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Archive for October 22nd, 2010

A theme examined on here several times (examples here and here) is how NAMA can effectively manage a €74bn portfolio with 100 people with just some input from Capita. This threadbare resourcing comes after NAMA engaged 64 legal firms and 30 valuation firms to help with acquiring the loans in the first place.

Yesterday the Independent reported on yet another disgruntled buyer being fobbed off by both NAMA and NAMA Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS). This time it’s Josh Brayman, a fund manager at UK-based Statten Capital who is (or was) interested in property in and around the two main cities, Cork and Dublin. “My impression was that decision-making was stuck in a political quagmire” says Josh. Individual buyer disgruntlement should be treated with a degree of scepticism of course but there seems to be an emerging pattern here. What seems a little sinister is that the Independent reports property professionals are reluctant to criticise NAMA on the record, but the Independent does provide some off-the-record comments criticising NAMA’s inertia in making decisions and bringing product to market (at present of course , because there has not been any foreclosure yet, it will be the developers that dispose of property, though under NAMA’s auspices).

A long-held concern on here, and indeed part of the reason for calling the blog NAMA wine lake, is that NAMA would sit on property preventing price discovery which would lead to stagnation of the property market (and indeed with a risk the stagnation could spread to property-related sectors of the economy and society). The IMF, the NTMA’s John Corrigan and Peter Bacon have advocated early disposals by NAMA and indeed NAMA itself has said that it will seek to offload 25% of its portfolio by the end of 2013 (June 2010 Business Plan – page 10). It seems that the PIs are taking far more action through the courts to pursue borrowers (according to the Court Service, so far this year Anglo has initiated claims against 45 defendants compared with just 23 for all of last year, INBS has initiated 54 claims compared with 34 for all of last year) but once the PIs obtain judgements will they just sit on the property or dispose of it? If they are on the State life support system then they will be able to afford to sit on the property though the restructuring decisions from the European Commission might seek assurances that this will not happen.

So is NAMA’s inertia due to lack of manpower, work overload, policy or just poor management? Or a mix of all four? As always with Irish institutions there is the risk that management concentrates on process at the expense of objective – €27bn of loans valued and transferred, 100 appointments, avoiding banana skins – all are great process achievements but NAMA’s objective is to maximise profitability whilst returning some liquidity to the banks. Lastly one disgruntled potential buyer does not a pattern make, but he seems to be one of many stepping forward to criticise NAMA either on- or off-the-record.

UPDATE:  24th October, 2010. The fustian Jonathan Guthrie in the Financial Times (free registration might be required) relates a story from a Wolverhampton insolvency practitioner who claims that NAMA has agreed to sell a property acquired for GBP 4m for GBP 11m. The property isn’t identified and there is a suggestion that NAMA was tardy in responding to what was in the opinion of the IP a no-brainer, it took “a few days” apparently. I wouldn’t be so concerned at that turnaround but I would be concerned to know what steps NAMA took to ensure the GBP 11m was a price that couldn’t be bettered elsewhere. What competitive tendering took place? Or is NAMA taking advantage of this period when NAMA has not foreclosed but has effective control over the action of developers to bypass the code of practice relating to the disposal of assets? NAMA might find itself with egg on its face if any one of this disposals turns out to be worth far more than was achieved – an asset valued by both bank and NAMA at GBP 4m as at last Nov 30th including an average of 10% long term economic value hasn’t risen to GBP 11m by magic – there is a reason and it is to be hoped that NAMA has explored the new circumstances to ensure it achieved the best price (“achieved” by proxy of course because it is NAMA that is controlling the developer’s actions). The FT characterises NAMA as having  ” has an unenviable reputation in Ireland for muddle and bureaucracy” and “commercially speaking, may not have a clue.”

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A couple of days ago the PTSB/ESRI house price series was revealed for the third quarter of 2010. A day beforehand on here, I had tried to examine the accuracy of the PTSB series in light of PTSB apparently having less than 4% of the mortgage market and the significance of the non-cash market. I wrote to the ESRI yesterday setting out my concerns, pointing out that people expect to be able to treat ESRI information with confidence and that a house price series that is unrepresentative could have an immediate and damaging effect on the purchasing decisions of what are mainly first time buyers who represented 58% of all transactional mortgages granted in Q1 & Q2 of 2010. I wouldn’t expect a reply for a few days.

Because Irish Life and Permanent (PTSB’s parent) let slip in the half year report for 2010 that the company advanced gross new lending of €0.1bn, I was able to estimate the company’s share of the mortgage market (or to be more accurate the share of the Irish Banking Federation mortgage market which claims more than 95% of the State’s total mortgage lending). Assuming the house prices achieved in the IBF mortgage market display a normal statistical distribution I was able to calculate that the margin of error on PTSB’s average prices had roughly a 7-8% margin of error, ie a €200,000 average could be a €184,000 average of as high as a €216,000 average. Fine you might say, you could live with that level of estimating. Except of course that margin of error is understated because cash transactions will increase the margin of error. By how much?

The first information vacuum

We don’t know the number of residential transactions in this country. By which I mean the information is not compiled and/or made public. It is a very basic piece of economic information – see the attached for the UK’s information release each month. In the UK in September 2010 there were 78,000 residential property transactions. That was the size of the market. What about Ireland? We have no idea at all, not just for September 2010 but for any period it seems. Earlier this week the Revenue kindly provided stamp duty data from 2003 onwards for residential and 2007- for commercial. Whilst giving a partial picture of transactions, it was incomplete because it excluded stamp duty exempt transactions and the Revenue say that this information is not available. The IBF on the other hand release comprehensive information on mortgage drawdowns but they exclude cash transactions and indeed non-IBF member mortgages. So that too is a partial picture. If the UK had a market that was comparable to Ireland then those 78,000 transactions for 63m people in September 2010 might equate to just over 5,000 transactions for the State. The IBF claim to issue about 1,500 transactional mortgages each month. So would that imply that the State has about 3,500 cash transactions each month? Who knows, but if we did know we would be able to better quantify the margin of error in PTSB’s house price series. That is the first information vacuum.

The second information vacuum

As an interested observer I must say I was mildly shocked by the Minister for Planning, Sustainable Transport and Horticulture Ciaran Cuffe’s press announcement yesterday which accompanied the summary report on so-called ‘ghost estates’ in our State. Not only was the announcement unclear as to the remit of the recent review (“all housing developments of two or more dwellings built or granted permission in the last few years that had commenced by the time of the survey” – excludes finished estates, estates commenced before 2007 and estates where there is less than 10% vacancy and one-off housing), but it gave the impression that previous estimates of vacant housing in the State were wrong (“the market has lacked clear and independent data until now on the number of new unoccupied homes”) and there were indeed hints at shortages (“the total number of vacant units either completed or nearly completed is roughly equal to 18 months’ construction output of new housing at 2009 levels”). The announcement made available a summary report which analysed some estates by local authority. A detailed report was originally advertised on the environ.ie website yesterday but when asked, the Department of the Environment, Housing and Local Government press office said “it is our intention to upload to the Department’s website early next week a further breakdown of the figures by city/county area early next week and also maps for these areas”.

One of the key problems confronting NAMA in respect of residential property is true price discovery – how much is a property worth, and for long term economic value purposes how much property have we & how many people have we, so that we can establish the demand:supply position today as a basis for projecting future values based on future construction estimates, obsolescence and population change. Those foundations do not exist. And they should.

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