NAMA’s valuation date costs taxpayers upto €5bn

With the emerging rumours that the first NAMA loans will be bought in April or May 2010, the response from Minister of Finance to a question from Deputy Deidre Clune on 10^th March 2010 (not 11^th March as reported in the Sunday Times) may have a significant financial impact on taxpayer risk in NAMA.

The question and answer

64. Deputy Deirdre Clune asked the Minister for Finance the latest estimate of the decline in the value of property here which is likely to underlie the National Asset Management Agency loans. [11571/10]

Minister for Finance (Deputy Brian Lenihan): Section 73 of the NAMA Act sets out that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. NAMA have set this date as 30 November 2009. It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations. Valuation will be in accordance with recognised red book valuation standards, European valuation standards, or International valuation standards, as appropriate to the locations where the property is situated. The valuation process for the eligible bank assets will be certified by independent experts and validated by the Financial Regulator to ensure that the NAMA valuation methodology is robust and credible.

What Section 73 of the NAMA Act says

73.—(1) NAMA may specify a date or event by reference to which the market value of a bank asset or type of bank asset or property or type of property is to be determined.

(2) Under subsection (1) NAMA may specify different dates or events for any or any type of bank assets or property.

(3) Under subsection (1) NAMA may specify a date before the coming into operation of this Act.

(4) The specification of a date or event under subsection (1) has effect for the determination of a market value for any purpose under this Act (including for the purposes of Chapter 2 of Part 7).

Let us also remind ourselves of the objectives of the NAMA legislation

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.

So why was the 30^th November, 2009 chosen by NAMA and what has happened to property values since 30^th November, 2009?

In answer to the first question I do not know. As far as I am aware NAMA did not publicly announce the fact it was choosing 30^th November 2009 as the valuation date and the first time this has become known, as far as I know, is via the Oireachtas question above. I could speculate that NAMA needed to choose some date, otherwise there would be endless disputes as to falls and rises to the present day. However in light of what has apparently happened in the property markets since 30^th November, 2009 shouldn’t NAMA be changing the date (there seems to be no legislation to prevent it from doing just that) to 15^th March, 2010 for example?

In terms of what has happened to property prices since November 2009 the picture is universally consistent – they’ve fallen significantly. The ESRI/Permanent TSB Index revealed that residential property fell by 3.6% in December 2009 alone and the rate of falls were accelerating (September -1.1% , October -1.8% , November -3.1% and December -3.6%). In February 2010 ESRI/Permanent TSB announced that they were suspending their index and would henceforth be producing quarterly indices with the first in April 2010. There is no other formal index. However the median view of a group of property pundits in January 2010 was that prices would drop by 9% overall in 2010 with the suggestion that prices might recover towards the end of the year, thereby suggesting a greater than 9% annualised fall in the first part of the year. Since November 2009 therefore the suggestion is that prices have dropped 5-10%. IPD the publisher of commercial indices suggests that commercial property fell by 4.9% in the last quarter of 2009 and there no suggestion that the falls have reversed though the rate of fall was moderating to an annualised 20%. Would it be safe to speculate therefore that commercial property has dropped 5% in the last 3 and a half months?

Overall what these figures suggest, if I can attempt a response to Deputy Clune’s questions is that the assets that were worth €88bn at origination and which were worth €47bn last September 2009 and less than that in November 2009 are likely to have dropped a further 5-10% or €2.3-4.7bn (based on September 2009 estimates) and this is what NAMA will overpay by today in terms of Market Value.