Archive for June, 2010

NAMA has set the Valuation Date pursuant to section 73 of the NAMA Act at 30th November, 2009. That is the date at which the Current Market Values and Long Term Economic Values were to be assessed. The revelation of the date came in March 2010 in response to a question in the Oireachtas. A few days later, the London Sunday Times published an article which drew on respected economists, Brian Lucey, Ronan Lyons and Constantin Gurdgiev and estimated that setting the Valuation Date at 30th November, 2009 might cost the taxpayer €5bn because the market had continued to fall after that date – that date, the 30th November 2009, was not “the bottom”.

Yesterday in the Oireachtas, Labour Deputy and Finance Spokesperson, Joan Burton posed the following question and received the response shown:

Deputy Joan Bruton: To ask the Minister for Finance the financial impact of changing the valuation date for future tranches of National Asset Management Agency loan transfers from 30 November 2008 [sic, the actual valuation date is presently set to 30 November 2009] to 30 June 2010; if a legislative amendment will be required to change the valuation date; and if he will make a statement on the matter.

Minister for Finance ( Mr Lenihan) : Section 73 of the NAMA Act provides that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. The NAMA Board has set this date as 30 November 2009. It follows that any property price changes after 30 November 2009 will not be reflected in the NAMA market valuations. Commercial property price indices suggest that prices in Ireland may have experienced a small decline since November 2009 but prices in the UK, which has about one-third of the assets underlying the NAMA loan portfolio, rose by a greater percentage. The overall impact, on a weighted average basis, is estimated to be broadly neutral.

The valuation date was set in advance of the voluntary application by the banks to be designated as participating institutions. Any change made now to the initial valuation date would create inconsistency between the valuation placed on assets already transferred as part of the first tranche and those transferred in subsequent tranches.  It must be remembered that the European Commission on 26 February 2010 approved the approach taken in establishing NAMA and the valuation methodology adopted.  A change to the valuation methodology would necessitate a new notification to the Commission, and a new decision by the Commission on whether or not to approve it.  This would cause unnecessary and undesirable delay, and result in little or no gain.  What is most important now is that NAMA completes the transfer of the eligible bank assets and meets the demanding deadlines it has been set.

The Minister for Finance, Brian Lenihan made a number of points, the most significant of which was that the overall effect of changes in property values in the NAMA-bound portfolio since November 30th, 2009 is “broadly neutral”. Let’s take the points in turn:

The UK has “about one-third of the assets underlying the NAMA loan portfolio” – this may surprise you because when the draft Business Plan was published last October, 2009 the UK loans were estimated on page 18 to be 27%  of the overall total of €77bn (ie around €21bn). In February 2010 when the EU granted approval to the NAMA project, the Decision (paragraph 28) stated that 20.7% of the assets backing the loans were located in Britain and 6.2% in Northern Ireland (ie 26.9% overall) and that the total loans were €82.5bn so the UK would have been around €22bn. So now they are nearer a third than a quarter? The draft Business Plan confirms on page 32 that about 30% of the loans are denominated in currencies other than the euro. In October 2009, the euro was trading at GBP 1 < EUR 1.10 and yesterday it was at GBP 1 > EUR 1.23 so the €21bn last October might have grown to €25bn and since presently the total NAMA loans are being referred to at €81bn then €25bn UK loans would be 31% of €81bn total loans. So indeed through currency appreciation it would seem that the UK property-backed loans are close to one third of the NAMA total. That makes the UK very significant indeed. It should be noted that the NAMA CEO, Brendan McDonagh, told the Oireachtas Finance and Public Service Committee in April 2010 “However, about 20% of the portfolio is held in the United Kingdom and we see many opportunities to dispose of assets in that market.”

Property price indices since November 30th, 2009 – The Minister refers to “commercial property price indices” and interestingly in the Sunday Times article referred to above, the contributors have referred only to “house and land” prices and the commercial sector seems to have been overlooked. Also the Minister refers to indices in Ireland and the UK. So what is the true position?

Residential(Ireland): In Ireland since there is no House Price Database, the two sources of residential actual transaction prices are the Permanent TSB/ESRI who produce the only hedonic House Price Index (ie an index that examines the nature of transactions and properties transacted when preparing the index) and the Department of the Environment Housing and Local Government who produce average property values but as they say “Average house prices are derived from data supplied by the mortgage lending agencies on all loans approved by them. In comparing house prices figures from one period to another, account should be taken of the fact that changes in the mix of dwellings will affect the average figures.” The Permanent TSB/ESRI shows there to have been a 3.6% national drop in prices in December 2009 and a 4.8% drop in Q1, 2010, ie if the index was 100 at the end of November 2009 it would have been 91.8 at the end of March 2010. The next publication of the Permanent TSB/ESRI House Price Index is due at the end of July 2010 in respect of Q2, 2010. The latest statistics from the DoEHLG are for Q4, 2009 and show that new houses dropped by 3% between Q3 and Q4, 2009 and second hand houses fell by 4% between the same two periods.

Residential(UK): In the UK there are a number of sources which produce timely information on residential property transaction values. There is an overview here. Two financial institutions, the Nationwide Building Society and Lloyds/Halifax, produce what are probably professionally regarded as the most authoritative general statistics. In addition the government’s own Land Registry produces statistics which includes all transactions including those not subject to mortgages. A number of property sales websites, including Rightmove and Hometrack produce statistics as do some media outlets eg the FT. Both the Nationwide and Lloyds/Halifax show a similar picture in terms of movements in national prices since last November 30th, 2009 – Nationwide published its figures for June 2010 this morning so they’re bang uptodate and they show average prices have risen by 4.5% from 162,764 at the end of November 2009 to GBP 170,111 at the end of June 2009 (Interestingly average prices in Northern Ireland fell in Q2 by 5.2% to an average of GBP 128,846 and Northern Ireland has been the worst performing region of the UK in 2010). So UK residential overall if the index was 100 at the end of November, 2009 it would have been 104.5 at the end of June, 2010.

Commercial is a more difficult area to value as it includes so many different categories though the main ones are office, retail and industrial.  Though there are a number of sources, Investment Property Databank (IPD) is arguably the most authoritative.

Commercial (Ireland): In Ireland IPD produce their index in association with the Society of Chartered Surveyors and the latest results (The SCS / IPD Ireland Quarterly Index at end March 2010 is based on a €2.7bn sample of 312 properties from 12 portfolios) are to the end of March 2010 and they show that capital values fell 1.8% over the quarter and 4.9% in the final quarter of 2009. The quarters are not broken down by month but if we assume a simple monthly average for Q4,2010 (1.6% per month) the capital values will have dropped from a value of 100 at the end of November 2009 to 96.6 at the end of March 2010.

Commercial (UK): The last index published covers the period to the end of May, 2010 and showed that between the end of November, 2009 and end of May, 2010 capital values increased each month as follows:

December 2009      3%

January 2010                   1%
February 2010        1.25%

March 2010            1.5%

April 2010              0.8%

May 2010               0.5%

So a capital value of 100 at the end of November 2009 would have reached 108.3 at the end of May 2010 with increases moderating.

Overall Summary

There is no satisfactory summary of the split between NAMA residential and commercial assets in the NAMA draft Business Plan. Plainly some assets backing the loans will be commercial and some residential eg the Battersea Power Station plan is for 3,5000 dwellings as well as offices and shops. So what I do here is present two extremes – where the assets are 100% commercial or 100% residential but based on what is understood to be the latest split between Ireland and the UK.



So, if all property backing the NAMA loans was commercial then there would appear to have been some improvement in the value of the NAMA assets since November 30th, 2009 (€0.2bn). If the property was all residential there would have been a drop of €3.5bn. I am concerned that we do not have uptodate information for either Ireland residential or commercial and unless Ireland commercial turned the corner in Q2 then it is likely there would be no real change if the assets were 100% commercial. Given recent forecasts from many quarters of further price drops for residential it would seem that the €3.5bn loss if all the NAMA assets were residential is an underestimate. So is the effect of the passage of the last 7 months on NAMA values “broadly neutral”? Difficult to say but it would appear that it is more likely that prices have dropped and given the worst scenario the cost to the taxpayer could be €billions. The Minister has the comfort of not having uptodate property value figures for Ireland and presumably he has sufficient information from NAMA about the residential:commercial split which means that he can state with apparent veracity that values are “broadly neutral”.

“It must be remembered that the European Commission on 26 February 2010 approved the approach taken in establishing NAMA and the valuation methodology adopted.  A change to the valuation methodology would necessitate a new notification to the Commission, and a new decision by the Commission on whether or not to approve it.  This would cause unnecessary and undesirable delay, and result in little or no gain.” A copy of the published EU Decision is here. There is no reference whatsoever to the Valuation Date. The valuation methodology involves the calculation of the Current Market Value, the Long Term Economic Value and applying various discounts for due diligence, foreclosure and risk. Would a change to the Valuation Date be a change to the valuation methodology? The EU studied the methodology at length and changed some of the percentage deductions – plainly the EU would need approve any further change to those percentages. But would a change to the Valuation Date to 30th June, 2010 need further EU approval? The NAMA Act allows NAMA to set the Valuation Date and if they set the date at (say) November 2006, the height of the property market, then that would have the potential to seriously disadvantage the taxpayer and the EU would probably reject the change. Would a change from November 30th, 2009 to June 30th, 2010 attract anything other than a summary fast-tracked approval? It is hard to see why it wouldn’t.

There will be a return to this topic when the SCS/IPD Ireland commercial index for Q2 and the Permanent TSB/ESRI House Price Index for Q2 are published and when there is a better split from NAMA of the assets backing the loans it is taking over.

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Adding his voice to a chorus of recent predictions of further drops in Irish residential property values, Friends First Chief Economist, Jim Power yesterday unveiled his latest report on the Irish economy and predicts that property prices “could fall by 12% this year” and that completions of new housing might only be 12,000 units. According to the Permanent TSB/ESRI prices had dropped by 4.8% nationally in Q1, 2010 so Mr Power’s prediction is that there would be a further 7.2% fall in prospect (from values at the end of 2009).

Apart from Minister for Finance, Brian Lenihan, who was reported as saying that prices at the start of April 2010 were realistic and that purchases of property could now be undertaken with confidence – widely reported as the Minister calling The Bottom of the market again, apart from the Minister it would seem that most commentators still see further falls though Mr Power’s at 7.2% would appear to be at the low end of the range of forecasts.

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The journalist Michael O’Farrell penned an interesting piece in last week’s Irish Mail on Sunday which was “sure to infuriate ordinary householders” because it quoted extensively a “financial expert advising some of the largest developers”. On top of confirming that the NAMA developers had sought “payments and profit-shares” from submitted business plans, the article was at its most provocative when it quoted the adviser saying  “It is commercially reasonable and commercially sensible and while politically it looks like a really good idea to bang the drum and say we are going to throw all the developers off their sites and chase them to the ends of the earth, that just isn’t going to deliver the value”

So how important is co-operation and engagement by the developers to NAMA? In the first instance of course the developers owe their debts to NAMA and if they are not paid, NAMA can generally foreclose the loan and repossess the asset and possibly pursue the developer for any shortfall. But then what? Does NAMA need the developer to remain on board with the project to “deliver the value”?

Arguably not at all. Remembering that NAMA is in the main dealing with large projects and if NAMA has competently secured the documentation relating to the asset when buying the loan from the NAMA financial institution, then all NAMA will lose will be the vision of the developer. If the developer had access to finance then presumably the loan would have been redeemed before coming to NAMA and given that NAMA has access to a €5bn development pot, NAMA is in the driving seat as far as financing is concerned. What about the other usual components of property development?

Architectural services: for large projects will likely be provided by third party providers and NAMA should have secured all paperwork produced

Planning : again normally undertaken by third party providers, the large property consultancies will have their own planning teams. NAMA should have secured current paperwork and it should not then be an issue to proceed with the third party providers. Some overseas assets may require the personal relationship of developers in securing planning (or ensuring planning consent is not revoked or modified) but these will be minor in the overall NAMA portfolio and risks should have been reflected in the valuations by NAMA.

Surveyor and engineer services: again likely to be provided by third parties

Promoters and estate agents: Now this is usually an area where the developers have tended to have a more personal hand in affairs. But again through the use of the larger property consultancies NAMA should be able to replace that expertise.

Builders and contractors: some of our bigger developers have their own building companies to be sure, but if the quantity surveyors and architects have done their jobs correctly then NAMA should find there is no shortage of builders that can complete the developments.

So what is missing? Really only the developer’s vision, and depending on the state of completion of the project NAMA should be able to do a decent job of attracting alternative investors or developers to deliver a vision – after all, there will not be any new use for the property that NAMA developers can have patented – one way or the other it’s just augmenting the value of land in ways that are tried and tested for centuries.

Of course NAMA’s hands will be tied by the terms under which they have acquired the loans. If they have valued on false assumptions and particularly at too optimistic a long term economic value or failed to secure paperwork or optimistically assumed a high level of co-operation from the developer then NAMA may effectively be blackmailed into paying large salaries or profit-shares.

So it would seem to me that NAMA should hold the whip hand when negotiating the future involvement of developers in their schemes and given NAMA’s firm grip on the purse strings in a market where finance is not abundant, NAMA should be able to deliver deals with NAMA borrowers which unambiguously deliver the best return to the tax-payer.

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The Central Statistics Office late last week released data on planning permissions in Q1, 2010 which indicated, as expected, applications continue at a low level and even though there was an increase of 10% in applications compared with Q4, 2010, the usual increase between Q4 and Q1 is 30% so safe to say that the residential construction sector stays weak. This entry will examine planning applications over the last decade and compare actual building activity and will conclude that the State is still building far more than is required.

Firstly here’s the data (the base information is available in a google docs spreadsheet here, planning permissions are published on a quarterly basis by the CSO whilst completions are published annually by the Department of the Environment Heritage and Local Government):

There is not a 100% correlation between planning permissions and completions, evidenced by the fact that in the 9 years to the end of 2009, there were planning applications in respect of 698k housing units and only 584k were in fact actually completed.

If you assume there to be a one year lag between the granting of planning permission and the completion of the building then the experience in 2009 was that completions were 40% of the applications in 2008. Overall over the decade the figure was 80% so plainly things have slowed down with the crash in the property market. In 2009 there were 40,556 applications and if the 2009 trend in completions were to continue, we will have 16,000 completions in 2010 (40%). Annette Hughes at DKM Consulting, a company which advises government and the construction sector, was reported by the Irish Times over the weekend was forecasting 7,500 completions this year of “houses” which would see a completions at less than 20% of 2009’s applications.

With the population looking as if it will be broadly flat in 2010 compared with 2009 – births offset by deaths and more significantly, net outward migration and assuming an average household of 2.7-2.8, then the demand for property should be minimal and certainly less than 5,000 units. With the enormous overhang of empty property and the likelihood of new build being greater than that required by the minimal increase in population, would price elasticity of demand models indicate that a further substantial downward correction is in prospect?

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The past few days have seen a volley of leaks from NAMA and the Department of Finance which might, if you were paranoid, presage some publicly repulsive news in the forthcoming NAMA Business Plan and Quarterly Report.

The Sunday Business Post has “learned” and subsequently reported that the first developer business plans submitted to NAMA have asked for €1.5bn of funding from NAMA. If not briefed by NAMA, then how exactly has the Sunday Tribune learned this overview fact? NAMA’s leaking is attracting ridicule even from the BBC who say “Nama has said that it will not normally reveal the identities of the developers it dealing with, however the Dublin media has named many of the companies who have had loans transferred”

The Irish Examiner published a story yesterday which is based on NAMA confirming on Sunday that although NAMA borrowers may be paid salaries and expenses, they will be modest and not aimed at supporting extravagant lifestyles.

The Irish Independent’s front cover yesterday carried the headline “NAMA to go after the homes of wealthy developers”. The story was based on “sources” at the Department of Finance and indeed documents provided to the Independent detailing pleadings by the Construction Industry Federation (CIF) for mercy for developers. The DoF however rejected the pleas and are acting tough. They cite the fact that the Minister for Finance inserted a section into the NAMA Act which allowed for transactions whereby assets were transferred by developers to the spouses could be set aside. However there has already existed such legislation where a debtor disposes of assets to avoid paying their debts – it is difficult to see what the NAMA Act added to the debt collection regime. So one takes away an impression of acting tough but suspecting that is not the case – spin in other words.

Did the Irish Mail on Sunday let the cat out of the bag by quoting an adviser to NAMA-bound developers who said “’It is commercially reasonable and commercially sensible and while politically it looks like a really good idea to bang the drum and say we are going to throw all the developers off their sites and chase them to the ends of the earth, that just isn’t going to deliver the value.’ Behind the first wave of developers taken into Nama, hundreds more are preparing, with the help of an army of financial advisers, to make a pitch for wages and profit-sharing deals”

And today the Independent reports that two of the poster boys of the financial crisis and property bubble collapse, Sean Fitzpatrick and Bernard McNamara may face bankruptcy (or the Irish version of it which generally sees family homes protected under the Family Home Protection Act 1976) “within weeks”

Was the intention of the leaks and briefings from NAMA and the Department of Finance to try to take the sting out of the NAMA business plan expected later this week which might reveal the scale of write-offs of developer loans (commonly referred to as bail-outs) and advances to developers who are commonly seen to have, along with the banks and the regulatory environment, brought the country to its economic knees or details of payments to developers in return for future co-operation on their developments? Perhaps we will have an answer in a few days.

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“We go there and they come here” – so sang Christie Moore with “Lisdoonvarna” and succinctly summed up modern mass tourism. With news that the Top 10 NAMA developers have requested €1.5bn of funding to complete projects I wonder if it is time for NAMA to cast its net far and wide for third party (co-)developers and investors. After all NAMA has been referred to as the world’s biggest property fund with €81bn of property under management. So why not have a global approach to attracting funding? If Treasury China Trust can still throw shapes in the Chinese market, if Bernard McNamara can rustle up €20m deals in Qatar, if Avestus (formerly Quinlan Private) is developing a 100,000 sq ft shopping centre in St Petersburg and if Sean Mulryan’s Ballymore is developing the Embassy Quarter beside the Battersea Power Station site (property of Treasury), then what is NAMA doing to get developers and financiers from abroad to invest in NAMA assets, particularly the ones backing €55-60bn of loans here.

Of course you might say the Irish property market is moribund and not attractive to foreign investors. But remember that NAMA has paid a price for the loans reflecting the reality today and taking a prudent view of the long term economic values. So if NAMA has done its job correctly then there should be a relatively level playing field for attracting finance between Dublin, Doha, St Petersburg and Shanghai.

So how are NAMA courting international investors and developers? Whose job is it at NAMA to seek out these creatures? Who has that expertise or experience? Global property fund = global reach. And NAMA might find it gets more co-operation from NAMA developers if it is known that there are other suitors seeking to develop or invest in NAMA projects. Time for NAMA to engage with the Arab sheikhs, Hindu Sikhs, Jesus freaks?

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If the first tranche of NAMA loans which totalled €15.3bn gross (out of an estimated €81bn) is representative, then NAMA may find that it eventually faces requests for some €8bn of development funding if the Sunday Business Post is correct in its reporting that the first NAMA Top 10 developers have submitted business plans which required €1.5bn of NAMA funding.

NAMA of course required a €250m advance from the Department of Finance in May 2010 to provide a “working capital buffer” and that was in addition to its €100m of seed capital in the NAMA SPV and the advance payment of fees by financial institutions that may have been €2.3bn according to the first tranche NAMA press release.

The revelation of the size of the funding requirements is likely to attract substantial public unease though of course NAMA may decide to not satisfy this level of funding. NAMA should also have recourse to other funding:

1. From the developers themselves – as NAMA is no doubt finding out, many developers will have loans which are either non-recourse, have ringfenced liability to SPVs or are otherwise unlikely to threaten the overall wealth of the developer. Some developers will have substantial funds available to them. NAMA required developers to set out a comprehensive schedule of assets when presenting their business plans and if this has been honestly prepared it may provide a rich vein of funding.

2. From third party investors/developers – referred to by the NAMA CEO, Brendan McDonagh, at the Oireachtas Joint Committee on Finance and the Public Service in April 2010, NAMA will adopt a role of match-maker between “distressed” NAMA developer and other investors and developers. Some of these marriages won’t be welcomed by developers – egos and history may make some tie-ups unpalatable – but NAMA may have the final say in who provides funding. There is no shortage of potential funding partners eg Green Property and TPG Capital have signalled that there is €900m available for projects though that appears to be more geared towards purchasing as opposed to joint development. There are plenty of developers out there as well in funds.

3. From banksSavills organised a conference recently which heard “In terms of new lending, the most active players, according to Savills, included nine German banks, four UK institutions and two international lenders.” So the NAMA financial institutions mightn’t have an appetite to invest in this schemes but NAMA, together with the borrowers, may secure financing from other banks.

So once NAMA satisfies itself as to the content of the business plans, it will presumably then ask the NAMA borrowers to what extent these other funding sources can be tapped. NAMA has a finite €5bn for development (though the Minister for Finance can increase that, although he may need to come back to the Oireachtas for approval). Only 20% of the loans have transferred. NAMA needs to objectively prioritise development allocation according to commercial return. So committing 30% of its development fund (and the fund was also to be used to catch any other NAMA expense eg a difference between interest received and paid) with only 20% of the loans transferred mightn’t be the wisest move at this stage. And if NAMA does provide advances and development funding, it will be interesting to find out what Return on Investment % it is seeking, given the funding is probably not available elsewhere perhaps 20-25% per annum might be a good start.

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