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Archive for June 29th, 2010

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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