Two very different visions of prospects for the economy and property market emerged in court, writes SIMON CARSWELLFinance Correspondent

THE PURSUIT of long-term protection for Liam Carroll’s troubled Zoe Group at the Four Courts offered an intriguing glimpse of the wider public debate about what the future holds for the economy and property market.

After failing to secure examinership from the court over insufficient evidence in a first application, the group offered more detailed insights into the economy and property market to support its rescue plan in a second petition.

This was opposed by Dutch-owned ACCBank, the only lender among eight to challenge the petition. The bank turned to other experts to reject Zoe’s submissions.

There was mainly consensus between the sides that the economy would reach the bottom of the cycle in 2010 and start to recover in 2011.

However, there were contradictory views on whether this would lead to rising values in the property market lifting the Zoe Group out of insolvency and ensuring its survival.

Depending on the views of each side, there were either signs of a noticeable pick-up in the property market in recent months (the group’s case) – or the property values would take a decade or more to recover (ACC’s case).

If the former scenario turns out to be accurate, Zoe argued that it would be possible to realise the full value of its properties – €1.211 billion over three to five years – which, with financial assets, would be enough to repay liabilities of €1.3 billion due mostly to eight lenders.

However, if ACC is correct, the group’s property assets would be worth €644 million on the basis of distressed sales in a highly depressed property market over a six-month period.

These valuations were provided by estate agents CB Richard Ellis on the commercial property assets and Hooke MacDonald, which valued the residential properties. Counsel for Mr Carroll’s group claimed in court that ACC had not disputed any of the future valuations proffered by its valuers.

However, when ACC made its case, the bank said the only evidence on property prices was contained in a report submitted by the bank from UCD economics professor Morgan Kelly.

The academic argued that property prices would not return to the inflated “bubble” levels experienced in 2007 and were likely to remain at between a third and a half of peak prices of the mid-1990s for a decade or longer.

Described by Judge Frank Clarke as “the leading proponent of the non-soft landing school”, Prof Kelly painted a grim picture for the property market, drawing on the experiences of 40 boom-and-bust cycles but particularly on the collapse of Irish rural prices in the 1970s and Japanese urban prices in the 1990s.

The academic pointed out that while the Japanese economy grew 20 per cent between 1990 and 2007 property values kept falling sharply.

He cited property collapses in the Netherlands in the 1980s and Finland in the 1990s where values halved over six to seven years.

CBRE said comparing Irish rural values in the 1970s with the current Dublin market was “like comparing apples and oranges”.

Goodbody Stockbrokers, which is owned by AIB (the largest lender to the Zoe Group) also supported the group’s case, saying that Japanese property values declined because the country’s government had continually failed to deal with problems in its banking sector.

Prof Kelly’s view-point was queried by Zoe’s lawyers who said that he was “much more pessimistic” than other economists and the views in the mainstream, and that his opinions on property were of a “highly generalised nature”.

The judge jumped to Prof Kelly’s defence somewhat when he said the academic had been “laughed at” when he said back in 2007, a time of still heady prices in the property market, that values would decline by 50 per cent. Prof Kelly was “almost right”, said the judge.

Counsel for ACC later told Mr Justice Clarke that the only evidence before the court on the prospects for long-term property prices was contained in Prof Kelly’s property report, repeating a similar comment by the judge.

Seán McCormack, a valuer at DTZ Sherry FitzGerald, said in a report submitted by ACC that the vacancy rate for Dublin offices was in the region of 19 per cent compared with about 14 per cent at the peak of the market. CBRE responded saying that this represented only an additional 5 per cent of unoccupied space.

Take-up of office accommodation peaked at 290,000 square metres in 2007, Mr McCormack said in his report, and this was in “stark contrast” with 2009 when “it is unlikely that take-up will exceed 85,000 square metres”.

“The overall picture in commercial is unlikely to improve, certainly over a two-year period and perhaps longer, albeit that some stability in the rate of decline in values is expected in that time,” he said.

Mr McCormack added that the residential market was “characterised by a reluctance to purchase and clearly this position is hindered by a more limited finance market”.

Mr Carroll’s lawyers countered saying the property market was “not on its last legs” and there had been “a noticeable pick-up” in the market recently.

A letter from another auctioneering firm, Savills, to Mr Carroll’s company Danninger said that it was “reassuring” that inquiries for commercial property had “started to pick up as companies look to take advantage of competitive terms and rental levels”.

The firm said that it was “aware of several large multinationals looking to take space in the next 12 months” which were seeking about 50,000 sq m of office space.

“Some are coming to Ireland for the first time and others are located here already and have lease ends or break options approaching,” said Savills. The firm said the vacancy rate would “continue to rise sharply during the year to peak towards the end of this year or early 2010”.

CBRE also responded to ACC saying that in the last month it had signed deals on office space with Amazon (1,100 sq m), Facebook (1,200 sq m) and Covidien (1,500 sq m).

David Cantwell of Hooke MacDonald said he did not believe there was over-supply in the market, noting that there were 6,000 to 10,000 residential units available for purchase in Dublin, which would normally be sold over a nine-month period.

Zoe also claimed that Nama would stimulate lending in the economy. The plan proposes to inject tens of billions of euro in fresh credit into the market in return for the sale of the toxic bank loans.

ACC banker John O’Shea disputed whether Nama would have a positive effect, saying the State agency, not the banks, would decide whether to postpone interest payments due from Zoe – a key plank in its survival plan.

The opposing views on the future of the property market will help Mr Justice Frank Clarke determine whether the seven Zoe companies can survive out of “the incubator” that will be a two-year moratorium on interest payments on the bank loans.

His decision will be made on September 14th at the earliest, two days before the Oireachtas begins its debate on Nama.

It will be yet another occasion where the High Court has an opportunity to express its views on the perennial and hotly contested debate on the future of the property market.