and Morston Investments among others). He had made it big-time during the bubble years but a collapsing property bubble set the stage for a dramatic show-down. An imprudent speculator in many respects, he had the reliable backing of domestic banks, unconcerned for their shareholders but rather more concerned for their political allies and their network of cronies. There was, however, a dissenter in their midst in the form of ACC Bank.

The old “Agricultural Credit Corporation”, privatised in 2002 and bought by Rabobank, had gone astray in the froth of the speculative bubble, along with the rest of the banking sector. They found themselves in the unfortunate situation of having lent a vast sum to a property developer who had gambled away most of their capital through huge losses on speculative property “investments”. Unlike most of their Irish banking peers, ACC Bank have a wary foreign owner to answer to. Rabobank are a triple-A rated bank – a now rare breed of solid global banks – that can boast of a financial stability and a deep capital base they can dip into during leaner times, which is the envy of the global banking sector. It is no wonder that one of their Irish subsidiaries, ACC Bank, with its mounting provisions for loan losses, was proving to be a thorn in their side, and they needed to bring it under control. As a global bank with its headquarters in the Netherlands, Rabobank is reluctant to allow a large part of their Irish loan portfolio to rot away while the Establishment scurries about making deals to protect their own short-term interests.

In contrast, the two biggest lenders to the Zoe Group were far more willing to compromise to avoid liquidating the company. Allied Irish Banks (AIB) is Irish-owned and subject to the pressures of its fellow crony club members. Bank of Scotland (Ireland) is a subsidiary of HBOS and Lloyds TSB which have also proven their lack of aptitude for risk management. Both banks have been rescued from collapse by government bailouts. When Zoe Group finally breached its loan covenants, ACC called time and applied to the courts to liquidate the company. The other banks which had financed Carroll were still in denial about the severity of the problems of Zoe and of the wider property slump in general and focused only on the short-term consequences. Liam Carroll appealed for court protection and, according to an Irish Times article, his justification for this preferential legal treatment of his groups’ €1 billion deficit was a truly remarkable “single page outlining the hope value of his assets and two short sentences explaining the valuations and citing their source“.

Despite the Zoe Group being clearly insolvent and Liam Carroll proving unable to offer any credible plan for long-term survival, the banks were still prepared to support a deal involving examinership (a process akin to Chapter 11 bankruptcy for US readers) and reorganisation to keep Zombie Zoe on life-support – with the exception of ACC Bank. They fought a legal battle to liquidate the remaining value of their loans and were portrayed in the press as agressive.  Finally, on 11 August, the Supreme court dismissed Carroll’s appeal.

Perhaps ACC Bank is playing hard-ball to strengthen their negotiating position and force an offer from the other banks to buy out ACC’s loans on favourable terms in return for relenting on their petition for liquidation. Ironically, their own self interest is also in the interests of the taxpayer. A forced liquidation of Zoe Group companies would ensure that the banks realise the losses on the loans before they become a taxpayer’s liability when they are transferred to NAMA. It must be said, the Establishment, a crony-capitalist club of bankers, developers and politicians (predominantly Fianna Fáil) with vested interests, put up a good fight – as far as the Supreme Court, exhausting all domestic legal remedies. A continuation of legal proceedings and even a hypothetical victory involving the granting of court protection and examinership would have simply delaying the inevitable liquidation the hopelessly insolvent company. Thankfully, the result is a victory for ACC Bank and possibly even a rare victory for the taxpayer.

So, are we to congratulate our Supreme Court for upholding the rule of law for a foreign-owned company just as it would for a domestic one? Well, perhaps. That is the best answer I can give because my suspicions remain that the Supreme Court had their hands tied. Ever since Ireland joined the European Union in 1973, it has been subject to the supremacy of European Community Law which is within the jurisdiction of the European Court of Justice. The Supreme Court judges know that if they had ruled in favour of Liam O’Carroll and against ACC Bank, any appeal to the European Court of Justice would have been overruled. They would have lost much credibility.

NAMA (National Asset Management Agency) has more in common with cows than one would imagine…

Livestock, specifically cattle, and their produce, are by far the greatest output of the farming sector in Ireland. The bubble referred to in the title of this article, however, refers not to the cows, but the land on which they graze. With the exception of Luxembourg (an anomaly due to its diminutive size), Ireland has the most expensive agricultural land in Europe.

Why, you might ask, is there such as wide chasm between prices for agricultural land in Ireland and its European average? Why do prices bear no relation to agricultural productivity or the income stream one would expect to achieve from such an investment?

I present exhibit A – a listing from Henry O’Leary, a real estate agency that seems to specialise in rural plots of land. Some of these plots are already zoned for residential development (normally a single house). I draw your attention to the purely agricultural land i.e. with no planning permission for residential development.

First up, is 114 acre property with an undisclosed guide-price. I guess they don’t want to scare off potential buyers, so we’ll move swiftly along to the second property:

Dromore, Glandore in West Cork.

(hover the mouse cursor over the blue boxes in the screenshots below to see the pop-up comments)

No doubt this second property is a fine plot of agricultural land and a veritable bucolic wonderland of sea views. Ok. So the price? It comes in at a modest €1,000,000. That’s SIX zeros i.e. €1 million or approaching US$ 1.5 million at current exchange rates.

I hope you were sitting down for that – sorry for not warning you. Once your heartbeat has managed to re-establish its normal rhythm and your grasp of conventional wisdom is sufficiently twisted to accommodate this insanity, allow me to remind you of a very important issue – the emotional welfare of the cud-chewing, methane-farting residents of those fields.

The scenic value of those ocean views for our dear bovine friends more than justifies the 7-figure asking price of this “non-residential agricultural holding with ocean views”. You could even name it Bovine Vista!

But wait, maybe we’ve missed something:

“within walking distance of Glandore village, it has extensive road frontage and given the location this farm could prove an exceptional investment should planning permission be obtained even for just one house”

An important detail indeed. No need to even consider the cows, so. You’ve got a chance that some idiot in the County Council makes a mistake in the planning application process and grants planning permission. The minor detail of actually paying to have the property developed can be overlooked for now.

With my best wishes to the sucker who sinks his current and future life savings into Bovine Vista, I must, lamentably, continue to the next property for sale:

Butlerstown, Bandon, West Cork

Once again, this is land zoned for agricultural use – a whole 17 acres of it – which means only €59,000 per imperial acre (or US$85,000 at current exchange rates) or for a more internationally recognisable figure – a paltry €145,000 per hectare.

In the case of this property, let’s consider for a moment the hypothetical (and fortunate for the buyer) circumstances of the land being rezoned by the County Council. The land would obviously be worth much more than its agricultural output would suggest. The reality is that the guide price of this agricultural holding already prices in a significant chunk of the speculative gains the buyer MAY make in the event of that improbable rezoning. There must be something I’m missing…

“The agricultural qualities of this land which are superb no longer form the foundation upon which the valuation is based, it’s positioning adjoining Barryroe GAA Grounds and being in close proximity to Lislevane Village are far more likely to dictate the outcome of this sale.”

Now I see – I missed the nod and the wink. I guess I was mistaken in relation to the previous property too. It was no idiot in the County Council but a wily opportunist who deftly made a slip of the pen (or more likely an openly agreed determination by collusion), resulting in the fortunate mishap of planning approval for development of the property. So with this infallible investment strategy in mind, we should consider the pricing strategy – pick a very high figure and double it.

Is Ireland “Special”?

Considering that agricultural markets are global, we should expect some convergence of prices among agricultural regions with similar physical and climatic conditions. Only land with similar characteristics should be compared because factors such as soil quality and climate influence productivity greatly. Ireland’s climate is, admittedly, very suitable for livestock farming, but this is insufficient to explain the valuations. In fact, the difference is so large that it cannot be attributed to domestic factors.

The arch-nemesis of the natural environment a.k.a the Common Agricultural Policy of the European Union, is another factor that should not be disregarded. CAP subsidies, however, do not explain the disparity because they should push up agricultural land prices by similar amounts throughout Western Europe (the new EU member states will not benefit from full CAP subsidies until 2014 after the current 7-year budget expires). Even allowing for a recent drop, a recent report by Savills Ireland, a real estate company, reports that average agricultural land prices in Ireland average at about €40,000 per hectare. Even in other parts of Western Europe such as France – itself a wealthy and productive exporter of agricultural produce – the price per hectare in the more expensive regions for agricultural land averages at under €7,000 per hectare. I should mention, though, that other countries show signs of (less severe) bubbles including the UK, Denmark, Benelux and Italy.

No, Ireland is not special and this is simply another bubble waiting to burst. The urban property bubble in Ireland was also “justified” by arguments such as the positive demographics, but that, in hindsight, was obviously was a fallacy. In fact, the Ireland of today is a country of net emigration, as young people once again leave in search of work abroad and recently arrived immigrants return home. Agricultural land will eventually return to levels corresponding to the financial return on its agricultural output just as urban rental property is dropping to a realistic level suggested by its rental yield.

The Fallout – Last Man, NAMA and the Environment

Obviously, the last man in will be worst hit. This is the risk that any individual takes when making an investment (especially in an asset price bubble)  and, as such, does not concern me.

NAMA (National Asset Management Agency), a.k.a the Taxpayer, the subject of much attention recently for its proposed acquisition of much of the toxic property debt of Ireland’s banks, will be exposed to this bubble. As these toxic property loans largely consist of loans to developers, it is to the property developers we should look. Their viability depends to a large degree on the valuations of their “land banks” which are often undeveloped agricultural land adjacent to urban areas. I wonder what NAMA’s bill to the taxpayer will amount to once the developers are faced with the bursting of this bovine bubble.

The two examples above are far from any city, however, the emphasis placed on proximity to any kind of village or hamlet with the objective of inflating the price serves as a warning to accountants now attempting to place a value on the property loan bank assets that NAMA is about to acquire on behalf of the State.

Finally a word of advice to tourists – visit Ireland while you can. Its last remaining remnants of natural coastal beauty are being destroyed thanks to the collusion of property developers and local government officials. Our only hope is that the collapse of the urban property bubble takes this rural property bubble down with it!