Mr. John Moran:

I have provided the committee with a detailed opening statement which I will run through again this morning. I was asked to comment on issues relating to the nature and functioning of the commercial real estate market in the period up to 2008 in the context of the banking crisis in Ireland. I will deal with the size and nature of the real estate market in Ireland and I will give a brief overview of Jones Lang LaSalle and the nature of the services that we provide. I will give broad details of our client base, the sources and extent of funding to the commercial real estate market, the composition of investors in that market, its interrelationship with international markets and investors, and the understanding of risk at the time.

My comments relate to the commercial property market though I will occasionally reference the residential market, particularly as it affected land levies. The Irish retail real estate market is made up of various components. There is the residential market, the development land and agricultural market, the investment market and the various occupier markets such as offices, retail, industrial, hotels and licensed and leisure premises.

Up to 2008 the commercial real estate market was growing strongly. There were increased levels of purchasing, leasing and construction activity. Ireland's economy was performing well with GDP and employment driving the expansion. It is worth remembering that, at that time, we were the fastest growing economy in western Europe, the second wealthiest economy on a per capitabasis measured by GDP and we had the fastest growing population in Europe. During that period unemployment averaged just over 4%, which was effectively full employment. That is important because the real strength in occupier and investor demand is what was supporting the property market. That demand was driving activity levels and increases in values and the capital values of Irish commercial investment property increased by 72% in the five-year period up to 30 September 2007, the date we define as the peak of the market in terms of value appreciation. Property yields were at record levels, which was a reflection of both the strong investor demand and the availability of significant amounts of debt. The graph on page 1 of my submission shows the 72% appreciation in capital value from Q1 2002 to Q3 2007.

This all translated itself into particularly strong transactional activity. Between 2004 and 2008, €8 billion worth of commercial investment property was sold in Ireland. The peak year for investment volumes was 2006, with €3.6 billion traded in 12 months. For context, this compares to the previous record of €1.2 billion in 2005 and an average of €768 million per annum between 2001 and 2004, and they were record levels in comparison with what had happened in the 30 or 40 years preceding that. In addition to domestic spending, there was also considerable Irish investment activity overseas, particularly in the UK and continental Europe. The graph shows the spending patterns of Irish investment in Ireland over the six-year period. All sectors of the market were active, with demand outstripping supply. Demand was not solely focused on prime assets, with secondary and tertiary assets also trading. There was evidence of demand across all size categories and activity was taking place in all locations across the country.

The investment market was characterised by large amounts of money seeking product. Demand was exceptionally strong, with the vast majority of transactions involving domestic purchasers. Values really intensified in 2005 and 2006 and so did attitudes towards investment, with investors seeking to move more aggressively up the risk curve and undertake either development in their own right or in conjunction with developers as joint ventures in search of better returns.

Alongside a very strong investment market there were also exceptionally strong occupier markets. The letting market for offices averaged 2.3 million sq. ft. per annum between 2004 and 2008, totalling 11.6 million sq. ft. over the five years. This is significantly higher than the 8.8 million sq. ft. in the last five years 2010 to 2014. The record years for office take-up in Dublin remain 2006 and 2007. Demand was focused on core, city centre locations, accounting for approximately 60% of take-up per annum. Traditional banking, financial and professional service companies were driving demand during this period, with a new wave of the technology sector just starting to take off. Page 3 shows graphically how office take-up compares from 2002 to 2014 and members will see that the peaks were 2005, 2006 and 2007. In response to that demand there was a response from developers in supplying office construction, with 8.8 million sq. ft. constructed between 2004 and 2008. This represented a 33% increase on the total stock levels at the end of 2003.

The retail market was also performing strongly, with improvements in the economy boosting consumer sentiment and spending. A number of international chains and domestic retailers were entering the market and trading well. As demand continued, vacancy in core schemes and high streets was tightening, with limited choice for occupiers. The market responded to this with a surge in retail development. Between 2004 and 2008, total shopping stock in Ireland increased from 13.7 million sq. ft. to 22.4 million sq. ft., an increase of almost 9 million sq. ft. and a lot of this was in provincial locations. By the end of 2008 Ireland had the second highest shopping stock per capitain Europe.

Other sectors performed relatively steadily in comparison to retail and offices. Industrial activity was relatively subdued until 2006, when again there was record occupier take-up of 2.9 million sq. ft. Industrial land values saw significant growth due to a scarcity of supply in areas where people wanted to locate, generally in the south west of the city and in north west Dublin. Occupiers were predominantly general distribution companies which, as is often the case in the Irish distribution and industrial market, are generally purchasers rather than renters.

The values of commercial property adjusted to this strong demand with significant increases over a short period of time. Rents experienced similar growth, with prime office rents increasing from €40 to €60 per sq. ft. and retail rents such as on Grafton Street increasing by more than 100%. Industrial premises also saw rental growth but not at the same pace. The highest rent levels ever achieved in the market remain 2006 and 2007, which is graphically illustrated on page 5.

In response to very strong occupier markets and investment markets, development land also saw an enormous increase in activity. The land market always responds to occupier markets and as activity and pricing grew significantly across all sectors this was also mirrored in development land. Between 2004 and 2006, the number of deals in Ireland increased significantly, reaching over 250 transactions in 2006. The market was characterised by strong demand from developers and investors, who were chasing product and competitively bidding on all assets that came onto the market. In 2006, the highest sale price for a development site was achieved, which was €155 million per acre. This compares to the current top values of approximately between €35 million and €37 million per acre. There was a push for higher densities by the planning authorities but, in the absence of clear guidelines, many developers factored very ambitious densities into their land pricing. The underlying strength of the residential market and residential values also contributed enormously to the high levels of land value that pertained.

I was asked to comment on what JLL do in this market so I will run through the details very quickly. The Chairman has already given members the global overview of the company. In Dublin we have a full service offering, with expertise across all sectors and processes involved in buying, selling and managing real estate. This involves investment sales and acquisitions, leasing activity for both landlord and tenant, property and asset management, planning and building services, valuation advisory services, land and research.

Our main area of focus is commercial property across all sectors, namely, office, retail, industrial, land and hotels. We have undertaken some residential work for clients, but this is not a core specialism. Our client base varies significantly, but historically our largest client profile is institutional, such as pension funds, life assurance companies and banks. We have also acted for developers and occupiers and provide a broad service to everybody in the real estate industry.

From our perspective the advice we give to clients is strategic and consultancy-based. Given that we act for both landlords and tenants and vendors and purchasers, our aims and objectives vary, depending on the instructions, but in any deal we do or any piece of work we perform our duty of care is to the client. As we act for buyers, sellers, occupiers and landlords, we have no vested interest in the performance of the market. We prefer to see a steady performing rising market at the rate of inflation rather than the dramatic booms and busts recently experienced.

Our firm's staff have the necessary academic and professional qualifications to work in the property sector. Most of our staff are members of all relevant professional bodies, including the Royal Institution of Chartered Surveyors, the Society of Chartered Surveyors in Ireland. Various other professional organisations are represented within the office. Being a member of a professional body means that one must adhere to a strict standard and ethic on a daily basis. It is noteworthy that yesterday, for the eighth consecutive year, Jones Lang LaSalle was announced as being one of the world's most ethical companies by the Ethisphere Institute.

I will deal next with the sources and extent of funding in the commercial real estate market in Ireland. It should be noted that we are not directly involved in the funding element of commercial real estate transactions. Our expertise is in real estate and the details of funding acquisitions and developments are left for discussions between our clients and funding institutions directly. While we might introduce parties and provide some background information, specific details of terms and agreements did not involve Jones Lang LaSalle and were not shared with us. Our view of funding conditions relates to what our clients told us and what was common knowledge in Ireland at the time.

Between 2004 and 2008 the largest sources of funding for the commercial real estate market were domestic banks, the UK representatives which had offices here and a couple of European banks. I do not think I need to name them as everybody knows who they are. Each bank had a differing exposure and concentration across all sectors. We were sure at the time that there was a lot of funding available in the marketplace. We were not involved in final loan-to-value calculations between our clients and the banks, but we are aware that loans were available at high value ratios. Funding was also available for almost every type of property transaction, whether for a pure investment purchase or a speculative development. Initially, a significant proportion of the lending was non-recourse, that is, the asset was the only security that the bank held. With the benefit of hindsight, the practice of borrowers giving personal guarantees to secure debt became increasingly common in 2006 and 2007 and led to significant cross-collateralisation of debt. Any further detail of funding and lending during this time would be more accurate coming directly from the banks, lenders and borrowers. Aside from the banks, the market was also awash with a lot of equity, which leads me on to my penultimate comments on the composition of investors in the Irish commercial real estate market.

The major players in Ireland were domestic and accounted for approximately 90% of all investment volumes between 2005 and 2007. They were a mix of private syndicates, private high net worth individuals, institutions and developers. The largest proportion of transactions were undertaken by private Irish individuals or syndicates. These purchasers were backed by funding from banks, with very limited, if any, pure cash purchases. There were also a number of purchasers who were backed by equity. The broad investor profile comes from four sets of investor: private syndicates that used pooled equity and debt; private high net worth individuals who used a mix of equity and debt; and institutions such as pension funds and life assurance companies which purchased with 100% equity. The developers were the final cohort and used equity and significant amounts of debt. Over time it became less certain how much actual cash was employed as opposed to equity release lending. Overseas investors had a limited presence in Ireland during this time, as pricing had intensified significantly and Irish real estate was regarded as too expensive for international investors. Up until the current cycle, the Irish market had traditionally been domestic in nature, with a very limited international input, other than occupiers. It was regarded as an expensive market in the period to 2008 and, as a consequence, there was limited overseas investment in Ireland during this time. I have graphically demonstrated on page 8 of my submission how yields tightened between 2003 and 2006. They compressed from 6% to 3.7% for offices. At these levels, international investors were priced out of the market, with more competitive yields available in other European countries.

A noteworthy feature of the time was that Irish purchasers were not just focused on domestic assets. Significant levels of Irish money were spent across Europe and the world. In particular, it was reported in 2006 that Irish investors had invested approximately €3.5 billion in the United Kingdom and a further €2 billion in the rest of Europe and the USA.

As a real estate advisory firm, it is our job to advise clients on real estate issues. It is, therefore, imperative that we understand levels and impact of risk. Prior to the banking crisis, we were advising our clients on the nature and impacts of the property market and how it was performing. Any advice was informed and reinforced with key primary research data. We collect and monitor research for each property sector, with some of our data sets dating back to the early 1970s. We believe our advice was strategic, using our expert opinion to assess, for example, saleability and letting ability at the time. We would provide details for clients on end-use values based on current market levels, providing strategic advice on sentiment and general market performance. Any valuation we provided for clients was carried out in accordance with the RICS Red Book Guidance Notes and based on evidence of historical market values. It is very important to understand valuation reports are not forward-looking documents; they are a snapshot in time based on current market evidence. It is not within our scope or remit as real estate advisers to put any application to these numbers, particularly in order to generate future projections, unless we are asked to do so. Our clients take our advice and it is their responsibility to apply our recommendations to their models to generate cash flows, repayment models and profit and loss projections for themselves. From this, they can formulate their own inputs and assumptions, but that is not a process in which we are involved. The responsibility for this lies with the property owners and, we assume, their bankers.

I will give an example of how this worked on an almost daily basis. There were numerous development sites sold in Dublin at the time. We would have given numbers to our clients and appraised the value of sites. We would have said to our clients that they could bid X for them. Any number of times developers or clients came back and said, "I am going to bid X plus 20% or X plus 50%." We had no input into these decisions and, frankly, were always unsure as to how they had come to these conclusions.

The strong demand from investors and occupiers essentially was what dictated market performance during this period and drove market activity. It is important to note that a functioning property market is not driven purely by value. Capital values are often used as an indicator to show how a market is performing. Value can be affected by a variety of factors. As well as value, to determine what is a functioning property market we also consider depth. A more reliable method for assessing whether a market is functioning properly is focusing on demand and supply, using market transactions and depth. Having lived through the horrendous recession in recent years we all run the risk of forgetting what the market was actually like in 2005 and 2006. There was enormous depth to it. Any asset for sale had a number of bidding investors in competition with one another. As 2007 and 2008 developed, we saw that there were risks in the market. The warning signs were a shallowing of the depth of bidders in the market, a shallowing of the depth of occupiers and the fact that house prices had started to wobble. We noticed that the number of bidders during the sales process had started to decrease significantly. As a consequence, we advised most of our client base not to participate in the market on the buy-side and, where appropriate, we advised clients to sell. We did this in 2005, which at the end of 2006 had proved to be the wrong decision. Anyone who did not buy at the end of 2005 had lost the opportunity to participate in an additional 40% capital growth. It was only in 2008 that this decision proved to be correct. I can assure the committee that it was not a populist decision and we were not very popular for doing it.

We think our client investors were aware of risks at the time. The market in Ireland is relatively transparent and it would have been impossible not to have been aware of some of these signs, as transaction processes are open.

There is reasonable availability for sharing information and data. Data is a big issue in the Irish real estate market and I will happily talk about it later if necessary.

Jones Lang produced a transparency index in 2006. We were ranked the 15th most transparent market in the world which is a "high" transparency category. We are now in the top ten in the world because there have been improvements in transparency over recent years.

Other participants in the marketplace, such as investors, developers and the banks had the benefit of professional advice, or had significant in-house expertise to assist in their decision-making processes. By 2008, there was a recognition within the property industry that market conditions were over-heating, however, I do not believe that most market participants realised the extent of bank lending to the property market, and second, that we would ever witness the collapse in value that subsequently occurred, which was due to an extraordinary confluence of global macro-economic events, combined with an over-reliance on debt in the property market.