No some will groan, it should be wound down immediately, it shouldn’t even be allowed its current scope, it will only put more of our money at risk. This entry highlights a paradox in NAMA’s operation to date and examines an extension in NAMA’s role.
From the outset NAMA was designed to take a certain class of loan from the books of banks operating in Ireland, on the basis that these loans were as a class, toxic – of either bad or indeterminate quality (some of the loans will be top quality but they’re still part of a class that is in overall terms, toxic). That class of loan was “land and development”. Now from the start it was recognised that some borrowers would have taken out loans for “land and development” but would have additional lending for all sorts of things, some of which had nothing to do with property eg art collections, helicopters but others were property related eg investment property, mortgages on their own property. These loans given to these borrowers “associated” with the “land and development” were also to transfer to NAMA. So when NAMA produced it’s draft Business Plan in October 2009, it was projecting (page eight) that €49.4bn of the then €77.1bn loans would be for “land and development” and €27.7bn would be “associated” loans. An eligible loan regulation was published in 2010 which set out in some detail the loan assets that NAMA was to take over.
But take a look at the loans that NAMA has taken over in tranches 1 and 2, totalling €27bn – out of what is now projected to be a final total of €81bn. Of the €27bn, only €7.1bn relates to “land and development”. The rest relates to completed property ab initio. The June 2010 NAMA Business Plan says on page 23 that investment property is expected to make up 30% of the final NAMA portfolio total. That would mean that of the remaining €54bn of loans only €4.3bn related to investment property which feels wrong (by the way I am drawing a distinction between land and development and all other commercial property – the remaining commercial property is investment property in my terms).
And why was NAMA designed to only take one class of property loan and not others unless they were associated? Because land and development loans were seen to be most impaired, most toxic and most likely to jeopardise Irish banks. And indeed Savills are now saying that development land in Ireland is now down between 75-90% from peak. However that was the view back in early 2009. Since then the capital value of commercial property has continued to drop like a stone. Between the end of March 2009 and the end of June 2010 Irish commercial capital values have dropped by 24% with no end in sight and we are now off some 58% from peak values – see table below for the SCS/IPD quarterly capital falls and the effect on a base of 100 at the end of March 2009 and also the peak to date drop.
The components of the SCS/IPD index are shown in this report from IPD in June 2009 (page 30). It is Dublin-city and -county focussed but 5% of the property assessed is provincial and this index is one of the two adopted by NAMA in its Long Term Economic Value Regulation (the other is the Jones Lang Lasalle index which shows a similar profile).
So the question now is – based on the fact that commercial values have dropped significantly since NAMA was designed and that more than 70% of NAMA’s tranche 1 and 2 relate to non- “land and development” loans, should NAMA’s scope be expanded to include all commercial property? Or to ask the question another way – if NAMA’s scope is not extended to include all commercial property then won’t banks still have a significant toxic loanbook after NAMA transfers, and won’t banks still be unable to access finance?
As was shown here last week in a rough analysis of the non-NAMA loanbook there would appear to be €71bn of non-NAMA commercial property loans with only €7bn of provisions for losses against them. So if NAMA were to take over these loans, NAMA would need double in size (from €81bn to €152bn) but all other processes would remain. The time taken to value and transfer loans would extend, and NAMA would need be a bigger organisation. If NAMA doesn’t extend its scope then the risk is that its role will be in vain, it may mitigate slightly the toxicity of certain banks but there will still be a black-hole of commercial property loans which will deter the risk averse financial markets.
I leave you with one thought courtesy of Brendan O’Connor in yesterday’s Independent. The Americans have changed totally, and modified elsewhere, their approach to dealing with this financial crisis. They have done so with openness and confidence. By contrast there has been precious little refinement of our own approach to confronting the crisis. Is there a fear that any change will spook the markets and undermine the image of sure-handedness and commitment in our approach? That should not be the case and we should not avoid review and modification of our strategy and tactics if that’s what current experience tells us.
NAMA Wine Lake 
Is this not the essence of the battle with Paddy McKillen? Performing loans which may not be in breach of their covenants in any way?
The problem for NAMA is that the banks are trying to hold all the loans that are performing and are not in breach of their covenants in any way – and only want to dump the impaired commercial property investment loans. In this they have the support of their borrowers, who want their performing loans kept out of NAMA at all cost.
Actually, the client has a even bigger incentive than the lending bank to keep the status quo. He is probably borrowing at an historical sub 1% margin on an interest only basis and therefore enjoying some surplus income. A move to NAMA could change that.
The bank (albeit losing money on the interest rate in the short to medium term) is hoping to get a full recovery rather than a NAMA price at the end of the loan period. In the interim it can use every bullying tactic in the book (by putting pressure on other business dealings) to get the borrower to increase the interest rate.
“Is this not the essence of the battle with Paddy McKillen? Performing loans which may not be in breach of their covenants in any way? ”
No, as I understand it Paddy has a €5-10m development loan and that one loan qualifies everything else as associated. Paddy’s assets in the main would be classed as investment property eg the Maybourne group of hotels but they become NAMA-eligible on the back of what is a relatively tiny loan.
Absolutely banks will want to hold onto performing loans. There is an examination of the financial reasons for this at
https://namawinelake.wordpress.com/2010/08/07/where-have-all-the-performing-loans-gone/