Some of this blog’s audience will have little experience or interest in commercial property, and may be more interested in residential property and NAMA’s activities in that area. In truth, NAMA’s 13,200 Irish dwellings represent a small drop in an ocean of 2m Irish dwellings of which 290,000 are vacant and where there is a vacant overhang estimated to be 80-100,00 dwellings. Given that NAMA has until 2020 to deal with Irish residential property, the annual impact of its activities in this area will not be huge. Contrast that though with commercial property where NAMA says it paid €9.25bn for loans relating to Irish commercial property, property now estimated on here to be worth €6-7bn. Given the total Irish market was worth less than €0.5bn in 2011, you can readily see that NAMA is a major, if not dominant, player in commercial property or Commercial Real Estate (CRE) as the professionals call it.
So NAMA’s introduction of so-called “staple financing” or “vendor financing” in 2011 for its CRE was noteworthy. “Staple financing” is where NAMA converts part of the sale price into a loan which the buyer pays to NAMA over a period of years. For example, NAMA might sell a property for €100m and the buyer puts down €30m in cash, the remaining €70m becomes a loan which the buyer pays to NAMA, with interest, over a period of years. So far we know about one NAMA property sold with staple financing –One Warrington Place bought byUS investor Northwood earlier this year for about €27m.
NAMA also has a financing scheme for residential property which it launched in May 2012, generally called the “negative equity mortgage” but referred to by NAMA as the “80:20 Deferred Payment Initiative”. This was initially announced in the first half of 2011 but it took a year to get approval for the scheme, including approval from the Competition Commissioner at the European Commission – a formal request for the approval documentation has been made on here and the results are expected next week.
But NAMA didn’t seemingly seek European Commission approval of its staple financing arrangement, which may have a far greater impact on the Irish property market than the negative mortgage product for residential property. This absence of approval may shortly become a problem for NAMA.
NAMA’s competitors are privately asking how they can compete with NAMA in disposing of their property when, because of their smaller size, lack of Government backing, lack of cheap financing – remember NAMA is mostly financed by “senior debt” bonds which cost NAMA about 1% per annum – they can’t offer their property with staple financing.
On Wednesday this week in the Dail, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance, Michael Noonan to lay before the Dail the standard terms of a NAMA staple finance deal. Minister Noonan said there wasn’t a standard set of terms. The full exchange is here
“Deputy Pearse Doherty: the full terms under which the National Asset Management Agency provides staple financing or vendor financing to buyers; and if he will lay a copy of the standard terms for the provision of such financing before the Dáil. [28479/12]
Minister for Finance, Michael Noonan: I am advised by NAMA that there is no single standard set of terms for stapled debt which NAMA may offer to parties acquiring commercial property from NAMA borrowers or receivers. Terms quoted will vary to reflect the attributes of various commercial property categories and individual properties, the varying strengths of tenants and leases, and the strength of counterparties/property purchasers. NAMA advises that only strong and reputable counterparties will be considered for stapled finance. For instance, NAMA advises that for prime investment properties, that is properties whose investment characteristics include, for instance, good location and strong tenants on leases with long maturity at realistic rents, which would qualify for the most generous loan terms, NAMA may offer up to 70% of the purchase price for a period of 5 years at a typical interest margin of 3% over cost of funds.”
Financing Irish property, residential or commercial, is notoriously difficult at present with suggestions that only Bank of Ireland, and to a much more limited extent UKlender Barclays Bank, active in the CRE market. NAMA has announced that it will make €2bn available for staple financing which means that perhaps one half of its Irish CRE portfolio will be sold with this benefit. NAMA says it doesn’t have standard terms so we don’t know, for instance, if it requires guarantees or security over borrower assets. The absence of EU approval of NAMA’s staple financing scheme is curious and NAMA may find itself on the wrong end of a competition challenge in the not-too-distant future.