The NAMA CEO, Brendan McDonagh, speaking in London on Friday last to a gathering of investors organised by Davy stockbrokers, said that the Agency had approved €6.2bn of asset sales to date. It is not clear how many have been realised in cash but NAMA’s bond redemptions, new cash advances to developers and the NAMA cash mountain indicate that more than half have actually been rang up in the cash register.
Sources indicate that one of the most recent transactions has been the sale of a property in the City’s Finsbury Square(technically the building is in the London Borough of Islington but it is effectively part of London’s financial district). Royal London House at22-25 Finsbury Square, EC2 is understood to have gone “sale agreed” for GBP 25m (€29.5m). The building has 89,157 sq ft of partly-tenanted existing accommodation , but there had been plans to redevelop the site and double the accommodation.
The seller is a development company whose loans have been transferred to NAMA, Shieldpoint 22 Limited controlled by developers Eugene Larkin and John Flynn and the property has been on the market reportedly for more than a year. It is understood that NAMA paid just GBP 18m (€21.2m) for the AIB loan on the property, meaning that NAMA should be able to book a profit of some €8m on the transaction, which will be just over 1% of its projected operating profit – that is, profit before impairments – of €600m in 2011. The buyer is not known at this stage, nor is the face value of the loans but it is believed it is over GBP 25m, with the site being originally purchased for GBP 40m in the mid-2000s which indicates an eye-watering loss of nearly 40% for the developers.
NAMA’s 40% profit (GBP 7bn from an acquisition price of GBP 18m) in part demonstrates the strength of the central London commercial property market since mid-2009 when prices started to recover from a UK-wide collapse of more than 40% since the financial crisis broke in 2007.
Although the London market is buoyant in the sense prices continue to rise and there is funding available for purchases, it remains a concern that NAMA is selling its best assets now which might otherwise have appreciated more in coming years, compared with declines in its own backyard.
NAMA was asked for a comment on the above transaction, but a response is unlikely as NAMA has a policy of generally not commenting on individual sales. In fact there is no external assessment of NAMA’s individual sales – not by the public accounts committee, not by external auditors who will not be interested in commercial values and apparently not by the Department of Finance. So NAMA might have racked up a success, but we may never officially know…
only a GBP 15 million loss for the state on the sale isnt it?
@exiled, we don’t know the face value of the loans but if the loans totalled the purchase price, then yes a GBP 15m loss for the State as we effectively own AIB with a 93% shareholding.
Word down the East End is that there were conditional offers around the £30 million mark. NAMA chose the “bird in the hand” immediate cash. It is rumoured that the par value of the loan was in the early to mid £30 millions – issued originally by AIB. The market is getting much tighter in London and it is a tough call at present. Time will tell if NAMA made the right one.
Just a thought…. at 90,000 sq.ft. the building has been multi-let on short term tenancies since the inception of the loan. Even at £20 per sq.ft. it implies an annual income of £1.8 million.
A 5% return on the par value of the loan, or a massive 10% return on NAMA’s purchase price! Since NAMA’s coat of funds is circa 1.5%, it does beg the question of why NAMA sold it in such a hasty manner. Just to get cash in from the sale of low hanging fruit? What is the agency’s strategy?
They had the choice of an 8.5% profit annual income, or a “sell-it-quick ‘n give us the cash” smash and grab. They chose the latter. Interesting, but are they working to any sort of longterm enhanced value strategy? It would seem not.
@WSTT, NAMA’s most senior property man, John Mulcahy would probably point you to yields in central London and claim that they point to a market peak and that therefore, now is the optimum time to sell. John was also understood to be the adviser who informed the late Brian Lenihan’s view in September 2009 that Irish commercial property was close to the bottom because of the historically high yields. Two years later and after nearly 25% declines, that view doesn’t look too bright.
NAMA’s cost of funds will indeed be 1.7% per annum to March 2012 when it is likely to fall to 1.2% in line with 6-month Euribor. So yes, if NAMA bought the loan for €18m it would have paid in NAMA bonds for €17m and NAMA subordindated debt for €1m. NAMA doesn’t pay interest on subordinated debt if NAMA makes a loss for the year after impairments which is likely again this year. So NAMA’s interest cost is indeed €290,000 per annum and given inflation in the UK, you would have thought that NAMA would generate a nice little profit from rent by keeping the property/loan.
Do 3.5-5.5% yields point to the optimum time to sell central London property? With inflation at 5%, though set to fall in 2013, and with property shortages in central London and lack of new build, I would have said there was a good chance of rents increasing to bring yields back up again, and keep the momentum on upward price rises.
Unfortunately NAMA and John Mulcahy will never be quizzed on this, it seems. And as with other individual transactions, NAMA won’t comment.
“Do 3.5-5.5% yields point to the optimum time to sell central London property?”
NAMA did not sell this property at those yields. It sold the property at over double or triple the prevailing yield.
@Jake, where’s the evidence of that? It sold 1 King William Street in the City of London at nearly 6% compared to a “going rate” yield of 5.25% – that’s wasn’t double or triple obviously. So what are you referring to, in this case of this property?
I’m certainly no expert but it seems to me that property in central London would always enjoy some level of demand regardless of the wider economic situation.
NWL alluded to the fact that NAMA might well have been better to have retained these central London locations in the hope that they will appreciate and which might help offset the continued depreciation in Dublin (Ireland) properties which it owns/manages?
maybe having a blonde moment here,but if the ‘face’ on AIB loan was in and around 25mio how did we ‘lose’ 15mio ?
the metric here would be price per sq.ft. or ‘FAR’ link attached-so buyer paid 327 per sq.ft for a redevelopment play based on existing in place,but if you can double the sq.ft. its actually 164 per build-able sq.ft.
@WSTT as humorous aside,was in this building during my brief baptism in the ‘city’ actually played lawn bowls on the green.
Comparing apples to oranges,its not a ‘yield’ play.
http://www.investopedia.com/terms/f/floor-area-ratio.asp#axzz1gQy5jX2z
@NWL
I am quoting you on the “Do 3.5-5.5% yields point to the optimum time to sell central London property?” from your response to WSTT.
I am quoting WSTT on “They had the choice of an 8.5% profit annual income, or a “sell-it-quick ‘n give us the cash” smash and grab. They chose the latter. Interesting, but are they working to any sort of longterm enhanced value strategy? It would seem not.”
I am assuming both of you are accurate.
On a more commonsensical level, it does not take a real estate expert to realize that property in this London location has great potential and is a very “low hanging fruit”, if not sitting on the ground.
As far a waiting, if the London City property market were to crash, NAMA and Ireland would have a lot more to worry about than real estate portfolios. Why not sell property that is falling in value and save the appreciating?
@Jake, I’m with you now.
No, WSTT’s 8.5% is not a yield. What he suggests is that NAMA might have rented the buiding for £1.8m per annum which represents a 10% on NAMA’s purchase price, understood to have been about £18m. NAMA pays about 1.5% (1.7% to be precise now, falling to 1.2% next March) per annum on its NAMA bonds, so NAMA might have generated a (10%-1.5% =) 8.5% profit per annum on the price it paid for the loan.
However, you do raise an interesting point. If the rent roll of the building is indeed £1.8m then that would mean a £25m price tag represents a 7.2% yield which is considerably up on the 5-6% yields presently standard in the City. If there were indeed offers at £30m then that would have represented a yield of 6% on a £1.8m rent-roll which would be more like it.
So yes, on the face of it, the yield does look weak – 7.2% achieved (say, based on a £1.8m rent roll) versus I would guess high 5.x%
Cost to NAMA: £18 million
Rental Income 90,000 sq ft @ £20 per sq ft minimum for short term lets = £1.8 million per annum
Therefore the yield = 10%
In reality the rental level on Finsbury Square is £40 per annum plus, so the 10% return on a really bottom line rent of £20 per sq ft is very conservative indeed.
@WSTT, I was referring to yield on the sale price of £25m but I take your point. If NAMA was generating 8.5% profit per annum in a market where inflation is currently 5% and likely to stay elevated for another 12 months at least, then might this not have been a keeper for a few years?
And indeed if the rent-roll might indeed have been £3.6m, it does look very cheap indeed at £25m or a 14.4% yield.
The building in 1991 was a piece of crap,B building,its a tear down.
It housed, government offices such as the Valuation Office,your extrapolation on a RR makes no sense.Complete conjecture and speculation.
@WSTT you can NOT finance short term leases,short term conservation,its a balance sheet loan.
@NWL no it does not,you are ‘assuming’ 100% occupancy,no slippage,no costs associated with holding it.Going in headline yield MAY appear attractive but until NAMA, allows us to take a look we are wasting time.Does anyone have a copy of the in place RR or offering memorandum ,happy to run some numbers on it.But simply multiplying the sq.ft. by a implied rental rate does not make a yield in place,its a scenario.
@John, you are right to say there are a lot of assumptions with that yield calculation such as the condition of the building generally (assume good) type of lease (assume full repairing)and actual space rented (assume 100% so one tenant with no common parts). Having said that, Finsbury Square is an established City address and whilst it wouldn’t command the £50-60 psf available elsewhere in the City, £40 doesn’t look unrealistic. So 14.4% yield? Maybe.
To add to the appropriateness of the sale, the Pound is now at a low exchange rate by any standards. By holding on to the property, one is also going long the Pound. This is coming from a country, Ireland, that just might end up with a new, weaker currency if and when it exits the Euro. The point is this was poor decision. Little or no downside and better than even for upside. Additionally, there is not need for cash other than window dressing, a la end of fourth quarter.
@JG
NAMA does not have to finance the property. It owns the property. There is plenty of equity in the property for NAMA to finance improvements if so needed.
@NWL you know i give JM a hard time on here, deliberately,but in all seriousness if they sold this at 14.4% IN PLACE income then NAMA should be shut down.Perhaps the tenant is relocating,kick out clause,i worked on this ‘square’ its a great location,but a mid teen yield there has to ‘hair’ on it.
@JG, on the other hand with mult-tenanted short term leases (likely if there is a planned redevelopment) then 60,000 sq ft @ £30 might not be unreasonable either giving you a 7.2% yield.
Which renders it a balance sheet loan,limiting your audience considerably.There is a liquidity crisis in London,try raising 25 mil buy in to do a 100 mil spec redevelopment,good luck.
@JW so NAMA should redevelop in London,then,say as opposed to Dublin,because they eh ‘own’ it ?
They owned the loan,not the re-development play,so NAMA should spec built a office building in London,or should they find a tenant first like State Street.
Which, ‘confidentially’ is looking for new headquarters in Dublin.
There is no EQUITY in the deal and the original borrowers are either skint or walking .
@JG
If there was no equity in the deal you might want to ask NWL how there appears an 8 million profit. We are not talking about redevelopment. We are talking about the prudence of quick selling a property that easily cash flows on NAMA’s books and has significant upside. As far as Dublin “financial” district property, I will take City of London any day. Let’s come back in three years and see what has happened to Dublin compared to London. If I remember correctly you have expressed repeatly your less than sanguine outlook for the former.
Jake take the money and run, in cash.
If half what I read and hear is true,then there sterling is looking at a 30% adjustment .
@JG
Are you dreaming of Ronnie and Maggie? Pound on par, hope you are correct. I have my eye on a nice flat in Belsize Park.
And Charlie negotiating for us instead of a repressed school teacher,partial to Charvet shirts myself.NAMA has ample sterling exposure bring in home boys,quickly .
@JG, The property has been multi-let on short term tenancies, pending redevelopment, for the past 3 years. It was 100% let (there is demand for short term leases). The planning permission was for 150,000 sq ft of offices. No-one in their right minds would fund speculative office development in London at present without either very deep pockets (aka Russian/Chinese mafia) or a pre-let. Pre-lets are really only available for office development over 200,000 sq.ft. presently.
Therefore the building was a hold, especially for NAMA. It was producing stable short term income off a cost to NAMA of £18 million. They chose to take the money (£25 million) and run. While it produced a bookable profit to them of £7 million, it also produced a possibly unnecessary loss to the taxpayer of circa £10 million.
That’s where property management expertise comes in. NAMA, in my opinion, have once again shown a lack of experience and “joined up thinking”. What is their overall strategy? To maximise returns for the taxpayer or expediency? Or indeed, do they have any strategy at all?
@WSTT we both are well aware they have no strategy,but i have no issues/problems with them tanking the London market,bring it on.
Dump the whole lot get out of sterling yesterday,crash the market in London,flood the place,did you bother to read the odious article from telegraph that NWL linked.SELL everything in London,get the British banks to mark their assets to market,let the fun and games begin !!
@WSTT hope it was a mid teen yield, distressed seller with boat load coming at ya……………..put everything in London for sale,everything,take the cash and run,yo just got ‘robbed’ or did we !
JG, As the clock at the Curragh race-stand says “Time tells all”.
NAMA has 9bill of assets we owe the British 4bill move the needle flood the place with distressed assets and short the UK banks !
The opposite to what they did to us on Anglo.
“If they aren’t able to destroy the desire for freedom, they won’t break you. They won’t break me because the desire for freedom, and the freedom of the Irish people, is in my heart. The day will dawn when all the people of Ireland will have the desire for freedom to show.
It is then we’ll see the rising of the moon.”
—final lines of the final entry of Bobby Sands’ hunger strike diary
@JG, The building was refurbished with the last 10 years and was in good condition. Can’t speak to its condition in 1991 – I was still in nappies! :-)
@WSTT according to the telegraph linked by NWL the problem was the new BREED of Irish…………….we were supposed to stick to the ghettos !!
And yeah that’s right we can move the market if we decide and whoops is that the sound of sterling crashing,gotta love the bulldog spirit,methinks they cant afford it,all bark no bite!
‘Part of the difference in the interaction with the UK property market was that rather than stick to typical Irish enclaves such as Cricklewood and Neasden in north London, this new breed of developers had very ambitious tastes, leading to Nama taking on property across the capital, from Kings Road in the west to the Isle of Dogs in the east.’
telegraph.
JG, In view of our recent loss of sovereignty to the Franco-German elite, Bobby must be spinning in his grave.
I like our hand,just wish we had Sean and a few other,oul fellas to play it .
Took the hit,incoming via London ,lock and load.
Word is that this sale closed yesterday, depositing £25 million into NAMA’s sock for Christmas.