It was interesting that NAMA’s first property for sale with vendor or so-called “staple finance” – that’s where NAMA waives up to 70% of the initial purchase price, converting it into a five year loan at about 4% per annum – was initially sold to a buyer who rejected the staple finance and instead offered cash. But alas the sale of the office block at One Warrington Place to Prudential fell through, and NAMA had to seek another buyer. The new buyer, understood to be an American investor, Northwood is taking advantage of NAMA’s staple finance so perhaps this incentive will be more popular than first thought.
In NAMA’s wide-ranging announcement this morning, conveyed by its chairman Frank Daly at a meeting of certified accountants inGalway, the Agency says
“NAMA expects to lend at least a further €2 billion in the form of vendor finance to acquirers of commercial property.”
This is a staggeringly high figure. Remember that NAMA paid €9.25bn for loans connected to Irish commercial property by reference to values in November 2009 and adding on a so-called “long term economic value” premium. By reference to industry indices, the property underpinning these loans is now worth €6-7bn, so NAMA putting up “at least a further €2bn” in staple finance which equates to €2.9bn if €2bn equates to 70% of the purchase price. That means that nearly half of NAMA’s Irish commercial property will be sold with vendor finance. NAMA charges a 2.5% margin over its cost of funds – which in turn is linked to the 6-month Euribor rate, currently 0.97%. It is theoretically possible that NAMA will offer staple finance outside the Republic of Ireland, but other markets seem to have had better banking recoveries than Ireland.
This announcement by NAMA suggests that the prospects of Irish banks lending for commercial property purchase in the short term are not good. NAMA will also be accused of distorting the true market with its staple finance, but with so much commercial property on its books, and the Irish commercial market worth less than €0.5bn last year, what is NAMA to do?
Could this drive commercial propoerties down? i.e. Certus and UB are looking to get out of this space. They might need to offer additional discounts to sell.
Overall, lots of bits’n'bobs out of NAMA today. Makes me think NAMA’s auditors mightn’t have played ball on portfolio valuations. And we’re getting the spin before the accounts are published. Though I had thought if the report was bad, we wouldn’t see it pre-referendum.
@Ahura, I understand the report and unaudited accounts for 2011 will be published over the next day or so, the ball is in the court of the Department of Finance remember, NAMA submitted both documents by 31st March and can’t publish until Minister Noonan places the documents before the Oireachtas.
If last year is anything to go by, unaudited accounts can be way off the mark. Looking back through your old posts it seems that provisions in unaudited accounts last year was 1bn versus the audited 1.5bn. So we can infer “NAMA isn’t able to value property”. Not exactly the message we want to hear. Quite honestly NAMA should have faced a strong censure for not being able to value their own portfolio. Or censure for being dishonest.
On this basis, this year’s unaudited accounts might look ok ;).
Where do you see the phrase “in Ireland” re the assets that will attract staple finance? It’s an assumption that you are making which may or may not be correct. If it was not true the NAMA would be lending 2 bn /13billion (according to their new leaflet 44% of all stock is commercial) = a much more sensible proportion of staple.
@Capoliman, I don’t see the phrase “in Ireland” in the announcement and that’s why the above contains the following
“It is theoretically possible that NAMA will offer staple finance outside the Republic of Ireland, but other markets seem to have had better banking recoveries than Ireland.”
I would suggest that NAMA now bundle their “stable finance” paper and sell it to the ICB. The ICB can then use it as collateral to borrow the cash from ECB they will need to give to the Irish “banks” when the bank runs get started in earnest. Then NAMA can use the cash from the ICB to get “stable finance” going again and sell the paper again to ICB. This all makes perfect sense, until the end. If you cannot get a hold of some Norwegian Krone, try to buy some of their bacalao. I hear it keeps for quite a while and tends to hold its value.
This was the first real opportunity for Frank’s new spin doctor to shine. And he gets a raspberry from me. It was an important speech, that was full of half-truths.
Let us examine the facts in Franks ‘real world” and separate the spin from reality.
Frank made the following statements:
a) “I would emphasise that NAMA’s primary objective, as set by the legislature, is to repay its debt and our overall strategy is geared towards meeting this objective over the shortest possible time span, subject of course to evolving market conditions.”
NAMA’s primary objectives are set out in the NAMA Act in Sections 2 and 10, and they read as follows:
2.—The purposes of this Act are—
(a) to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State, and
(b) to address the compelling need—
(i) to facilitate the availability of credit in the economy of the State,
(ii) to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy,
(iii) to protect the State’s interest in respect of the guarantees issued by the State pursuant to the Credit Institutions (Financial Support) Act 2008 and to underpin the steps taken by the Government in that regard,
(iv) to protect the interests of taxpayers,
(v) to facilitate restructuring of credit institutions of systemic importance to the economy,
(vi) to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy,
(vii) to restore confidence in the banking sector and to underpin the effect of Government support measures in relation to that sector, and
(viii) to contribute to the social and economic development of the State.
10.—(1) NAMA’s purposes shall be to contribute to the achievement of the purposes specified in section 2 by—
(a) the acquisition from participating institutions of such eligible bank assets as is appropriate,
(b) dealing expeditiously with the assets acquired by it, and
(c) protecting or otherwise enhancing the value of those assets, in the interests of the State.
(2) So far as possible, NAMA shall, expeditiously and consistently with the achievement of the purposes specified in subsection (1), obtain the best achievable financial return for the State having regard to—
(a) the cost to the Exchequer of acquiring bank assets and dealing with acquired bank assets,
(b) NAMA’s cost of capital and other costs, and
(c) any other factor which NAMA considers relevant to the achievement of its purposes.
So NAMA’s primary objective is not to repay its debt as Frank says simplistically. It is as stated in Section 2 “to obtain the best achievable financial return for the State” along with all the other objectives listed above; the most important of which relate to stabilizing the financial system in the State, addressing the compelling need to facilitate the availability of credit in the economy of the State and contributing to the social and economic development of the State, all the while protecting the interests of the taxpayers.
Frank has ignored these points because NAMA has failed in its objectives. So Frank makes up an objective, which if repeated often enough may become a self fulfilling “fact” and dim people’s memories of the reality.
In his speech to the 2nd Stage of the NAMA Bill 2009, Brian Lenihan said,
“The simple fact is that credit remains the lifeblood of any economy. It allows business to source funding for productive developments and to foster creativity and innovation so that we can become a more competitive, export-orientated economy. It allows individuals to access mortgage funding and finance the purchase of consumer goods. The only way to restore the flow of credit is through a cleaned up banking
system.”
None of that has been achieved. The remnants of bust our banks are still in denial and have not yet faced up to the mortgage and commercial losses that still remain on their books.
As Obama said in a speech about the banking crisis in the United States earlier that same year: “…whether we like it or not, history has shown repeatedly that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months — years of low growth, years of low job creation, years of low investment, all of which cost these nations far more than a course of bold, upfront action.”
That was the primary objective and the challenge, Frank. And NAMA, the banks and the government flunked it.
He also said:
b) “As we all know only too well, the property market in Ireland has continued to fall further over the intervening two and a half years. Assets located in Ireland are therefore worth less than their original acquisition price. On the other hand, assets located in Britain and elsewhere have generally appreciated in value and that has to some extent mitigated the impact of the decline in Irish prices.”
Not so. Over the past two and a half years, trophy assets in the West End of London have increased in value. Residential assets in the UK generally are at best flat and commercial assets elsewhere are patchy, with no increase in value outside of London. The truth here is that NAMA is not facing up to the real declines in value – and has by this speech formally adopted the “pretend and extend” strategy of “kicking the can down the road”, while seizing the economy up further.
c) “With due diligence now complete however, and having had the opportunity to assess the property portfolio in more detail, our view is that it has more potential than we originally had reason to expect.”
As I predicted several months back, this is the excuse to morph into a property development company. It wasn’t bad enough to have every Tom , Dick and Harry in the country become busted flushes in the game, now NAMA wants to nationalize the insanity. I think that it was George Bernard Shaw that described the country as an open air lunatic asylum. A national property development company run by civil servants with no commercial acumen, but with huge potential for corruption is not what we need.
d) “Our best estimate, at this stage in the analysis, is that some 9,200 residential units linked to NAMA loans are generating rental income from tenants.”
It is ironic that the income from these residential units alone should bring in the best part of €100 million per annum, enough to pay 50% of NAMA’s interest bill on its Irish portfolio – and it still can’t make a profit.
e) “In about two-thirds of cases, we are satisfied that we can work with debtors who have demonstrated that they can be commercially viable and where we feel there is sufficient trust and goodwill to enable us together to extract the best value from the assets. We see our ongoing engagement with these debtors as collaborative and the establishment of trust is therefore very important to us.
In dealing with debtors, we have attempted to act reasonably and fairly.”
Well now Frank, this statement flies in the face of historical fact. In the USA and Sweden, only 30% of developers survived, and their “bad banks” (RTC and Securum) were much more commercial than NAMA. The reality is that the debtors do not trust NAMA. There is no trust, no goodwill and no relationship. You cannot have a relationship if you are a turkey being prepared and readied for stuffing. And I do not think that Frank is naïve enough to believe that the debtors do not know their ultimate fate under the NAMA process. The debtors know that it’s the fable about the frog and the scorpion again. Just for the information for the spin writers in NAMA, this is what the debtors think -
One day a scorpion is hanging around the side of a stream. A frog happens by on his way across the stream. The scorpion cannot swim so he stops the frog and asks if he can climb on his back for a ride across the water.
“Do you think I am crazy?” The frog says. “If I let you on my back, you’ll certainly sting me and I’ll sink in the water and die.”
The scorpion replies, “Hey, just think about it for a second, I can’t swim. If I sting you, then you’ll die and I’ll sink and die too.”
The frog thinks for a second and decides that makes sense, so he proceeds to give the scorpion a ride across the stream.
About half way across the stream, the scorpion stings the frog. The frog screams,
“What are you doing? Why did you sting me? Now I am going to drown and die and you are going to sink and die too.”
The scorpion answers, “It’s because I am a scorpion. It’s just my nature.”
That’s what we think Frank. There is no trust. Nobody wants to work with NAMA – and I’ve talked with most of them.
f) ‘And there is a quid pro quo for keeping them in business. For instance, the debtors must grant us charges over unencumbered assets or reverse asset transfers to connected parties. Some of them find this too exacting and will not agree to this.”
This is all part of the lack of commerciality in NAMA’s thinking. It has taken the Agency two and a half years to realise that they cannot sell the Irish assets to anyone except the home team. The problem for NAMA is that the debtors know that giving away or reversing assets to NAMA guarantees nothing except indentured servitude for the next eight plus years with the knowledge that any personal assets remaining will be taken after that time.
g) “We do not consider ourselves under pressure to sell a substantial part of our Irish portfolio now at current rock-bottom prices, particularly given that it makes a lot more sense to sell many of those assets in two, three or five years’ time in a stronger market after we have developed them and enhanced their value.”
Translation: We are screwed. There is no market and no bank credit for anyone to purchase these assets except for the vulture funds, who will buy them for a pittance and then sell them for a fat profit in five years time, making us look like idiots – so we are going into the property development business.
h) “If, for whatever reason, we were forced into a fire sale, the only beneficiaries would be those who have cash to invest and who would benefit handsomely by purchasing in current subdued market conditions where there would be very little competition. The taxpayer, on the other hand, would lose heavily.”
Translation: We would have to declare an even more humungous loss if we sold to all these suitors in the little round caps. We want to go be property developers, pretty please?
i) “Yes, we have sold assets in Britain which would be regarded as prestigious but we have also sold many other assets which have attracted little attention. And where we have sold we have got a good result for the Irish taxpayer in the form of the very attractive prices achieved.”
Now this is a pure “porky”. Most of the Irish sales in London, with the notable exception of the trophy assets” have been at the upper end of the yield spectrum. The Irish, and NAMA particularly, are viewed as “marks” by the London agents. The sales are seen as distressed and NAMA has not achieved “very attractive prices”. But maybe it depends what your standards are. I am aware that NAMA has sold properties in London; and that those properties have been passed on at enormous profits almost immediately, despite protests from the debtors. I am aware of properties where NAMA’s selling agents were also involved in the purchasing entity. I am also aware of properties where for reasons best known to itself, NAMA has not taken the best price on offer – but more of that anon.
j) “In some market segments – large offices, for instance – supply shortages are already emerging and we need to address that now.”
Translation: We really, really want to be property developers.
k) “We have now put in place within NAMA an Asset Management team with long-standing property expertise whose sole focus is on identifying and developing assets, in conjunction with debtors, receivers and joint venture partners, so as to create and add value. The team’s activities will range from initial appraisal of significant development projects, where there is proven or anticipated market demand, right through to financing and overseeing the delivery of those projects”
Translation: We are all set up and ready to go….. We’ll even do JVs if we have to.
l) “We have also been funding a number of retail developments, including the next phase of Charlestown Shopping Centre in Dublin which has been pre-let to tenants and to which we have committed €13m to date”
Translation: Have you met our new friend Mick “Will he f**k” Bailey?
m) “We are willing to provide funding of up to 75% of an asset’s purchase price to suitable purchasers in an effort to stimulate sales activity. One transaction already completed is the sale of 1 Warrington Place, a transaction facilitated by vendor finance provided by us. It will also involve a favourable shift in credit risk from debtors to more creditworthy investors.”
Translation: We want to get rid of these deadbeat borrowers and lend to our friends in the Institutions.
n) “Before the end of the year, we aim to launch at least one qualifying investor fund (QIF) as a way of attracting institutional investors such as pension funds and sovereign wealth funds to buy properties on a phased basis.”
This is an attempt to cut out the consolidators, CLO originators and vulture funds who look for 20% plus IRRs with several fee “waterfalls” and get directly to the institutional investors, pension funds and sovereign wealth investors who provide the hedge funds and private equity capital brokers with most of their backing.
o) “The recently-launched 80/20 Deferred Payment Initiative is aimed at owner-occupiers who are interested in house purchase but nervous about the risk of negative equity. Whilst the initiative has been launched on a pilot basis in respect of 115 family homes in Dublin, Meath and Cork, the intention, based on successful uptake during the pilot, is to make the protection more widely available across our housing portfolio. I am pleased to say that the early signs are positive, with 16 units sold and reservations placed on another 16 of the 115 houses in the pilot phase. The value of these transactions generated in the two weeks since launch is €8.4 million.”
I wouldn’t be boasting about this if I was NAMA. It registers a bit above Merlyn Auctions, but well under Space / Allsop. Sixteen sales is derisory where NAMA put its best foot forward, with the best newly built units it had to launch its “exciting” new product. Booking deposits don’t count.
p) “There are more and more indications that the economy, and with it some important segments of the Irish property market, have turned the corner. While there have always been some transactions even in a subdued market, there is now evidence of sales volumes increasing. ….. the residential rental market is strong and pipeline demand for premium office space from FDI companies is encouraging”
What tablets do they take with their coffee in NAMA? I’d like some of them, because I see no pipeline demand of any strength for premium office space currently. Certainly none that portends an uplift in the market. And if you read the agents’ quarterly reviews, they don’t see it either.
q) “So let me be a little heroic – we have a distance to travel but there is a confidence in people and a positive energy that has been missing for a while but that I think is returning.”
Ah, now Frank…. Come on. Gimme a break.
Just an addendum in relation to Frank’s speech. It was also the things that were not mentioned that causes concern. He made no mention of the €3.1 billion that has gone into the black hole that is Anglo’s liabilities. It is getting close to repayment date – so I would have expected some comment. He also did not mention whether or not EC Competition approval had been received for the mortgage insurance initiative.
There was no mention either of why it was necessary for NAMA to have good relationships with the debtors. One of the main reasons is that NAMA has discovered that its prospective purchasers (the equity capital funds) require 100% correct and full security and legal documentation in relation to their purchases; something that the lending banks, particularly Anglo, did not bother too much about.
Environmental and Health & Safety liabilities have become big issues with purchasers. Many of the engineers and architects involved in the construction of the buildings are closed and gone – many emigrated. The long knowledge has been lost. Without the borrowers on board, NAMA has no idea where to go to repair the missing warranties and documentation. This affects the number of quality purchasers available to them and the ultimate value that they can recover.
It is rumoured that IBRC is suing one of its old legal advisors. I wonder why?
@WSTT, a formal information request has been submitted to the European Commission and it has until 30th May to respond with the decision and documents relevant to the decision including protestations on competition grounds.