Long term economic value – the First Tranche

It’s now over two months since NAMA started to acquire the first loans of the First Tranche. At the time, there was much debate as to the derivation of the numbers – why was the consideration paid, substantially lower than the long-term economic value (LEV)? How precisely did the recovery and default discounts work? Were they in respect of the first tranche only or the total predicted loans of €81bn? What went largely unnoticed was the fact that on average the LEV was 11% more than the current market value (CMV). This post examines the effect of this on NAMA’s future financial prospects.

The valuation date, by reference to which the CMVs were assessed in the First Tranche, was 30^th November, 2009. Why 30^th November 2009? The banks were required to submit their First Tranche data before Christmas 2009 and the valuers had to value to a specific date so 30th November, 2009 was as good as any, particularly against a background of statements from the Minister for Finance that we were close to the bottom in September 2009. Many commentators have pointed out that the market has continued to fall since then and that NAMA may be disadvantaging the taxpayer by perhaps €5bn by sticking with this date. It is unclear from the NAMA Act if the Minister for Finance can designate a new date for future tranches but he would certainly be protecting the taxpayer’s investment in NAMA if he were to do just that.

So, the First Tranche has a CMV of say 100 and a LEV of 111. Since 30^th November, 2009 the residential market has fallen by reference to the Permanent TSB/ESRI index by 3.6% in December 2009 and 4.8% in Quarter 1 of 2010 (a cumulative compound fall of 8.2%) so the CMV of the First Tranche is now worth 91.8. Are further falls in prospect for residential property? Who can say but the betting would be yes. But let’s say that March 2010 was the bottom. To break even NAMA would need see the 91.8 increase in value to 110 over the next 9-10 years, ie an increase of 2% per annum compound over 9.5 years (91.8 * (1.02)^9.5). To sell at 5 years NAMA would need see an increase annually of 3.75%. Achievable? Maybe but if residential property were to drop further then both that drop and the time it takes to reach the bottom could severely impact NAMA eg if property were to drop another 18% in the next two years as suggested by Moody’s then at the start of 2013 the CMV would be 75.2 and in the remaining 7.5 years of NAMA’s lifespan, property would need to rise by 5.25% each year compound to get back to the LEV. Again perhaps achievable. Factor in the cost of NAMA’s debt which is running at about 1%+ and you will  be looking at 6-7% per annum compound growth to break even. Perhaps achievable but a long way off the 1% per annum flat rate of growth over 10 years that NAMA set out as a basis to break even last October 2009.

The above analysis relates to residential. There is a mixed picture on commercial. However in the coming weeks when NAMA unveils its Business Plan, much attention will focus on how the market has changed since last November 30^th and also the recovery needed so that NAMA can break even.

Read Full Post »

Growing vegetables and house-swapping : two of An Taisce’s solutions to Ghost Estates

An Taisce, the private member-funded organisation designated with providing input to planning and development decisions, and whose motto is “Preserving our built and natural heritage for future generations” has chipped in to the debate over the future of so-called Ghost Estates (built or part-built housing estates from the boom which remain completely or substantially unoccupied).

Using the Ghost Estates as allotments for growing vegetables and house-swapping (where a partly-occupied Ghost Estate is de-peopled by swapping them with housing in more occupied areas) are two ideas floated in An Taisce’s latest (May) newsletter which will be available here – the proposals have been referred to an An Taisce advisory committee on NAMA which might explain why the newsletter is not presently available online.

However, An Taisce has also called for greater openness and transparency at NAMA in respect of property holdings and Ghost Estate proposals and that call will attract widespread support. Without a Business Plan, published Codes of Practice, exclusion from the Freedom of Information Act and very limited updates on operations, NAMA is at risk of cutting short whatever honeymoon period the brave efforts of its personnel may have secured.

Read Full Post »