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.
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.