“If past history was all there was to the game, the richest people would be librarians” Warren Buffett
There will be a review on here of NAMA in 2011, but it will be published over the New Year holiday when we’re likely to be nursing hangovers. This is a look forward into 2012 at one of the world’s biggest property asset management companies.
1. The NAMA advisory board
Following the review of NAMA by ex-HSBC career banker, Michael Geoghegan in October 2011, Minister for Finance Michael Noonan has announced a new quango, a NAMA advisory board which will advise the Minister on NAMA’s activities. The Geoghegan review was published in December 2011 and was described by one departing NAMA board member as a “watershed”. Minister Noonan has promised a Direction pursuant to the NAMA Act to establish the advisory board and its remit; yet three weeks after the announcement, we still await the Direction. And having personally spent some time recently reviewing the European Commission decision approving the NAMA scheme, I really can’t see this board having much of a role interfering in NAMA’s activities. And it is really a sad state of affairs when the Minister needs an advisory board to tell him what the 700-odd staff in the Department of Finance should already be telling him. NAMA might indeed benefit from more asset management and property market experience, but it is hard to see how this advisory board will work, even if it does ever see the light of day.
2. NAMA asset management in Ireland
It’s a common mantra that the Irish property market will pivot on decisions at NAMA. Looking at NAMA’s residential portfolio, that seems an exaggeration. NAMA reportedly has 10,000 residential units under its control. Ireland has a total housing stock of just over 2m completed units, with some 300,000 vacant though some of these will be holiday homes. Consensus estimates are that the country has an overhang of about 100,000 units, that is, empty homes above the long term average. So NAMA’s 10,000 dwellings are not insignificant, but they hardly give NAMA a dominant influence in the Irish residential market either. Having said that, the long-awaited negative equity mortgage product is set to be launched in coming weeks; some housing will be offered on an arms-length basis for social housing; NAMA may dip its toes in auctions and given the 10,000 mortgage transactions in 2011, NAMA has the capacity to have an impact if it offloads a significant proportion of its portfolio in the short term. But as far as I can see, NAMA’s offerings to date which have included John Fleming’s Cork residential property, have not had any significant impact. And I don’t expect 2012 to be much different.
With respect to commercial property, NAMA is said to control €9bn of property by reference to November 2009 valuations, probably €6-7bn in today’s terms – that’s the equivalent of over 1,000 Anglo HQs. That is significant in an Irish market where transactions totalled less than €500m in 2011. NAMA is offering so-called staple finance – offering loans to potential buyers at 4%-odd for up to 70% of the value of the property; again this makes NAMA significant to the commercial property sector. So NAMA does indeed have the ability to shape the commercial market, and I would expect the Agency to be active in disposals in 2012.
With respect to development land, again NAMA has a lot on its books, the €50m 25-acre former Irish Glass Bottle site in Ringsend inDublin might be the jewel in the development land crown but NAMA is understood to control thousands of acres of development land throughout the country. But with little short-term development in prospect will NAMA sell or hold? Probably “hold” would be the guess on here.
3. NAMA asset management in Northern Ireland
If you thought property development and investment was an obsession on this side of the Border, you should really take a look at Northern Ireland. It has a GDP of €40bn compared with the Republic’s €160bn and its economy is dominated by public sector spending; corporate tax harmonisation with the Republic appears to be several years off -if it ever happens at all – so foreign direct investment is not likely to dominate its economy to the same extent as the Republic’s anytime soon. Add to this the historical sectarian dimension, the small local political scene, and you end up with a property market that makes JB Keane’s The Field look normal, un-obsessive and relaxed. NAMA is at pains to stress that it will neither hoard nor engage in fire sales in Northern Ireland, and its aim there (as elsewhere) is to maximise the value of its portfolio. Given Northern Ireland’s residential property is 44% off peak, and recorded a slight increase in Q3, 2011, you might think NAMA might bring residential property to market sooner rather than later. Ditto with commercial property. NAMA has said its Northern Ireland portfolio comprises undeveloped land GBP 2 billion (€2.4 billion), investment property GBP 1 billion (€1.2 billion) and “property and land under development” GBP 350 million (€400 million); these are nominal values, NAMA is likely to have paid far less for these loans. NAMA will be closely watched to see what it does with development land which has crashed 90%+ from peak values. NAMA also faces competition from a Northern Ireland Executive which is to sell off GBP 540m (€650m) of property over the next four years.
4. NAMA asset management in Britain
“Sell, sell, sell!” has been the NAMA approach to Britainin 2011, particularly in and around London. Not only have prices recovered from NAMA’s valuation date of November 2009 but some commentators suggest that Britain is close to a peak in terms of prime London prices. A recent (innumerate) Financial Times article reported “speaking to investors at Davy’s, the brokerage, inLondon on Friday, Mr McDonagh gave the first detailed breakdown of Nama’sUK loan position. Of a total €10.5bn in the country, €6bn are inLondon and the bulk of the remaining €5.7bn in the surrounding counties.” The betting would be that in light of NAMA’s strategy to date, these assets will be disposed of sooner rather than later.
5. NAMA asset management in rest of world
Understood to total about €2bn in terms of NAMA acquisition values – according to the NAMA CEO in October 2011 “our main assets in continental Europe, by value, are in Germany, France and Portugal and we have smaller pockets of assets, ranging from €10 million to €20 million, in Malta, the Czech Republic and Poland. Collectively, these add up to €120 million so it is not a huge amount”. And beyond Europe NAMA is understood to have assets in theUS (and it seemsCanada if only Ray Grehan’s €1m apartment). I don’t believe NAMA has anything of significance in Brazil,Russia,India or China.Cape Verde has not been mentioned in the context of NAMA, and NAMA’s recent advertisement for private investigators didn’t require expertise in South Africa. With recoveries in prices since November 2009 in theUS (in general), France and Germany, you might expect disposals in these territories if NAMA pursues the same strategy as the UK.
6. NAMA staff
Remember when NAMA was a glint in the late Brian Lenihan’s eye and was to have a staff of no more than 50? And then it rose in increments to 100, then 150 and now stands at 200. The Geoghegan review recommended a doubling to 400, mostly to come from transferring resource presently sitting in banks managing smaller NAMA loans. In Opposition, Enda Kenny wondered how NAMA could manage a €70bn portfolio with so little when compared to other large asset management companies. So don’t expect retrenchment and redundancies at NAMA anytime soon. What about the senior personnel? A common criticism is that it is of a civil service mould and unable to manage the cut-and-thrust of commercial life. The view on here is that we don’t have the information to tell one way or the other yet but it seems that the loan acquisition phase was handled competently. So I would expect Brendan McDonagh to remain in position. And frankly, in terms of chairmen and NAMA’s almost impossibly difficult position between Government initiative and commercial exigency, I think it would have been difficult to find someone better than Frank Daly. Rumour had it that he wasn’t to Minister Noonan’s liking but will the highly pragmatic Minister for Finance risk an unproven pair of hands in such a sensitive position? I wouldn’t be surprised however if NAMA’s most senior property man, John Mulcahy, were to seek greener fields. Within a highly – and probably necessarily – bureaucratic organisation and understood to be on “only” €300-400,000 per annum when the local commercial property market is likely to start stabilising, you’d have to wonder what will keep John at NAMA – it’s unlikely to be public or political adulation!
7. NAMA transparency
NAMA is set to come within the ambit of Freedom of Information legislation in 2012, but the view on here is that this won’t materially change NAMA’s transparency. Remember that Gavin Sheridan at thestory.ie had a success of sorts in September 2011 when he convinced Ireland’s Information Commissioner to classify NAMA as a public authority, and thus to be encompassed by legislation which allows environment-related freedom of information requests. I’m not aware of this success leading to any new information from NAMA. And remember that even when NAMA becomes subject to proper Freedom of Information legislation, it will still be able to hide commercial information, which is probably what we need most to see to be convinced that NAMA is meeting its primary objective of maximising returns from its portfolio. NAMA must offer up its staff for Oireachtas committee hearings when asked, so the public accounts and finance committees might be able to extract better information on how NAMA operates; the problem is that NAMA’s chairman is so skilled in the arts of Irish public discourse that he can occlude practically anything; NAMA’s CEO is mastering the art and it will be increasingly challenging to extract meaningful information. There is a suggestion the Comptroller and Auditor General will be conducting a “commercial audit” to ensure NAMA is disposing of property in the best manner, but I wouldn’t hold my breath. A few well-placed Parliamentary Questions might extract something of value. But all-in-all, I would expect NAMA in 2012 to remain a secretive organisation.
8. Profit and Loss
NAMA reported a full-year loss of €1.1bn in 2010. The betting on here is that it will make a loss in 2011 but it will probably be less than 2010 after Minister for Finance, Michael Noonan saved NAMA’s ass in Budget 2012 by drawing a line under the proposal to interfere in Upward Only Rent Review leases and by lowering commercial property stamp duty from 6% to 2%, and preserving existing tax incentives and extending others. So the expectation on here is that IPD and Jones Lang LaSalle will both report reversals of the substantial declines in Q1-Q3 of 2011 when Q4 is reported in January 2012. But how will NAMA do in 2012? The betting on here is that it will break-even, with impairments following declines in Irish residential property offset by an operating profit and a profit on sales in theUK, and the Irish commercial property stabilising.
When you consider the colossal size of the NAMA project, its dependence on third party service providers and its large volume of individual transactions, it is nothing short of miraculous that there hasn’t been any scandal of note. Poor old John Mulcahy was spliced with yachts and developer cronyism in 2010 but that was probably unfair; in 2011, solicitor Brian O’Donnell who is on NAMA’s legal panel – the work for which has now been completed – ran into money difficulties with Bank of Ireland but NAMA was quick to say his services had not been used by the Agency, and frankly even if they had it wouldn’t have been critical. Senator Mark Daly crops up every so often with allegations against NAMA, but when challenged never seems able to provide any detail. An Taoiseach Enda Kenny committed a stupid gaffe in June, when he claimed shenanigans in NAMA’s disposal of assets, particularly stupid as British and Northern Irish members of parliament were listening, but he withdrew the criticism and pronounced himself happy with NAMA a couple of days later. Whilst it remains a concern on here that NAMA always seems to be achieving the lower end of sales prices in theUK, nothing concrete has yet emerged to challenge the notion that NAMA is doing a decent job. During the year, there were a couple of suggestions of excessive entertainment at NAMA for new staff members. Indeed in December 2011, a private message was received on here suggesting NAMA was having a lavish Christmas party at a 5-star hotel but when asked, NAMA confirmed that its staff had no company-funded party this year at all. So what about 2012? Expect some claims about poor performance at some receivers/sales agents. If NAMA has 200 staff on its books and effectively employs another 400 at the banks, then it seems almost inevitable that one of them will cock-up at some point.
10. The unknown unknowns
Remember that it was Fine Gael policy at the start of 2012 to farm-out NAMA’s asset management role to 3-4 asset management companies; mind you, Fine Gael had a number of policies that never left the drawing board. And for all the swagger from domestic politicians, remember NAMA is a scheme which required European Commission approval, and any significant change to its remit or operations is likely to entail additional consent at European level. There was hysterical reporting that NAMA might be sold off, following leaking of the Geoghegan review but the only reference in the actual review was to the fact that as NAMA approaches the end of its 10-year lifespan, there may be a need to sell off whatever rump remains. If there is no euro at the end of 2012, what will that mean for NAMA’s portfolio? It would depend on how the euro broke up, what became of NAMA bonds, how loans to developers denominated in euros would be converted – but the fact that NAMA was sitting on real property assets might act as a brake on losses. On the other hand, if the ECB floods the EuroZone with freshly-printed euros, might that act to support property prices through inflation? Will the relationship between NAMA and its developers change into a more co-operative and less confrontational one? Probably not by design but nature might take its course as both sides recognise the realities.