Psst! Fancy a 20%-plus per annum return on your cash? It’s for an investment in Irish commercial property which has already fallen 65% from peak. As long as commercial property hasn’t fallen below today’s prices in five years time, then you will double your money. If commercial property increases by 10% over the next five years compared with today, even including inflation, then your return will increase to nearly 30% per annum. The scheme is underwritten by NAMA. Interested? Then too bad because NAMA only wants to hear from “strong and reputable counterparties”, but if you are a US “privately-held real estate investment advisor” run by the former head of Blackstone, then NAMA will welcome you with open arms, as indeed it recently did when it sold One Warrington Place – now confirmed on the Northwood website – for around €27m.
Ever since NAMA introduced its so-called “staple finance” initiative last year, where it converts part of the sale price of its commercial property into a cheap loan, the property community has been calculating exactly what financial impact the availability of such financing has on the Irish commercial property market.
“Staple financing” or vendor financing works like this : NAMA sells you a commercial property, an office block for example, for €100m. You put up €30m in cash and the remaining €70m is converted into a loan for five years on which you pay 3.5% per annum. The office block you buy is yielding 8.5%, in other words it generates €8.5m in rent each year. So you collect your €8.5m and you pay NAMA 3.5% on €70m or €2.45m per year. That will leave you with a “profit” annually of €6.05m. That’s over €30m in profit in five years, or in other words, you double your money. Of course at the end of five years, you’ll have to find the remaining €70m to pay NAMA, but as long as prices haven’t declined by reference to today, then you should be able to (a) sell the property and cash out, having doubled your money or (b) refinance the €70m loan with another lender.
Of course, this is not a guaranteed return. Irish commercial property has so far fallen 65% from peak, and it might fall further. But factoring in inflation, what is the betting that property in five years time is worth more than it is worth today?
If property increases by 10% over the next five years, then your return will increase to 27% per annum. Why so much of an increase? Because you are only putting up 30% of the purchase price, but the increase in property prices applies to 100% of the property, so you disproportionately benefit from any increase. Of course the same is true for declines.
But the question for NAMA is why is the Agency selling property which is yielding more than NAMA’s cost of funding – about 1% to which NAMA adds a margin of 2.5% when lending to purchasers. In the above example, if NAMA held onto the property for five years, then NAMA would generate €42.5m in rent and only pay €1.5m in interest on €30m worth of bonds which are used to finance NAMA. What NAMA is doing is gifting away profits to someone else. Of course, if Irish commercial property continues to decline over the next five years, then NAMA will have lost out by holding on to the property, but does NAMA not believe its own press when it says that Irish commercial property prices are stabilizing?