“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.
9. Scandal
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.
@NWL
“If past history was all there was to the game, the richest people would be librarians” Warren Buffett
If you were trying to make a point about the level of cynicism that prevails in today’s “financial markets”, you hit the nail squarely.
As a fatter of fact, librarians should be the wealthiest people in society. I would think the Irish might be the most knowledgeable regarding the importance of preserving the past given the history of Ireland and its role during the dark ages.
People like Mr. Buffett, who are privileged to have inside information and direct contact to the powerful in government, which make there so-called financial acumen a joke, are what is wrong with our own “dark ages”. Never forget that Madoff was chairman of the NASDAQ all the while he was cheating his friends.
As usual, an interesting, balanced and well researched report, NWL. I could write a book in response, but I’ll control the urge. I’ll just leave the balanced opinion to you and add a few comments from one that interfaces with NAMA on a working basis. I would preface it by saying that the following is my own opinion rather than fact. We will see how prophetic we both are at the end of next year.
1. The NAMA advisory board
To me, this is Michael Noonan’s “Trojan Horse”. He has never been happy with the fact that the economy is controlled by a quango over which he has little or no control. NAMA is an elephantine organisation that has the potential to completely collapse the internal economy. By setting up the advisory board he is hoping to enforce his thinking and policies on the MAMA executive and usurp their power. Michael Geoghegan is General of the “shock troops”. One who will report to Michael and carry out his wishes. Within 12 months either Michael Geoghegan or Frank Daly will be gone. Frank will see Mr Geoghegan for what he is intended to be. It is not possible for both to survive.
2. NAMA asset management in Ireland
NAMA has already tested the residential market on a “wholesale” basis with the Grange at Galloping Green, Stillorgan. It was left with egg on its face and is looking at a 20% loss on its purchase price. It has dropped its sale offering and hopes to sell the units singly. But its expectations are too high and it will fail in this too, unless it accepts the reality of the marketplace. It is learning the hard way that Dublin is not London. It is also learning the meaning of “liquidity” and how that is needed by intending purchasers – hence it will provide loans next year to prospective purchasers of its residential units in order to support the price level it needs to achieve. The big question for next year is; will the public perceive this wheeze for what it is – support for an unsustainable price for a market in continuing decline – and stay away? My guess is for a limited success because of the provision of mortgages, something that our zombie banks are not providing – despite their protests to the contrary. It is only when we have real liquidity available from the market, and not from NAMA, that we will we see a bottom to the residential market and a genuine reversal of residential values.
In relation to commercial property, NAMA has a short term opportunity to sell its low-hanging “cherries” in Dublin for a yield in excess of 7% per annum. It is a short term opportunity because the international funds that have been attracted to Ireland for the past 12 months have realised that there are better and more secure investments emerging at equal or better value in Europe and the UK, as big banks position themselves de-leverage massively over the next two years. As John Gallaher has pointed out here, development funding is no longer available in London and, for other than trophy assets, the UK market will contract due to lack of liquidity next year. The Lone Star group of funds that purchased Anglo’s distressed loan book in the USA has raised €8.5 billion to purchase bank assets in Europe and although it has bid for Irish assets, claims anecdotally that the real opportunities lie in european assets and that it is impossible to do business with NAMA. So, I expect to see a lessening of interest in Irish assets from international funds in 2012, especially in view of NAMA’s current and previous attitude to those who have approached it with a view to purchase.
With respect to development land, NAMA has no option but to hold. There is no market for development land in Ireland. Nor will there be until there is demand from local developers and the banks provide liquidity on a commercial basis to those developers. We are a long way yet from political and media – and thereby public – acceptance of this indisputable fact. Therefore, by extension, we are also a long way from job creation in the construction industry.
3. NAMA asset management in Northern Ireland.
Unlike John Ignatius Quinn, this is not an area that I am familiar with commercially. But suffice to say, I admire the commercial nous of our neighbours in the independent republic of South Armagh, who know how to deal with such issues as bank repossessions. The story is doing the rounds among the locals how one indebted borrower in Crossmaglen, who could no longer afford his repayments, imported a caravan into his garden, moved into it and handed the keys of his house back to the bank. After repeated attempts to sell to interested parties, in a scene reminiscent of “The Field” (I know, WGU) the bank gave up and sold the house back to the previous “distressed” owner for £50,000. I don’t know if they went so far as to give him a loan – but I am aware that they know how to solve their problems and deal with “bully boy” bankers in Crossmaglen. The title of “Latinos of the North” or maybe that should read “Sicilians of the North” goes to the sovereign citizenship of South Armagh. Whatever success NAMA may have in selling the quality real estate in Belfast or Derry, if the story above is any indication, its task will be considerably more difficult in the more remote rural areas where the Kroll Security writ does not run. For, whatever may be said by the politicians, the animosity that divides the North still simmers below the surface – scratch them and they bleed orange and green rather than red. And they look after their own. Not an easy market for the credulous Dublin civil servant types in NAMA.
4. NAMA asset management in Britain.
Yes, NAMA’s policy here is to sell at any price above the NAMA purchase price, or, it could be said, at any price. The Agency has been lucky, because the market for quality assets, especially quality income producing assets, has been hot. There is an argument to be made that a policy of holding the best assets and amortizing them over a 30 year period, then selling into a different market 6 years from now would have produced a much better result for the Irish taxpayer. For instance, in simplistic terms, if a NAMA waited to recoup a loan of £10 million producing 6.5% annual rental income for 6 years, it would have earned £3 million in interest (at a rate of 4.5%) and reduced the loan to £9 million. But that analysis is too late now. But it does show that the assets should have been managed and considered on an individual basis rather than the shotgun approach of “just sell!”
5. NAMA asset management in the rest of the world.
NAMA’s assets in the USA consist mainly of development projects. The Irish banks retained their property investment loans and these were subsequently sold as the banks’ loan books were sold. So NAMA has been left with the development sites. It has been trying to tidy up the underlying security on these as much of it is incomplete. The Irish banks (especially Anglo) sometimes lent off the back of Irish assets, by increasing the limit on the loan, as it was too much trouble to bother with US legal requirements. Hence, I believe that they will be hard pressed to recover their purchase price on these assets as the US appraisers do not normally take security issues into account when valuing the asset. Also they have the problem that liens by unpaid subcontractors and suppliers have to be settled before the asset can be sold; and that Real Estate taxes in the USA, which average about 2% annually of the appraised value, take precedent over all other interests. I do not know the constituent components and the breakdown of NAMA’s assets in Europe, so I won’t offer an opinion on them.
6. NAMA staff
Here we go…. I don’t disagree with most of your comments. But, I do not believe Frank will remain in his position much longer. His job is almost done and he is as useless as a teat on a bull for the marketing job that needs to be done in the future. He is a debt collector in the CAB mould. His job was in instilling fear into the borrowers and whipping them into line to comply with the
demands (not wishes) of the Agency. The inmates were moulded into his image – non-smiling, grey faced zombies without a hint of personality. His policy was effective but if NAMA is to be successful the ethos and culture need to change. That means a change at the top. Brendan will not go because he is a civil servant in the true sense of that term. He is a round peg in a round hole. He is there for the life of the agency.
Now, John Mulcahy is another animal entirely. He’s entrepreneurial and totally out of his comfort zone. He is gold dust to any of the funds that want to pick the prime assets from NAMA’s horde. Just as BOSI chose Green Properties as their receptacle and “platform” for any assets have added value potential, John is the genie that will open the Aladdin’s cave to an astute fund.
I would not expect him to refuse the undoubted golden “hello” that he will shortly receive when NAMA goes into its selling phase.
The rest of them are stuck – literally – in a dead-end job. Historically ex-bankers are in the main unemployable. They know nothing else except to be a banker, so they collect their pensions and retire. Ex-NAMA employees are stigmatised. They have made enemies. They will never be employed in the commercial world again. That’s one reason they need the double pension and will strive to prolong the lifetime of the Agency…. Enjoy it, guys, because this is it.
7. NAMA transparency
Talk about a classic oxymoron! This is the most secretive organisation in the State – bar none. The employment process is akin to induction into the CIA complete with warnings of immediate censure if a single word escapes from Treasury Building – unless it’s official “spin”, of course. Even the documents produced to the borrowers to sign (even though they are rejections – now with “letters of support) have clauses that require total confidentiality. In other words – such documents and agreements don’t officially exist. Not a glimpse of light escapes the darkness that is NAMA.
8. Profit and Loss.
The easy profits have been taken. We are now down to selling the remnants of the trophy assets and into what might be termed the quality secondary assets. But time is running out and the London market, where NAMA gathered in the cash, is turning. If it announces a profit this year it is a “fudged” one, because it is not recognising the true losses on its remaining portfolio and despite a couple of sales of commercial property investments in Dublin, the market remains extremely thin. And stable and more welcoming markets in Europe are opening up to the international funds. In summary, whatever profits are, or are not, announced for 2011, I continue to believe that NAMA is on course to lose €10 billion plus over the course of its lifetime. I have seen nothing from its performance to date that will alter that outcome.
9. Scandal.
Forget about the tabloid media tales of parties or dinners on yachts. This is the petty cash column compared to what can happen when (rather than if) we get a “rogue trader” in NAMA’s assets. As you say, there are stories circulating already of receivers underselling assets in the London market and even selling those assets to funds where they have retained an interest. There are rumours of NAMA sweetheart deals through receivers. This will only escalate as NAMA employs more receivers and it is one of the reasons that NAMA likes to sell through the borrower, using the subterfuge that it is the borrower who has requested the Agency for “permission” to sell. The very concept is laughable to all but the the inmates of Treasury Building. Scandal? It’s inevitable.. Just a question of time.
10. The unknown unknowns.
Where would we be without Donald Rumsfeld? The biggest unknown relates to what might happen if Italy, France or Spain goes down in the next three months. If it happens, it will take the property market and NAMA with it.
You are right to cite the relationship between NAMA and its borrowers as one of critical importance. Like it or not, they are wedded in a mutually dependent embrace. NAMA needs the developers to work out and refinance the remainder assets where at all possible although they will not admit it yet. And those developers that decide to stay and comply with their master’s demands, need to rebuild their future. Neither of them like it! The animosity and mistrust between the parties is palpable, if surlily suppressed. It is no basis for a business relationship that needs teamwork and respect to succeed. This year will tell if a mutually acceptable working relationship can be formed. More than anything else, expertise in marketing and in asset disposal is needed at the very top. The CAB mentality has to change in 2012, or NAMA is doomed. The UK bankruptcy option is too easy and attractive for its borrowers.
Just one final point on 2012 predictions. I believe that next year will see the start of “bundled” sales as we move away from the sale of single headline trophy investments. I think that the most obvious of these will be portfolio sales, where developers will seek external funds to buy their whole portfolio out of NAMA in one lot. A difficult task in the current environment, but a process that will begin next year.
A final prediction for 2012, nothing to do with NAMA, except that it will save them considerable grief, but because the euro “crisis” will inevitably be sorted out next year, the DOW will finish the year 20% plus UP after much volatility in the first 6 months.
@WSTT excellent post,and happy new year to you too,re point 5 above foreclosure wipes out any sub’s liens,but correct unpaid RE taxes run with the RE.Assuming,they have good title they should foreclose out these positions,if they dont then sell the paper.NAMA will get ‘money whipped’ or pay more in fees than they recover.They along with ALL Irish Banks ‘investors/speculators’ were considered a ‘soft touch’ or stupid money.As there is no ‘dumb’ money in town,anymore there is no clearly defined exit strategy.
They will not recover anywhere close to purchase prices.
Linked a innovatieve way to sell development land,was in this weeks WSJ,may provide an exit for them at home and abroad.
“But what’s particularly noteworthy about the deal is that LNR’s $25 million purchase price will be paid with $12 million in cash and debt. The remaining payment comes in the form of a profit-sharing agreement under which the Navy will receive 5% of all land sales that LNR makes to homebuilders on the site. The Navy expects this arrangement to be worth $13 million over the next decade, but the amount could be much less if the project is unsuccessful”
“In November, the Department of Defense eliminated that requirement in favor of a new type of arrangement, in which the government is allowed sell land at a discount price and share in the profits generated by developers on these land deals.”
http://online.wsj.com/article/SB10001424052970203391104577124620840702682.html
@JG, And a very happy New Year to you too, John. NAMA may have been taking lessons from the LNR. They have been talking to some residential developers on the basis that when the market shows signs of life, the developer (or a separate entity) obtain funding for a showhouse and, say, 10 units from any one of the banks still standing (or at least on one knee), or indeed from any funding source. Subject to sales, the re-financing entity would provide liquidity to the developer on a phased basis.
NAMA would receive all proceeds of sale, less approximately 8% to 10% (subject to negotiation) to the developer for his overheads and profit. NAMA’s obvious preference would be that this deal is not actually done with the original borrower/developer, as the agency’s attitude to its debtors is still one of vindictiveness.
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