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.”
Mr Brayman’s disgruntlement is hardly surprising for a Vulture, sorry Venture Capital manager seeking to purchase assets from NAMA at a rock bottom price. There are literally hundreds of bottom fishing funds seeking to acquire the “low hanging” fruit from NAMA. The only losers in such a situation are the Irish taxpayers.
NAMA’s remit is to maximise the return for the taxpayer. It can’t do that if it has a car boot sale of the best of the property assets underlying the loans. Also, most fund managers seem to forget that NAMA is not in a position to discuss their debtors’ (client’s? borrower’s? – crisis of identity here … clarity needed!) loans with a third party – at least not yet.
In essence, one of the main problems that NAMA has is encapsulated in this issue. If NAMA seeks money from these type of funds either as JV partners to complete developments or as purchasers, they are going to be left with little or no return for themselves.
These funds seek a minimum of 15% per annum in return for their finance. That’s for each year including the years taken up with waiting, seeking permissions or in construction. As one of them said to me recently “What’s left in it for NAMA?” The answer is “Nothing”.
It is only when normal banking is resumed and money is available to the property market at levels of around 5% (not 15%) can there be a return for NAMA.
At the present time and even in the medium term, that looks like a forlorn hope.
Hi WSTT,
You’re right that no-one is going to shed tears over a single disgruntled buyer, but he seems to be part of an emerging pattern. But just take what you say – NAMA has received approaches from hundreds of potential buyers. And whereas NAMA has 40-odd firms to examine developer/client/debtor/project facilitator business plans it hasn’t issued any tender for firms to examine buyer proposals. And by my figuring NAMA will have about 20 people (absolute max) looking at these proposals. Other than sending out holding letters, are they capable of doing an awful lot more? That is the main theme of what is a whinge – NAMA looks severely under-resourced in this area.
Very interesting about funds seeking 15% per annum. But take a look at the two items below and 15% mightn’t be quite the bottom feeding vulture number it seems.
The main news item this week for Irish property was the JLL index for commercial property for Q3, 2010. The fall in capital values was slight but the 5% drop in rents in one quarter and an annual fall of 20%-odd should strike fear in the hearts of most investors. It’s all very well for JLL to say Irish commercial yields (yield = annual rent divided by the value of the property) are presently at 8.5% but if rents are dropping by 20% per annum and capital by 5% then that 8.5% becomes negative in just over a year. As I say the big news is that commercial rents have fallen by 5% in the latest quarter, and remember Ireland’s rent agreements are still predominantly pre-Feb 2010 agreements which only allow for upward rent reviews. There is carnage in the commercial sector at present with collapsing rents. Against that background 15% annual returns on a risk-sharing basis don’t look so vulturish after all. Maybe.
The main macroeconomic piece of news this week was the fallout from the debate about our budget deficit, the commitment and requirement to cut to the deficit to 3% of GDP by 2014 and the impact of the bank bailout interest on the deficit. We started out the week thinking the budget adjustment in December 2010 might be €4bn (up from €3bn only 6 weeks ago) and by the end of the week we had Karl Phelan and one of the DoF scenarios indicating a €7bn adjustment. The DoF yesterday seemed to be saying that the figure would be around €4.5bn but it is unclear how that will lead to a 10% deficit next year [(taxation – spending)/GDP] which is what we signalled to the EU as a staging post on the roadmap to recovery. There were lots of figures being fired around discussing the impact of a €3-7bn adjustment in the December 2010 Budget but all were agreed that it would have some impact on growth. Michael Taft, economist at TASC seemed to be saying that a €1bn adjustment would equal a €1bn reduction in GDP, whereas the IMF seem to say that a 1% adjustment would equal a 0.5% adjustment to GDP over two years. Regardless of the detail, the principle is accepted that the bigger the adjustment the greater impact on GDP. GDP growth forecasts for next year are present in the 2-3% range, in other words our GDP will go from €160bn this year to €163-165bn next year. Michael Taft thinks a €7bn adjustment will reduce GDP by €7bn bring it to €153bn meaning GDP would need to naturally grow by 6.5-7.8% to reach a 2-3% improvement over 2010 (against the background of an uneven global recovery? Riiight!).
So if I was investing in commercial property (or indeed residential on a largescale basis) I would be looking for a high risk premium. 15%? More owl than vulture I would have said.
There is a link to the JLL index news here.
https://namawinelake.wordpress.com/2010/10/20/irish-commercial-property-down-1-1-in-q3-2010-compared-with-q2-2010-rents-tumble-by-5-in-the-quarter-and-19-8-in-past-nine-months/
There is a link to the fairly helpful discussion on the budget adjustment here.
http://www.irisheconomy.ie/index.php/2010/10/22/sticking-to-2011-deficit-goal-of-10-requires-e7-billion-adjustment/
“And whereas NAMA has 40-odd firms to examine developer/client/debtor/project facilitator business plans it hasn’t issued any tender for firms to examine buyer proposals.” That is one of the most positive suggestions that I have heard, because they are doing nothing. Brilliant!
I heard that a certain Paddy brought them in a Fund who made them a very substantial offer that would give them a profit on the purchase price of his loans and they were unable even to consider it.
Fifteen per cent is the base return that most venture capital funds look for before sharing any upside with a third party JV partner (such as NAMA or their clients?/debtors?/borrowers? – schizophrenia settling in). As you say, to achieve that target in current conditions is nigh impossible, hence it is hard to see any upside for NAMA if they sell to, or deal with Venture Capital Funds. They need a properly capitalised banking system lending money to their schizophrenic clients at competitive rates (c.5%) so that NAMA can share in any uplift or enhanced value.
I wish we wouldn’t use the term venture capital for the predators sniffing around Nama etc. They are vultures pure and simple.
Venture capitalists, in the traditional sense of the term, back high-risk young ventures whose only assets are those that go to work every day. They are certainly not into property. On account of the risks involved, they typically seek returns of the order of 30% plus pa and aim for a payback of 5 times in five years. They hope that about one in ten of their portfolio will better this and offset their lemons and living dead investments. All this is a far cry from the highly-geared hedge funds wishing to make killings on firesale property purchases.
While venture capitalists are not whiter than white, they don’t deserve to be linked to these property funds. In Ireland, we need more of the former and fewer of the latter.
@ Brian
They like to term themselves “Venture Capitalists”. If you Google Mr Brayman you will see that this is how his occupation is described. Everyone knows what they are.
In the NAMA scenario, anyone looking for exceptional returns will only achieve them at the expense of the taxpayer.
NAMA will be judged on whether or not they were naive enough to succumb to the “Sirens’ Song” of these carpetbaggers, because their profits will be the result of that outcome.
While we’re discussing the subject, this is not the only evidence that NAMA is under-resourced. I defy anyone to call them on the ‘phone and actually get a portfolio manager on the other end. You will get an answerphone and possibly a returned call later on in the late evening (a sure sign that someone is overworked).
Other evidence relates to the banks, AIB are licking their chops at the thought of keeping all sub €20 million loans. They are interpreting the opportunity to mean that this does not apply to the total aggregation of a debtors loans, but to each loan. So someone having a total of €100 million in debt could be held back from NAMA if this total constituted six loans all sub €20 million.
It saves the government and AIB making a full confession and finding more recap funds that are just not available. We now have the ignominy of a full U-Turn. It’s the UK and USA policy of “Pretend and Extend”. We couldn’t really “cut the mustard” when it came to making the full confession….. Back to the usual fudge.
Hi WSTT,
“Other evidence relates to the banks, AIB are licking their chops at the thought of keeping all sub €20 million loans. They are interpreting the opportunity to mean that this does not apply to the total aggregation of a debtors loans, but to each loan. So someone having a total of €100 million in debt could be held back from NAMA if this total constituted six loans all sub €20 million. ”
That can’t be true can it? This is how the Minister for Finance announced the increase in threshold – “The Government has decided, having consulted with the NAMA Board and the European Commission, that where the total exposure of a debtor is below a €20 million threshold in AIB and Bank of Ireland, that debtor’s loans will not now be transferred to NAMA. The threshold had previously been set at €5 million.” and “I have been advised by NAMA that there are 650 debtors with property-related debts of between €5m and €20m in these two banks. They account for just €6.6bn of the aggregate €80bn volume of NAMA eligible loans”
Isn’t NAMA now supposed to be directly managing itself the top 150 debtors whose debts start from €50m?
HOWEVER, when the Minister made the announcement on 30th September, 2010 of the change in threshold, BoI issued a statement addressing the change “that where the total exposure of a debtor is below a €20 million threshold, that debtor’s loans will not now be transferred to NAMA, thus facilitating the completion of all NAMA transfers by year end” whereas AIB did issue a statement but omitted any reference to the change. So I wouldn’t dismiss speculation that AIB are hoarding sub-€20m individual loans even where the total exposure was €20m+. Maybe a inter CEO phonecall is called for between NAMA and AIB to clarify the matter.
AIB statement 30th September 2010
http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Press_Releas/aib_d_press_releases&c=AIB_Press_Releas&cid=1282836014506&channel=IRCA
BoI Statement 30th September, 2010
http://www.bankofireland.com/includes/investor/pdfs/nama_update_300910.pdf
Minister for Finance Brian Lenihan statement on 30th September, 2010
http://www.finance.gov.ie/viewdoc.asp?DocID=6515&CatID=1&StartDate=1+January+2010&m=n
I think that the best way to illustrate the Vulture Funds’ effect on NAMA’s return is to use a real life situation of an ofice block in London which is currently 200,000 sq ft and has a permission for refurbishment to 250,000 sq ft. The original loan was £70 million.
NAMA Options:
1) Sell into curent market to Vulture Fund: Valuation £40 million (Just half what it was. The bank lent almost 90% loan to value). No uplift to NAMA. Loss on PI loan -£30 million
2) Refurbish 250,000 sq. ft. net:
Income:
250k @ £40* 7% less costs & 12 months rent free allowance Value = £120m
Costs:
Written down site value = £40 million
Construction costs: 300,000 sq. ft. gross @ £200 = £60m
Total costs = £100m
Profit before financial costs = £20m
Vulture Fund return required:
Finance on land: 2 years @ £40m*15% = £12m
Finance on construction: 1yr *50%(av) *£60m*15% = £4.5m
Total Vulture Fund return = £16.5 m
Left for NAMA =£3.5m
Therefore NAMA receives £43.5m on £70 million PI loan.
Loss on PI loan = £26.5m
Under normal bank lending conditions (without the Vulture Fund):
Total Bank interest @ 5% = £5.5 million
Therefore under normal banking terms :
Nama receives £54.5m on £70m PI loan.
Loss on PI loan = £15.5m
The net difference is £11 million.
The problem they have is getting the banks to resume lending to the debtors/developers/borrowers/anyone.
PS: Apropos the identity crisis above, I noticed that when the banks bounce a cheque now they “refer to debtor” rather than the traditional “refer to drawer”! Oh, the little subtleties that are used to insult – and this from AIB, would you believe!
Interesting WSTT, though you’ve reminded me that there has been no update from NAMA as to progress with placing its €2.5bn euro commercial paper since the start of September 2010. The paradox of the government withdrawing from bond auctions for 3-4 months whilst NAMA continued to go forth with a State-guaranteed issue was examined on here previously. But the key question would be why the €5bn available to NAMA through the NAMA Act can’t be tapped now with a State-guarantee (short term rates are close to 5%) and perhaps hope that cheaper JV finance will become available in the next few years.
Your example is interesting though if the €70m loan had a 90% LTV (loan to value, the loan expressed as a percentage of the value of the property) then that would imply a valuation of €78m. At the worst let’s say that was the value at the peak in June 2007. Values are some 35% off that peak today which would imply a valuation of €51m. And if NAMA was doing its job correctly then it will have paid a long term economic value based on a last Nov 30th current market valuation of about 10% and of course deducted a 5% enforcement contribution and NAMA premium of about 5%. So if the property has risen in line with general UK prices since last November (about 10% up) then NAMA could sell today and pocket a €2-4m profit. HOWEVER let’s put all of that to one side.
I don’t understand your development proposal. What would the office rent for without refurbishment with 200k sq ft? Is your income using Years Purchase (will explain if WSTT replied) at 7% yield to value not the income but the value of the property? Be interested to hear your response because I suspect this is very close to reality! And I think it would be helpful to general viewers if the financial proposal was set out in a level of detail that was generally understandable without a prerequisite of property valuation experience.
NAMA euro commercial paper programme
http://www.nama.ie/NAMAECP.php