Debate on future of the property market finally enters legal arena

ANALYSIS: The Zoe case continues the fierce exchange between economists and auctioneers

IT WAS inevitable that it would come to this once developer Liam Carroll’s besieged Zoe Group submitted a report on Ireland’s economic prospects to back up its survival plan and bid for protection.

ACCBank, the group’s only lender to oppose its second unprecedented bid for examinership, has submitted the views of other economists and valuers to support its case. As a result the debate on the future of the property market between economists and auctioneers that has raged for years in public has now entered the legal arena.

These views will assist Mr Justice Frank Clarke in determining whether seven Zoe companies have a reasonable prospect of survival and whether he should appoint an examiner to give them breathing space from debts totalling €1.3 billion, including €1.27 billion owing to eight lenders.

Evidence provided by Mr Carroll’s side has come from Dermot O’Leary, chief economist at Goodbody stockbrokers, and the firm’s head of research, Eamonn Hughes. Enda Luddy of CB Richard Ellis and David Cantwell of Hooke MacDonald have provided valuations, while John McCann, property surveyor at BNP Paribas, also offered evidence.

On the opposing side, ACC has turned to Morgan Kelly, a professor of economics at UCD and a long-time “bear” or pessimist on the future of the property market.

The Dutch-owned bank has also leaned on the views of Friends First economist Jim Power, UCD economist Karl Whelan and Seán McCormack, a valuer at DTZ Sherry FitzGerald, to support it.

Mazars accountant Simon Coyle has been recruited to oppose KP

MG’s rescue plan for the group. Michael Cush SC, for the companies, said there was consensus among economists that the Irish economy would reach the bottom in 2010 and begin to recover in 2011, but there were differing views on whether this would lead to recovery in the property sector.

Prof Kelly concluded that commercial and residential property prices would return to mid-to-late 1990s levels, or about a third or a half of the peak boom-time values. Property values could stabilise below half their peak for the next decade or longer, he said.

He based his findings on the collapse of agricultural land in Ireland in the 1970s and the sharp drop in Japanese urban land values between 1990 and 2007.

The academic warned in 2007 that property prices would decline by 50 per cent due to the “grave risks” to Irish bank solvency from over-exposure to high-risk speculative property lending.

Counsel for the Zoe companies said that Prof Kelly’s conclusions were “of a highly generalised nature” and that he was “much more pessimistic” than other economists who have argued that there would be a recovery in the property market.

The judge noted that Prof Kelly had been “laughed at” when he predicted that property prices would fall by 50 per cent and he was proved “almost right”.

Valuers for the group said the commercial property market was “not on its last legs” and there were signs of recovery.

Mr Luddy said CBRE had overseen contracts worth €400 million for international property investors over the past three months.

Mr Cush said the group could return to solvency within 15 months and emerge with a surplus of €19 million by July 2011 with the support of banks, excluding ACC.

Zoe’s seven other lenders are either supporting the petition for protection or are not opposing it.

The court was told the group had annual income of €40 million from rents and company dividends that could service most of the interest bill on bank loans.

Bank interest payments would be covered in full by the sale of 478 residential units up to July 2011. The companies believe that on this basis they have a reasonable prospect of survival.