NAMA chairman, Frank Daly delivered a speech this morning to the newly formed Society of Chartered Surveyors in Ireland (the body representing the merger of the old SCS and the IAVI). The speech will be remembered for placing in the public arena firmly for the first time a commitment for NAMA to provide funding to potential buyers. There are enormous competition, policy, economic and political ramifications from this commitment.
UPDATE: April 12th, 2011 NAMA’s announcement that it will act as a source of liquidity to potential buyers is understandable but troubling. NAMA might have done itself some favours by providing more detail because the average punter in the street might think “hang on! We got into this mess by allowing unfettered availability of credit to create a property bubble”. NAMA probably – and this is speculation on my part – is thinking of buyers of large commercial assets rather than a terraced 3-bedroom with a builder’s finish on a ghost estate in Leitrim, though NAMA didn’t provide any information to dispel that notion.
It is the case that there are very few lenders to buyers of property in Ireland at present. In such cases NAMA can sell to cash buyers or vultures, effectively one and the same and suffer fire sale losses on the assets or it can provide finance which might yield a better price, get some cash into NAMA in terms of the equity that a buyer would advance but the agency would be taking a risk on the resulting loan. So consider the following hypothetical NAMA commercial property
Nominal value of loan – €100m
Price paid by NAMA – €50m
“Cash” offers from vultures today - €30m
Price available at 8% yield – €45m
If a buyer can offer €45m and can fund €15m of that in cash, then should NAMA advance the remainder as a 3-5 year loan? NAMA might say that the market is close to the bottom and that if the rent available was a market rent (as opposed to an Upward Only Rent Review rent) then the interest payments could certainly be covered together with small capital repayments (say €1m per year). And if the outlook is that the property and banking sectors stabilize and the general economy improves then is it better for NAMA to sell to a buyer today who might require some “liquidity assistance” or to sell to a vulture or sit on the asset?
I can see where NAMA might be coming from in the above example. But there is a difficult distinction between providing liquidity to avoid fire sales and providing liquidity to maintain prices at unrealistic levels. And I can see issues for NAMA in how it implements this new approach.
With respect to the remainder of the speech the following was of interest on here
(1) Frank Daly uses his speech to publicly shoot across the bows of developers, telling them that he knows in some instances that they are playing for time and with respect to the 145 developers beyond the 30 in Tranches 1 and 2, and who have loans of €34bn (average €235m), if they don’t submit plans by the end of April, then Frank will have no hesitation in taking foreclosure action. I must say that there is a sense of widespread lack of co-operation from NAMA developers and a sense of desperation on NAMA’s part as what to do next with those developers.
(2) “quite a number of properties will be going on the market over the rest of this year and into next year”
(3) With respect to the funding of purchases, the NAMA chairman used a term that might be new to many : “staple financing”. This isn’t anything to do with buying office supplies but is a term borrowed from investment banking and means the seller finances the purchase by the buyer. The financing initiative is intended for the commercial market but NAMA is also exploring options “on the residential front”. Curiously NAMA suggests working with the two Pillar Banks (AIB/EBS and Bank of Ireland) to “move things along in this area”
(4) You have to admire the courage of Frank with talking up the property market – we are now back at commercial prices level suggested by long term correlation with GDP, office vacancy rates in Dublin are stabilizing, and office and retail yields are back at levels seen in the pre-Boom 1990s. On commercial property he concludes “without wishing to assume the precarious mantle of forecaster, I would suggest that there is limited downside for the commercial property market from current levels” which sounds a little like “a day like today is not a day for sound bites but I feel the hand of history upon our shoulders” On the residential side, he repeats the claim that in November 2009, prices were already down 50% and he wheels out the old line that the recovery will be patchy and certain areas will recover first – namely, certain parts of Dublin (where co-incidentally NAMA has a massive stock). His view is that most of the fall in residential property has already taken place. As that good-time girl, Mandy Rice Davies might have said “He would say that, wouldn’t he”. He concludes by saying that there is certain property which can only be sold for what you can get for it – code for “fire sales”
(5) It is now “high time” to get on with a register for both commercial and residential property transactions.
(6) Whilst stressing that he “is not commenting on Government policy”, Frank advocates a speedy resolution to the Upward Only Rent Review changes presently being discussed. Frank is also concerned about the effect consequent litigation might have on the property market. Frank didn’t mention the fact that commercial property in NAMA’s portfolio might drop 20%-plus in value if the changes are enacted.
(7) Frank refers to the fact that NAMA has actually introduced an innovation to property in Ireland by creating property receivers which are cheaper than corporate receivers. How well the new arrangements will work remains to be seen but from first sight, it seems like a surgical way of dealing with the problems of distressed property loans in a cost-efficient way. I don’t think NAMA has received much credit for this innovation which is a shame.
UPDATE: 13th April, 2011. Of all the newspaper articles carrying the “NAMA to provide property finance” stories in today’s Irish media, Barry O’Halloran’s article in the Irish Times seems to provide most details though his reporting of NAMA’s loans in general is rubbish – he claims the agency has acquired €88bn of loans for €37bn is just plain wrong, NAMA has acquired €72bn of loans for €31bn. Barry seems to have information that was not provided via the speech or press release by NAMA yesterday, namely that NAMA is intending to provide finance to banks who can then lend on to borrowers, that banks have a liquidity problem while at the same time NAMA has a cash mountain of €1bn, NAMA’s funds might allow banks reduce LTV requirements for mortgage borrowers which would mean a smaller deposit was required and that the plans are unlikely to be finalised before the end of the summer and would require Government approval.