Coping with Hindsight Leadership Lessons at GE
Investment Review and Outlook REIT’s: the Best-kept Tax
Volatility = Opportunity
Investing in Russian Growth? Has the UK Property
Private Equity -What’s Next?
Overdoing the Pessimism
Issue 12: April - July 07. A Quarterly Perspective from NCB.
Coping with Hindsight.
We all could’ve made fortunes a few weeks ago if we had simply trusted our judgement and
bet on Ireland to beat England in the historic 6 Nations game in Croke Park. It all seems so
incredibly obvious in hindsight doesn’t it? Irish rugby had never been on such a high and we
were ﬁelding arguably our best team ever. Add in the Croke Park factor and the fact that
we’d be playing in front of the largest and noisiest crowd ever to watch a rugby match in this
country. England, on the other hand, were struggling, had a very unsettled team, an unproven
manager and had lost their last three encounters with Ireland. Surely at odds of 6/4, Ireland
were a racing certainty?
Well, looking back on it now, after that famous and England might win. This was, of course, when we were of a mind to) and then some
40-13 victory, it certainly looks that way. a live possibility at the time, even though now, severe negative setback happens. We can feel
So, if it was so obvious, how come then we looking back on it, it may seem hard to believe. cheated and annoyed with ourselves.
didn’t back our judgement and bet heavily Despite this, we are left feeling we missed a
on the Irish win? For example, we could’ve great opportunity. Everybody suffers from these “if only” feelings.
bet k40k on Ireland to win and made a tax If it’s any consolation, you can be absolutely
free proﬁt of k60k - overnight. That would be In the investment business, hindsight can certain that even the legendary Warren Buffet
a return of 150% in the space of a short few make very smart people look very silly, and and all the very best professional investors
hours. I won’t even attempt to annualise that also make things that were not that obvious have them too. But we can also ease this
return, but, whatever way you look at it, it’d beforehand; look ridiculously obvious after type of frustration, by simply understanding
have been an amazing investment. the event. hindsight and indeed, the feelings brought on
by hindsight, a little bit better.
Of course we all know well the real reason We all know too well that feeling of regret we
we didn’t make the bet. The RISK of losing experience when, having actively considered It’s very important that we do, because such
was too high. Despite all our optimistic, buying a share, we dither and end up not feelings have the potential to damage trust
logical and well-informed assessments of buying it, and then that share rises sharply between clients and investment advisors. And
Ireland’s chances, we still genuinely (and quite soon afterwards. We also feel a different kind that’s not good for anyone. Clients, aided by
understandably) feared that things might not of frustration when we don’t sell or take proﬁt liberal portions of hindsight, can at times, ﬁnd
go to plan. Ireland might play badly on the day on a particular stock or a portfolio (particularly it almost impossible to accept that a good
advisor wouldn’t have seen certain events and other harsh realities and risks. But wealth < Breaking News >
unfolding - e.g. a market crash, a stock management is one of those areas where we
takeover, a proﬁt warning. It can even lead really have no choice.
them to thinking (very unfairly I might add) that NCB Charity Day 2007
their advisor is incompetent. The best investment advisors will get things
We are pleased to announce that NCB held its
wrong some of the time, and investors need annual Charity Day on 29th March 2007 - this was
Those of us working in this business need to to know that. If they don’t, they will be in a our ﬁfth and most successful charity day yet. All
be much more conﬁdent and proactive on permanent state of frustration. commissions generated by the ﬁrm on this day,
issues like this, if we are going to survive and totalling circa k400,000, were donated to three
deserving charities including:-
thrive in the long term. An honest and consistent effort on our part to
• Down Syndrome Ireland
educate clients on the unpredictability (as well
• The Irish Kidney Association
In the ﬁrst instance, we need to be forthright as the virtues) of markets, and to help them • The Neo-Natal Intensive
and clear with individual investors and clients develop appropriate and realistic expectations, Care Unit, Holles Street.
right from the beginning. We need to help them will go a very long way towards dealing with the Thank you to all clients who dealt with us on this
to understand that advisors (even the very dreaded hindsight. day and to those who made contributions to the
fundraising efforts.Your support is truly appreciated.
best of them) have lots of limitations. We all
know how difﬁcult it is to win any new piece of Crystal UK Development Fund
business, while at the same time focussing a
prospective customer on your own limitations NCB is currently in the process of launching a
k100 million UK property development fund,
the Crystal UK Development Fund. Pre-launch
commitments in excess of k40 million have been
Greg Dilger - Head of Wealth Management received to date. The fund will acquire a balanced
portfolio of residential and mixed use development
sites, primarily in South East England, which will
be brought through the planning process. NCB
expects investors to beneﬁt from the combination of
a positive UK macro environment, an experienced
management team, a pipeline of projects already
sourced for the fund and a tax efﬁcient structure.
For more information, please contact your
account manager on 01 611 5611
European Small & Mid Caps Guide
In conjunction with our partners in ESN, we
have produced the latest European Small
& Mid Caps Stocks Guide which integrates
small and mid cap stock information, proﬁles
and recommendations from our partners
across the main markets in Europe.
To receive a copy, please contact your
account manager at 01 6115611
Nigel Poynton, Director, NCB Wealth Management
If nothing else, the ﬁrst quarter of 2007 at some time in the last four years. Indeed earnings growth and valuation levels.
was certainly interesting, with plenty of some have likened equity investment in
market gyrations giving us constant food these markets as akin to “climbing a wall of Conﬁdence in Equities
for thought. The year started on a positive worry” – something that now seems to be Although we expressed concern about
note with markets powering ahead in part and parcel of the investment world. the short-term prospects for the market
January. However, February saw a sharp as greater growth risks are reﬂected, we
drop in global equities, which was more Global Outlook restate our conﬁdence about valuation
or less caused by a chain of events The global economy looks set to continue support in equities as an asset class. We
started by warnings of over-exuberance growing at a ﬁrm pace led by Chinese/ believe the longer-term outlook for equities
from the Chinese authorities together with Indian industrialisation and recovering remains positive. However, we still see
comments by the Fed’s ex-chairman, Alan domestic demand in core Eurozone and volatility rising from current low levels as the
Greenspan, exacerbating those worries. the developed Asian economies. The US cycle matures and this means that equities
Concerns over rising bad debt levels in the economy can sustain a soft landing but are becoming increasingly unsuitable
US mortgage market have also caused a protracted period of subdued growth for investors who cannot commit funds
signiﬁcant volatility, both in US and non- (both relative to its potential and relative to over a medium to longer-term horizon.
US equity markets, in recent weeks. Eurozone and Asia) looks to be in store as
interest rate and exchange rate movements To summarise, our core equity strategy is
Wall of Worry gradually push the US consumer onto the to invest further funds in large-cap core
Ongoing concerns, such as those back foot. The counterpart of this is that still European equity markets, with exposure
outlined above, will not necessarily result in stimulatory (albeit rising) interest rates and to the banking, energy, commodity
investors moving to the sidelines. Why? In appreciating exchange rates will continue and industrial services sectors. These
return for the last four years of exceptional to encourage compensatory consumption investments are predicated on the
equity market performance, investors growth in core Eurozone and Asia. probability that buying stocks at these
have also had to face up to four years of low PE ratios will deliver above average
worry - and not just in ﬁnancial markets. European equity markets have been long run returns and that global growth will
Geopolitical concerns and the threat of outperforming US equities in common remain robust. Our regional preference is
terrorism; rising oil prices and consequent currency terms for over six years now, reinforced by the belief that actual European
inﬂationary pressure; monetary tightening; and although the trend is maturing, we proﬁt growth this year may be ahead of
a US housing bubble; a global economic expect European (and Asian) equities to consensus expectations. Conversely,
slowdown, if not a full-scale recession; again beat US equities over the current we believe that US earnings growth
shrinking corporate margins and proﬁt year because lower interest rates in these and equity prices are likely to diverge
fears: they have all made headline news regions are more supportive of economic/ (negatively) from the rest of the world.
To discuss any of the issues raised in this article, please contact Nigel Poynton in
NCB Wealth Management at 01 6115611 or email email@example.com
Volatility = Opportunity
Eddie Clarke, Director, NCB Wealth Management
As I write, the market continues to wrestle with fear and optimism; fear of slowing growth and
rising inﬂation and optimism buoyed by private equity takeovers and relentless M&A activity.
Notwithstanding some notable exceptions, we’ve enjoyed bull market conditions for more
than 4 years now. So where to from here?
The battle of wits will continue between employ trading strategies where leverage colleague Dermot O’Brien’s article on page
those increasingly conscious of weaker is involved. But it’s not all doom and 9]. Ultimately, for those with the courage
market sentiment (and consequently gloom as current and prospective volatility of their convictions, phased investment
anxious to take proﬁts that might otherwise presents real opportunities. Given the in quality stocks will be rewarded. I’d
subsequently elude them) and those willing gains of recent years, price appreciation encourage readers to note the recovery of
to look through short-term weak sentiment and the positive experience of those the ISEQ 20 index of twenty leading Irish
to stronger longer-term fundamentals. The invested in equity markets, this is a pretty stocks from the not dissimilar turbulence
latter group will be focused on the strong good dilemma to be faced with. These experienced in May/June 06 (demonstrated
business models which will continue investors may choose to take proﬁts, take in the attached chart). Investors would
to create earnings growth, trading on some cash off the table and wait on the be well advised to take opportunities
modest multiples of earnings and paying sidelines for opportunities to re-enter / that may and will arise – it’s familiarity
attractive (and growing) dividend yields. buy-back when concerns settle or play out. with their favoured stocks which can turn
volatility into real opportunity. Of course it
Short-term perspective Long term perspective goes without saying that, as with much in
If indeed we are approaching the late For those with a somewhat longer time life, timing in equity markets is crucial.
stages of a four year bull market, the type horizon or time perspective, common
of volatility we’ve experienced recently may sense would suggest that when good
well become ever more frequent. Therefore, companies get buffeted around by short-
those seeking to trade with a short time term market whims there is an opportunity.
horizon need to be extra careful not to Taking advantage of that opportunity
leave themselves vulnerable to either the requires maintaining your conviction
type of creeping or incremental price falls particularly in the face of market volatility.
we’ve witnessed in Irish ﬁnancial stocks [For those looking for a reminder of the
of late or indeed the rapid falls witnessed basic principles and positive dynamics
across the market in late Feb of this year. of the Irish economy underpinning Irish
This is ever more the case for those who stocks, please look no further than my
To discuss any of the issues raised in this article, please contact Eddie Clarke in
NCB Wealth Management at 01 6115611 or email firstname.lastname@example.org
Alan Foy - Executive, NCB Wealth Management
Russia is geographically the largest country in the world. Its population is the 8th largest
globally and it has a plentiful array of natural resources. The economy has grown strongly
for several years now, as evidenced by a 6.7% growth rate in 2006. And with GDP forecasts
of 6.5% for 2007 and 2008, there appears to be great appetite among informed international
investors for all things Russian… what’s the attraction?
Background in Finnish companies with good exposure related. In January 2007, retail trade grew by
As you may recall in the last edition of ‘Wealth to the evolving Russian story. This article 13.5% in real terms and construction by as
Management’, my colleague Ian Quigley provides some of the highlights. much as 29.8% year-on-year (Chart 1, page 6).
introduced you to ESN, our strategic alliance So it appears that rapid domestic consumption
of investment banks and securities ﬁrms. Domestic consumption booming growth is the driving force in the Russian
ESN partners collaborate on a pan-European A key message emerging from the conference economy and it’s growing faster than the
basis to produce equity research, sales is that an exposure to Russian domestic economy overall which grew by 6.7% in 2006.
trading and corporate ﬁnance services for consumption is the route for investors to
our clients. It’s an invaluable resource which consider in playing the Russian economic If you add into the mix the fact that, on close
effectively provides our advisors with access growth story. Domestic consumption is examination, the economic fundamentals in
to original ideas from across Europe from booming. It is expected to grow rapidly by Russia are in fairly good shape – investors
research analysts who are “on the ground” 10% in 2007 and 9.5% in 2008 stimulated by should consider potential opportunities in
with local insight and knowledge. It goes strong wage growth, low real interest rates and the region. Russia has an extensive current
without saying that this represents a real higher public spending. While a great deal of account surplus (circa 5.5% of 2007e GDP)
competitive advantage for NCB and our clients. media attention about Russia focuses on the and virtually no foreign public debt (6% of
incredible wealth of the oligarchs, it often fails GDP in 2006) - in addition, their Stabilisation
Recently, my colleague Eddie Clarke attended to mention the rapid formation of a middle Fund already exceeds this amount with
another in a series of conferences entitled class. The increased afﬂuence of this middle $90Bn secured in the bank. This would all
“Invest in Russian Growth” kindly organised by class is much less understood and this is suggest that the risks for ﬁnancial crisis or
our Finnish partner Mandatum Stockbrokers. where the investment opportunity lies – we can higher interest rates in Russia are less than
The purpose of the conference was to see this lived out and clearly evidenced in the common misperceptions would have you
discuss Russia’s economic prospects and growth in domestic retail consumption and believe. Furthermore, the Russian Federation
to showcase the investment opportunities construction, a great deal of which is housing continues to have a budget in surplus (4.4%
of GDP in 2007e) implying that the State and presidential elections in March 2008. with western corporate governance, Finnish
could increase expenditure and further boost The president, Vladimir Putin is expected opportunities may be an excellent route of
domestic consumption in 2007-2008. to step down in 2008 and it is highly likely access. With a long history of trade between
that his successor will come from a small Finland and Russia, the Russian market
What about the Oil Price? circle of potential candidates in the current provides numerous opportunities for Finnish
Many might ask of the potential negative administration (Dmitry Medvedev and Sergei businesses, which are well positioned to
affects of oil prices. Well, our colleagues in Ivanov are favourites) therefore no sharp navigate and exploit the huge potential of
Mandatum argue that not even a decline in policy shift is anticipated. Mandatum assert Russian domestic markets. Russia is the
the oil price would slow the Russian economy that as a follow on from the presidential fastest growing market close to Finland and
down... so long as it doesn’t go below $37 elections there may be likely disputes over it offers attractive growth potential for Finnish
per barrel that is. The export and production oil and other raw material companies or enterprises. At the conference, attendees
taxes that Russia impose on oil companies indeed what constitutes ‘strategic’ Russian heard from the management teams of Finnish
increase progressively along with the oil assets which could accelerate and cause ﬁrms, which are well positioned to beneﬁt from
price. And as the oil price has declined from further turmoil in the ﬁnancial markets. At the their signiﬁcant expansion/growth in Russia
approximately $70 in early July to the current conference however, the analysts suggested and importantly in sectors that are likely to
approx $60, the only major impact has been that this confusion would not affect the beneﬁt from domestic demand including
to slow down the growth in their Stabilisation Russian real economy and they expect that construction (YIT), retail (Stockmann) and tyres
Fund- but a severe drop to below $37 the political turmoil caused by the elections (Nokian). If you are considering investing
would place their budget in the red, halt the will be short-term noise and nothing more. in Russian growth, investing in good quality
Stabilisation Fund’s growth and deteriorate Finnish companies with excellent exposure
oil companies’ earnings signiﬁcantly. Finnish companies with Russian exposure to the Russian domestic consumption
All this bodes well for investors in Russian story might be a good place to start...
Political turmoil only short-term noise domestic consumption. But where are the
Some investors may fear the potential opportunities? For those who wish to gain * Sincere thanks to our Finnish colleague,
turmoil resulting from the upcoming Russian exposure to this Russian growth story by Tuomas Komalainen at Mandatum Stockbrokers
parliament elections in December 2007 investing in publicly quoted companies for allowing us to reference and cite his work.
If you are interested in accessing the Russian growth story though Finnish stocks/Russian Managed
Funds please contact my colleagues Eddie Clarke or Ian Quigley for more information on 01 6115611.
Gearóid Hussey, NCB Wealth Management
As a follow on from my previous article, products, retail and health care industries are the best results, which means that they can
Private Equity-‘The Buying Spree’, I thought it often good buyout targets because revenues raise the most capital and win the most deals,
appropriate to go into the topic a little usually remain stable despite ﬂuctuations in according to Thomson Financial:
more deeply. the economic cycle. For example, KKR and
Alliance Boots’ biggest shareholder, Stefano • Texas Paciﬁc Group participated in 17
It seems no one can escape as private equity Pessina, has made a £10 billion friendly deals in 2006, worth a total of $101 billion,
ﬁrms seek buyout candidates of any size, with approach to the UK’s largest drugstore chain, • Blackstone followed with 19 deals worth
stable cash ﬂows, low debt levels and cheap which was subsequently rejected by the board. $93 billion,
share prices. Recently, TXU Corporation, the I would expect a larger bid to be announced in • Bain Capital Partners came in third, with
Texas power company, received an approach the near future. CVC Capital Partners, KKR and 12 deals worth $85 billion,
in the biggest ever private equity deal from Blackstone Group are considering a joint bid • KKR was fourth, with 13 deals worth $78
Kohlberg Kravis Roberts & Co. and TPG for the UK’s third largest supermarket, billion, and
(formerly Texas Paciﬁc Group). However, J Sainsbury, whose current market value is • Carlyle Group was ﬁfth, with 31 deals
even at $43 billion, it won’t be plain sailing about £9.5 billion. They are ﬁghting for the title worth $72 billion.
as Blackstone Group, Carlyle Group and of ‘Europe’s biggest ever leveraged buyout’.
Riverstone Holdings may make a counter offer The Year so far
for the company. Where will it all end? Performance in 2006 2007 is expected to be another major year of
Private equity fundraising reached new record growth in private equity. The industry is forecast
To recap, private equity ﬁrms typically buy levels in 2006, with data from Private Equity to raise $500bn globally in 2007 - $70bn more
companies at a low price and pile substantial Intelligence showing that a total of 684 funds than last year’s record, according to estimates
debt onto the acquisition target’s balance worldwide raised an aggregate $432 billion. from Private Equity Intelligence. The table
sheet. Stable cash ﬂows are a prerequisite In terms of the regional split of fundraising, the overleaf shows some of the Buyout Funds’
to pay down the additional debt, thereby funds raised in 2006 were split as follows: fundraisings at the moment:
dramatically boosting a deal’s returns. Over • 62% of capital raised focused on the US;
the period of ownership, the private equity • 26% of capital raised focused on Europe; At Goldman Sach’s recent AGM, the CEO
ﬁrm, in conjunction with management, will • and the remaining 12% of capital focused Lloyd Blankfein said the ﬁrm expects to raise
seek to improve the quality of the business on Asia and the Rest of World. $19bn to $20bn for its newest buyout fund
before selling it within a typical period of three – potentially the largest amount ever raised
to ﬁve years to another private equity fund or to Another point of note is that private equity by a private equity fund, which would top the
investors in an initial public offering (IPO). spending power is concentrated in relatively $18.1bn that Blackstone Group says it has
Ultimately, companies in the consumer few hands. The biggest ﬁrms tend to have raised so far for its newest fund.Fv
Buyout Funds on the Road
Fund Manager Target Size (mn) GP Location
GS Capital Partners VI Goldman Sachs private Equity 19,000 USD US
KKR Fund 2006 Kohlberg Kravis Roberts 16,625 USD US
Carlyle Partners V Carlyle Group 15,000 USD US
Providence Equity Partners VI Providevnce Equity Partners 12,000 USD US
Apax Europe VII Apax Partners 8,500 EUR UK
Thomas H Lee VI Thomas H Lee Partners 9,000 USD US
Hellman & Friedman VI Hellman & Friedman 8,000 USD US
Silver Lake partners III Silver Lake partners 8,000 USD US
Carlyle Europe Partners III Carlyle Group 5,000 EUR US
JC Flowers II JC Flowers & Co 6,000 USD US
The following companies are potential private Is the Game Up? Are we at the top of the could value it at $40 billion (k30 billion). David
equity targets and who knows they could be on Private Equity Cycle? Rubenstein told an industry conference in
the block in the near future: “I don’t think we are in a bubble similar to the Dubai recently: “If Blackstone goes public, it
tech bubble of 2000, but declines will occur. will be the ﬁrst of many.”
• UK supermarket, WM Morrison We can’t go on like this forever...returns will be
• Anglo-Dutch consumer products lower, a downturn will occur.” An IPO will give the company a source of
group, Unilever David Rubenstein, the co founder and head of steady capital without the expensive road
• French construction and engineering Carlyle Group. shows needed to raise funds from institutions
group, Vinci and high net worth individuals, on an annual
• UK airline, British Airways He went on to say that private equity was basis. The capital is also ‘permanent capital’
less vulnerable to a market collapse than that, unlike the funds raised from private
The fundraisings seem to be the easier part of the dotcom sector because the businesses investors and pension funds, does not have to
the overall process. The current buying power that have been purchased are established be returned to the source.
of US private equity ﬁrms is estimated at up to companies with real revenue.The conditions
$1.25 trillion. When the funds have been raised for the big buyout ﬁrms over the past few years Many feel it is very ironic that private equity
there seems to be an urgent need to put it to have been ideal – the cheap debt and low ﬁrms are going public, as one of the primary
work, as investors don’t want to sit on cash for interest rates have been key drivers for buyout beneﬁts of private equity is the freedom from
any reasonable period – and that’s where the activity over this period. Is this sustainable? the quarterly reporting distractions and having
trouble starts. The availability of cheap credit to answer to impatient shareholders. “There
has allowed ﬁnancial buyers to leverage up A Private Equity Firm Going Public is a huge irony here,” says an executive at
the market value of their acquisition targets Private equity ﬁrms may be taking chunks a company that has received approaches
and that obviously comes with risks. Another of the stock market private but, as their size from private equity groups. “If they dislike the
common practice is the idea of co-investing and ﬁrepower grows, it seems that they are markets so much, why go and raise funds
in deals, which helps to spread out the risk. considering their own initial public offerings. there?” Watch this space!
However, group buying can also increase One of the largest private equity players,
the likelihood of overpaying. Blackstone Group, is planning to come to the
public market over the next few months, which
Please contact Gearóid on 01 611 5611, if you would like
to discuss any of the topics raised in this article.
Overdoing the Pessimism
Dermot O’Brien, Chief Economist, NCB Stockbrokers
Real GDP in Ireland grew by 6% in 2006. This is a good deal higher than most forecasters
were looking for this time last year and, indeed, higher than ofﬁcial agencies were forecasting
towards the end of the year. Despite the better outturn, all we seem to be hearing lately is that
expectations for growth in activity this year are being revised down from earlier forecasts and
to a slower pace than last year.
This strikes us as more than a little drag on overall growth in the economy. house price inﬂation has slowed a lot and
strange on a number of counts. For a This conclusion seems to us to go to numbers showing a decline in housing
start, there is very little hard data on Irish way beyond the available evidence. guarantee contracts taken out to paint an
economic activity so far available and overly gloomy picture of the current state of
what there is looks stronger not weaker. It is certainly the case that the general the housing market. A few weeks ago we
Secondly, it chimes poorly with what tone of feedback from estate agents pointed out how poor an indicator of activity
one might expect given the stimulatory and mortgage lenders is that there the house guarantee data have been in the
nature of the 2007 budget involving, as has been some cooling in the housing past and, before that, we pointed out that
it did, a cut in the burden of taxation and market compared with the frenetic pace the deceleration in the rate of house price
a signiﬁcant increase in real government of activity this time last year. For the most inﬂation is more likely to be reﬂecting the
spending. Neither is slower growth what part, however, the agents are suggesting substantial increase in supply put in place in
one might expect to see in a year when that buyer interest remains at good the last two years rather than anything else.
maturing SSIA accounts will add at least levels but that this is not translating into
something to spending over and above transactions as quickly as last year. Thus, a good deal of pessimism on
what might otherwise have occurred. housing is not as well based as it may
As far as the lenders are concerned, the seem. Moreover, at least some of the
Of course, concerns about the housing general indication is that the value of new cooling in activity indicated by the lenders
market and the rate of growth in housing mortgage lending this year is expected and estate agents may not prove to be
activity are at the centre of this latest to be at or a little below last year’s level. lasting. Two things seem of relevance in
bout of relative pessimism. There is a These indications do not seem to us to this regard, consumers’ concerns about
perception that a substantial slowdown be consistent with a signiﬁcant slowing likely interest rate movements and the
in housing construction is likely this in housing activity but they have been inﬂuence of the possibility that changes
year and that this will act as a signiﬁcant added to data showing that the pace of will be made in the stamp duty system.
On the ﬁrst point, a recent survey way or the other, those currently sitting on in 2007? We do not think so. Housing is
sponsored by IIB Bank, suggested that the sidelines will have no reason to delay far from the full story as far as growth in
consumers were pessimistic about interest any further. For these reasons alone, the construction activity is concerned and
rates, expecting them to rise faster than feedback from the housing market could be is further still from being the whole story
do ﬁnancial markets. This is, perhaps, quite different in the second half of the year. of the Irish economy. The GDP data
understandable given the sequence of for Q4 2006 released recently made
rate hikes in the past ﬁfteen months but Over and above this, however, it does seem this point very well. They showed that
it takes no apparent account of the signs likely that the scale of house building in the housing investment actually declined
that the ECB is approaching the peak past two years probably represents a peak. year-on-year in Q4, by a little over 2%.
of its tightening cycle. Given the shift An 87,000 average level of new house However, overall investment in construction
in the ECB’s rhetoric, it is a reasonable completions in 2005 and 2006 is certainly rose by 7.4% because non-residential
expectation that the rate hike coming in in the upper reaches of any feasible investment was over 17% ahead of levels
June could be the last. At worst, the ECB range based on current demographics. a year earlier (Chart 1 page 11). It is also
may push rates to 4.25% but what they are Indeed, given how long this new supply interesting to note that while the pace of
currently signalling would not be consistent took to cool down the pace of house price growth in housing investment had been
with a more aggressive stance. If this is inﬂation, some share of those completions decelerating in the ﬁrst three quarters of
the case, it will become more evident may have been responding to unsatisﬁed 2006, even before the decline in Q4, the
towards the middle of the year, presumably demand from earlier years. On this basis, rate of increase in employment in the
alleviating current consumer fears. some fall-off in the rate of house building construction sector was accelerating,
this year would not be a big surprise. from 8.9% in Q1 to 11.2% in Q4.
The stamp duty issue should also be
resolved on a similar time horizon. In the It would, however, be surprising if the pace That the annual number of houses built
run in to the upcoming general election, of completions fell by any more than by a recently has been running around four
the opposition parties have announced few thousand. Given continued growth in times the total of the early- to mid-1990s is
proposals to reform stamp duty on housing the population of household forming age well known but the fact that non-residential
transactions. The Progressive Democrats, and the indications that inward migration construction has shown a similar scale of
junior partner in the current government, continues to increase, underlying demand increase may not be. This is typiﬁed by the
have also promised reform though the for housing looks solid. The fact that private data on the ﬂoor area of non-residential
Fianna Fail party has, apparently, set its face housing rents are accelerating is clear planning permissions depicted in Chart 2.
against any change. Given the possibility evidence of this (and probably also of the
of reform, it would be entirely sensible for impact of higher interest rates and more That this is the case simply reﬂects the
any potential house buyer who can to delay onerous stress testing on potential buyers accommodation needs of a workforce that
purchasing on the basis of the possible tax at the lower end of the income scale). is over 40% larger than it was ten years ago.
saving. It would be a surprise if this were not Moreover, as the economy continues to
a contributor to the cooling in the market, Even if the housing market is not as weak grow, so too will the need for commercial
especially at the more expansive end. The as some suppose but house building and industrial construction. In addition,
point, however, is that the situation should does fall a little this year, does that not still government spending on construction in
be clariﬁed once the election is over. Either mean that we should be cutting back on the next six years under the new National
stamp duty will be reformed or it won’t. One our general expectations for GDP growth Development Plan is set to eclipse that
in the previous plan by a large margin. Chart 1 - Investment in Construction (y-o-y%, constant prices)
For example, under the 2000-2006
plan, spending on roads projects
totalled around k8 billion. ��
In the new Plan, the total for roads has been ��
set at k17.6 billion. This is a small part of the
overall Plan but is equivalent to around 10%
of the current total value of GDP and will �
be spent over the six years 2007 to 2013.
To put this in context, in the ﬁve years to �
2005 when housing was growing strongly it
added an average of just over 1% to GDP
growth and the most it accounted for in any ���
one year was 1.5%. In 2006, the contribution
slowed to 0.4% yet GDP growth accelerated ���
from 5.5% to 6%. It seems there is more to ������ ������ ������ ������
the Irish economy than house building! ������� ������������������
Chart 2 - Non-Residential Planning Permissions (‘000 sq metres)
������ ������ ������ ������ ������ ������ ������ ������ ������
If you would like to receive regular economic commentary from NCB,
please contact your account manager in NCB Wealth Management at 01 611 5611.
in the Irish Commercial Property Market
Pat Gunne, Managing Director, CB Richard Ellis
Amid growing negative sentiment and confusion with regard to property market performance,
the time has come to set the record straight with regard to the reality of market conditions in
the commercial property arena and dispel some of the misguided perceptions that have started
to take root. Whilst sentiment in the residential property market has been weakening for
many months (and now looks like a good buying opportunity) it is important to stress that the
commercial property market in contrast is actually performing relatively strongly at present.
It is not the ﬁrst time in recent history that both average growth in the Eurozone expected to fair to say that different sub-sectors of the
markets have been performing out of synch. reach no higher than 2.5% per annum in the commercial market are performing to varying
The rationale for this is simply that the ‘herd medium term and little better expected in the degrees at present on the basis that they
instinct’ that exists in the residential sector is United States. We should not be entertaining are inﬂuenced by different fundamentals
not witnessed in the commercial property negative speculation when all that is being but all things considered the commercial
market where buying decisions are dependent experienced is a levelling in the extraordinary property market remains very favourable
on fundamentals such as rents, yields and pace of growth we previously experienced. for occupiers and investors alike.
rates of return and are therefore less impulsive No other economy is experiencing 4.5%
in nature. growth in employment generation on an Ironically, the biggest threat to the commercial
annual basis or experiencing the rapid property market now is a lack of conﬁdence. If
The property market is in simple terms a population growth that Ireland can boast. we allow ourselves to wallow in unfounded
sub-set of economic activity and on the negativity, it is very easy for this sentiment to
basis that it now appears that we will have to All of the fundamentals that drive commercial become self-fulﬁlling.
adjust to somewhat lower economic growth property market performance remain robust.
over the coming years, the natural result is In our experience, occupier demand in
that property market performance will in turn the core market sectors including ofﬁce,
decline. That said, even if economic growth industrial and retail remains positive and one
in Ireland slows to 4.0% per annum from its has to remember that the cost of ﬁve year
current rate of 6.0%, we have to remember money has remained stable at 4.25% for
that this still represents a rate of economic a number of months, which in itself bodes
activity that is the envy of Europe, with well for property market performance. It is
Has the UK Propertyfrom
Market Turned? Desk
Mark Crader, Senior Partner, Grainmarket Asset Management
The UK property market has enjoyed its longest are to a large extent redundant buildings and is forecasting it to continue to grow to
bull run for many years (and probably since when the leases expire leaving their owners over 65m over the next 25 years. All this adds
the end of WWII). Since the “green shoots of nursing large capital losses that only up to demand; demand for houses (that we
recovery” were ﬁrst seen in 1993 the market become apparent once the tenant has left. seem incapable of producing), demand for
has, with the exception of one early false dawn Notwithstanding the one or two exceptions that ofﬁces (with supply constricted by residential
and some micro markets such as the ﬁnancial might fall into this category the positive carry competition), demand for leisure and so
district’s problems in 2001, moved ever North. is, in my view, gone for a long, long time. on. The UK is a very crowded place with
This has seen yields for secondary property 240people/sqkm (source Sedac/UN) when
compress from around 15% to below 6% today. It is certainly true that it is illogical to have, compared to France 108/sqkm and Ireland
When this yield is added to the rental growth what is in effect, an indexed income stream at 55/sqkm. Whilst some areas of London
the increases in value have been dramatic. paying more than a ﬁxed coupon loan. are amongst the most expensive places to
In fact it is very difﬁcult to imagine how Doesn’t mean it can’t happen – just means rent ofﬁces with the St James’s area ﬂirting
property could ever have been that cheap! it’s a buy signal when it does. As property with £100/sqft there are other reasonably
is already a negative carry, notwithstanding central areas where one can rent good quality
The important question now is; the minute returns on indexed linked space for around a ﬁfth of that. I personally
should it ever be this expensive? Gilts, it is difﬁcult to see any signiﬁcant think this equates to value and opportunity.
compression in yields from this point.
In order to answer this most important of As the positive carry has been so successful it
questions one has to dispense with the Of course the other major inﬂuence on has tended to push the more traditional ways
easiest and most successful business model values is rental growth and here the view for of extracting money from property to the side.
of the last 15 years – that of positive carry increasing values is far more benign. London This has seen the traditional rental growth
(i.e. the yield on property being greater than is an expensive space to rent ofﬁces but it is route to riches being ignored. It is also true
the cost of funds in acquiring it). In truth this also one of the major world cities and indeed it is harder work to get rental increases. Rent
yield gap was eradicated a couple of years is forecast to be the 4th biggest city economy reviews are normally hard fought and time
ago on prime property and more recently on by 2020 according to PwC. The demographics consuming, new lettings a slow and expensive
secondary stock-especially when one adds for the UK and, the South East in particular are process and straight development more so
the lender’s margin. It is important when encouraging. The National Statistics Ofﬁce (and with more risk!). However I do think this
judging a true return that one considers the reported in August of last year that the UK is the “game” those of us involved in property
vacant possession value of a property and population broke through the 60m barrier for will have to play over the next ﬁve or so years.
many of the seemingly high yield properties the ﬁrst time with a net migration of 235,000 It should make us money and it will be fun!
To discuss any of the issues raised in this article, please contact Bobby Hassett in
NCB Wealth Management at 01 6115611 or email email@example.com
REIT’s: the Best Kept
Killian Nolan, Business Development Manager, NCB Wealth Management
REIT’s have been a popular investment vehicle in the US and Far Eastern markets for many
years and demand for REIT’s in Europe is set to soar, thanks to the recent introduction of
REIT’s legislation in both the UK and Germany.
So what exactly is a REIT? shares in REIT’s, however, offers better ﬂexibility The returns within a unit fund are rolled up
A REIT is an investment vehicle which invests as they are freely and openly traded on the gross and investors will only pay tax on the
exclusively in property, and is traded openly on stock exchange. dividends and capital growth at the lower rate of
the stock market. REIT’s offer a transparent, 23% (marginal rate + 3%) when they withdraw
liquid and tax-efﬁcient way to invest in property. Key Advantages of REIT’s their funds.
REIT’s provide a number of key advantages to
The way REIT legislation has been structured investors, including: It is also possible for the fund manager to put
means that most of the rental revenue from 1. efﬁcient tax structure, a currency hedge in place to cover the value of
managed properties can be passed directly to 2. the potential for higher yields all non – Euro denominated assets.
investors free of corporation tax. Under most 3. protection from inﬂation.
circumstances, REIT’s may also pass on proﬁts 4. liquidity On reviewing the market we discovered there
on the sale of assets back to shareholders are a number of very good funds available but
free of corporation tax. REIT legislation usually All the above sounds very interesting but there the one we believe offered most to the Irish
requires that most of the rental proﬁts must be are a few draw-backs for an Irish investor who Investor is the Standard Life Global REIT fund.
passed on to investors. This combination can invests directly in REIT’s, the dividend will be
boost dividend yield and where this happens taxed at the higher rate of tax (41%) and there Along with offering the right structure Standard
such investments are more attractive to will be currency exposure when buying in the Life Investments also offer extensive breadth
investors who require income. UK, Asia and US etc. and depth in both analytical and investment
expertise across direct property, listed property
This demand has been met in part by direct So what’s the most efﬁcient way for an Irish and property related equities. Their portfolio
property funds in recent years, but these investor to invest in REIT’s? reﬂect the best ideas from across their global
funds can present a liquidity challenge, and While it may not be deemed as the “Sexy Way” investment platform, in a product that offers
may require investment managers to place to invest, a unit fund is the most appropriate investors the advantages derived from highly
restrictions on investor access to cash in the way for Irish investors to access the Global liquid exposure to global property markets.
form of withdrawal notice periods. Buying REIT market.
If you would like to receive further information on REIT’s or speciﬁcally the Standard Life Global
REIT, please contact your account manager or Killian Nolan at 01 6115611.
Leadership Lessons at GE
Alan Foy - Executive, NCB Wealth Management
Dan O’Connor is former President and Chief Executive Ofﬁcer of GE Consumer Finance
Europe and assumed the position as National Executive for Ireland in 2001. Dan is currently
a non-executive director on the boards of both AIB and CRH. Recently we were privileged to
have Dan address us in NCB regarding his successful career and provide insights into his time
at GE. It was an illuminating presentation which grabbed the interest of all who attended, so
much so that I’d like to share some of the highlights with you in this article.
Career Path took it. Dan spent four successful years Finance-Europe (GECF). Dan was appointed
It’s impossible to condense a sparkling with the company and went on to become President & Chief Executive Ofﬁcer in 1999.
curriculum vitae like Dan O’Connor’s into a Group Financial Controller before leaving The company has a number of broad product
single paragraph and serve it any justice. to join the newly formed Woodchester lines including credit cards, personal loans,
However, Dan was educated at UCD, having Investments in 1987. Woodchester was sales ﬁnance, mortgages, auto ﬁnance and
completed both a Bachelor of Commerce set up by Craig McKinney, the Scotsman insurance. These products were distributed
degree in 1979 and a diploma in Professional who helped to shake up the consumer through an array of channels including
Accounting in 1980. Not unlike many of and leasing end of the ﬁnancial services retailers, mail, telemarketing, branches/partner
his peers at that time, he then decided business in the 80’s. McKinney believed in points, ATM’s and the internet. You may be
to continue along the accountancy path developing young talent and Dan was quick surprised at just how signiﬁcant this business
and signed a training contract with KPMG to get signiﬁcant responsibility early on. is... to put it in context, GECF Europe’s
Dublin. Although he was recruited to the operations employ circa 22,000 people in
audit business, Dan emphasised that he GE Consumer Finance 24 countries across Europe and with a net
was afforded the opportunity early on to Dan’s learning curve accelerated signiﬁcantly income of $1.6 billion and assets in excess
get involved in a range of special projects after the US ﬁnancial giant, GE Capital acquired of $85 billion - it represents Europe’s largest
both within and outside the ﬁrm. This meant the company. McKinney eventually moved consumer ﬁnance business. During Dan’s
that less of his time was spent solely on aside to enjoy more of his beloved hunting and time with GE Consumer Finance, the business
traditional audit work typical of most trainees. as Deputy CEO, Dan found himself working witnessed excellent growth (19% CAGR) and
as part of a huge international conglomerate. successfully completed over 20 acquisitions.
Although he enjoyed his time at KPMG, Dan Following the deal, GE transferred responsibility
decided that working in practice was not for much of its European business to Dublin Go Deep, Move East
for him. And when an opportunity arose in - the size of Woodchester’s business Dan gave us a great insight into the rigorous
1984 to work for B&I line (Irish Ferries), he doubled and it was renamed GE Consumer and deliberate approach that GE took to
growing the business. A business model acquisitions in markets including Poland, the businesses. He demanded that they
coined “Go Deep, Move East” meant that Czech Republic, Slovakia, Hungary, Russia, understand their business – every nut and bolt
the company developed deep networks in Latvia, Turkey and Romania. These were – and had high expectations and standards for
the territories that it operated. At the core of countries with lower ratios in terms of consumer them. He wanted results, he wanted answers
its operating philosophy, the emphasis on assets & liabilities to GDP and less disposable and he wanted honesty.
local knowledge was paramount. Without it, income per capita than their more western
the operations just wouldn’t be able to tailor counterparts. Importantly, they had maturing At these GE leadership reviews, the chiefs
suitable offerings or develop the right type of consumer credit markets and were more would assess their leaders against strict
relationships with clients. accepting of the direct business to consumer performance metrics, the GE values and their
channels (B2C) which suited GE’s business exceptional skills. GE values, as Dan explained,
This approach involved leveraging each model. GE beneﬁted from early mover were a critical element of GE’s leadership
platform; acquiring businesses with advantage and built a solid footprint in these development. GE wanted their leaders to be
quality locations and client bases, building territories and achieved great results along the curious and passionate, accountable and
out distribution capability, sharing best way with 28% compound growth in assets and resourceful, committed team players and
practice from GE’s operations, leveraging a staggering 45% compound growth in net to be open-minded and energising in their
cross-selling opportunities, adding new income. This model allowed the businesses to approach. Ambitious growth demanded it.
products and importantly - selling directly develop into a very meaningful part of the GE GE didn’t leave leadership to develop by
to clients. It’s an approach that worked well Consumer Finance story. chance – they identiﬁed the right people for
– GE moved to set up operations in the the right roles, promoting at the right times
eastern parts of the EMEA market where Leadership Lessons in their careers and used their talent pool to
consumer credit was becoming more widely A really engaging element of Dan’s effectively create a very mobile, adaptable
available and accepted by consumers. presentation focused on leadership. There’s and skilled leadership ranks throughout the
a lot written about the legendary GE CEO company. GE identiﬁed leaders who were not
The GE team searched for new opportunities Jack Welch and of his successor Jeff Immelt only hard working but who had the courage
in markets with attractive fundamentals regarding their leadership approach, style, to do what was right for the business.
(population size, strong wage growth and traits etc. So it was great to get a ﬁrst hand
efﬁcient tax policies etc) and with room to grow insight from Dan who actually interacted and But perhaps most importantly, they looked
in terms of deposits and retail lending. The worked alongside both of them. What was for leaders who were able to grow their GE
company established a presence through key most surprising was just how seriously these businesses with and through the people
GE chiefs took leadership development. They who worked for them. They developed their
focused on identifying leaders; they focused leaders, rigorously. So it should come as
on the results these leaders delivered; they no surprise then, that when Dan O’Connor
focused on promotability and they focused on made it known that he was retiring from GE
developing their leaders’ talent. And they spent (after successfully developing a host of global
a lot of time doing it! By way of example, Dan leadership roles in the company), that some
outlined how Jack Welch would meet with all of the largest banks in Europe, including
of the national executives individually at the some close to home, wanted to recruit him.
performance review stage for 2 hours or so It appears that leadership lessons learnt at
and here he would quiz them on their results GE are a much sought after commodity…
Dan O’Connor and really examine them on their respective
To contact Alan, please email firstname.lastname@example.org or telephone 01 611 5611.
How Can You Afford 30 years of Spending?
Aoife Lavan, Executive, Personal Financial Services, NCB Wealth Management
We are now in an era where more than ﬁfty percent of trainees admitted to the Institute
of Chartered Accountants in Ireland are female, the same statistics apply to trainees
admitted to the Irish Taxation Institute, currently ﬁfty three percent. The modern Irish
woman certainly appears to be more ﬁnancially independent than her predecessor.
However, is the average Irish woman as paid and therefore cannot make pension there scope that the individual could make
ﬁnancially independent when it comes to contributions, why it can sometimes be more pension contributions for both themselves
retirement planning? It would appear based on difﬁcult for women funding for retirement, and their stay at home spouse and claim
results from the CSO (Central Statistics Ofﬁce) and the real difference becomes evident. tax relief on these? Maybe something similar
December Survey 2006, that answer is NO. to the SSIA’s could be introduced or allow
According to the CSO the ﬁgures for 2006 extra tax relief for pension contributions for
• Only 61.8% of the Irish adult workforce showed that ﬁfty two percent of all Irish stay at home spouses. In 2006, 60% of all
have a private pension women aged 15 and over were not ofﬁcially females over 15 were working in the home,
• Only 58.3% of men in the Irish in the workforce and therefore had no ofﬁcial if something like this was introduced surely
workforce have a private pension earnings in order to contribute to a pension. this would have an immediate effect on the
• Only 50.6% of women in the Irish Of the total population of Irish women aged 15 current pensions coverage issue for women.
workforce have a private pension and over, the following was the breakdown of
those who were unpaid and unable to make From the above we can see that often it can be
Pensions week was the week beginning pension contributions: more difﬁcult to provide a pension for women
12th March 2007 and the Pensions Board in Ireland due to personal circumstances.
concentrated in highlighting to the public the • 4% unemployed Aside from the above, in reality women can
lack of pension coverage in Ireland, especially • 22% were students be more vulnerable to being short of money in
when it comes to women. • 60% on home duties (ofﬁcially unpaid) retirement because of the following:
• 9% retired
Currently 50.6% of women in the Irish workforce • 5% other • Women tend to earn less than men
have a private pension compared with 58.3% • Tend to have a broken career pattern
of their male counterparts. At ﬁrst glance this Can I be a little controversial and ask the • More likely to work part-time
would not appear to be a signiﬁcant difference question – if a couple decide that one of the • Live longer than men
but when you take into account the number spouses will stay at home to provide home
of women over 15, who are not being ofﬁcially duties rather than stay in the workforce – is
The simple fact that women live longer than Women may receive pension income from the Finance Act 2006 introduced a cap of
men means that women will need to fund for state, private pensions, occupational pensions k5 million on the total pension beneﬁts an
a longer retirement, see: Chart. Yet they are and from a spouses pension. individual is entitled to, this has become a
more prone to having a broken career pattern, target of sorts. Have people also considered
because of childbirth, and are more likely to The question isn’t so much how to spend that this is also a target for their spouse?
work part-time to rear the children and work your retirement years, I hope it’s beginning to Effectively you could fund for k10m per working
in the home and therefore contributions to become clear that the question actually is; How couple. There is huge scope for family run
pension schemes are signiﬁcantly reduced or can you afford 30 years worth of spending? businesses/companies where both spouses
stopped completely. are involved, it is important for both to take a
Its not all doom and gloom, its never too salary each and fund for a pension for both
I think that we all agree that we would ﬁnd it late to start saving, women in their 50s spouses, this can be hugely relevant when
difﬁcult to live on k209.30 per week (current could realistically have 10 to 15 years of extracting monies from a company on exit.
contributory state pension), or k200 (current potentially high earnings, mortgages may
non-contributory state pension), so what have been paid off, and they might be In case you haven’t heard, 60 is the new 40
should we do? more ﬁnancially independent, from these and 70 is the new 50 – make sure you enjoy it!
earnings they can fund for a pension.
Firstly we should accept that we are going to For those ladies who are starting off, it is
get old – hopefully gracefully and we should better to get into the habit of saving a
ask ourselves the following questions if we are little bit consistently from an early age, it
currently employed: can be taken from your salary at source.
1. Where does your current income ���������������������������������
2. Does your employer have a
pension scheme? ��
3. Are you a member?
4. If you are self-employed have you set
up a personal pension? ��
5. Does your spouse have a pension
that will provide for you?
6. If you have a pension: ��
a. How much do you pay monthly?
b. Do you know how much it will be
worth at your retirement? ��
c. Can you top up your pension through
AVC’s (additional voluntary contributions)?
7. Do you know the tax beneﬁts of saving ��
via a pension?
���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����
8. Formulate a plan and do something
about it now!
To discuss your pension planning requirements please contact
Aoife at 01 611 5611 or email email@example.com
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International Financial Services Centre, Dublin 1, Ireland. Please call Alan Foy on 01 611 5611 or email firstname.lastname@example.org
Tel 353 1 611 5611 Fax 353 1 611 5988 Web www.ncb.ie
The information contained in this document has been obtained from publicly available sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a
solicitation for the purchase or sale of any investment. Opinions in this document are based on our judgment at time of publishing and are subject to change without notice. Intending investors should read the
detailed literature available before investing. Any people acting on the information contained within this document do so at their own risk. Recommendations in this document may not be suitable to all investors.
We recommend you contact NCB for professional advice before investing. We recommend that you take professional tax advice in relation to your investments. Investors should note that past performance is
not necessarily a guide to future performance. The value of investments may fall or rise against investor’s interests. Income levels from investments may ﬂuctuate. NCB is a member of the Irish Stock Exchange,
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