The myth of the Paddy premium and the reality of the NAMA knock-down

Some stories in life play to our prejudices. Senator Mark Daly’s allegations two weeks ago (see here and here) about NAMA selling property at a loss back to the original developer played to our prejudice that NAMA is corrupt or incompetent, that developers are devious and secrecy prevails in this country where insiders are still making fortunes off our misery. The fact that the Senator declined to give details of the alleged transaction under privilege when he had the opportunity during the special Seanad Saturday sitting a week ago to debate the Finance Bill makes me think there mighn’t be as much to the story as the soon to be unemployed, former auctioneer (whose family is still in the auctioneering business) Senator would have us think. Or maybe I am betraying my own personal prejudices towards mediocre politicians and their last-ditch attempts to enrich themselves before the forthcoming election.

Another story that I have come across in the past is of the old enemy, the English overcharging Irish buyers for property in the UK during the Celtic Tiger era, just because the buyers were Irish and the English figured the Irish were stupid and therefore could be fooled into overpaying. And so we had the myth of the Paddy Premium. And given our prejudices towards perfidious Albion, Irish jokes and the view that alongside our neighbours we were unsophisticated parvenus who only a generation ago were lucky to be employed as navvies in Great Britain, it was a myth easily believed. But was there any basis to it?

From my own knowledge I would have said there was little truth to it. The UK attracts wealth and investment from all over the world and by most standards the UK is a reasonably well-governed, uncorrupt, transparent and open place to do business. Whilst some media outlets like the Daily Mail and Daily Express would seem to undermine confidence in a culturally diverse society, the inescapable fact remains that much business is conducted with foreigners in the UK. And many of the sellers are themselves foreigners, be they European Jews, Iranian brothers or Egyptian shopkeepers.  And when it came to property transactions, Irish buyers were generally advised by local property companies and my own view would have been that they were reasonably well advised. And during the Celtic Tiger era, the Irish acquired major UK assets such as the Battersea power station site, large swathes of London docklands, literally acres in London’s West End and City, not to mention prestigious office, hotel and retail sites. There was certainly the impression that the Irish had money burning holes in their pockets but that was actually true. To quote from Michael Lewis’s excellent feature in Vanity Fair last week “the Irish banks were making far riskier loans in Ireland than they were in Britain, but even in Britain, the report revealed, they were the nuttiest lenders around: in that category, Anglo Irish, Bank of Ireland, and A.I.B. came, in that order, first, second, and third”. I would say the Irish did contribute to the property boom (both residential and commercial) in the mid-2000s, and we have suffered with the decline in both sectors (residential is off 13% from the peak in October, 2007 according to the Nationwide Building Society and commercial is down 35% from the peak in June 2007 according to the IPD index). But given the fact that the Irish are now net sellers in the UK, the Paddy Premium claim is moot anyway. The issue now is whether buyers of Irish property will be seeking a discount on market valuations, the NAMA knock-down.

NAMA has certainly not been helped by the hype surrounding the creation of the agency – “bad bank”, “toxic bank” and a whole host of other descriptions comprehensively covered by Paddy McKillen’s legal team in Dublin’s High Court in October 2010 when the property investor/developer was fighting NAMA’s decision to absorb his loans, have been applied to the agency; a key argument in Paddy McKillen’s case was that association with NAMA was bad for your reputation. And indeed I think there is something to that. Whilst we mightn’t be regarded as a complete national economic basketcase just yet, it is understood that we are in distress. NAMA was billed as the world’s biggest property fund owning €90bn of property loans at par value, and NAMA is effectively State-controlled and the State is host to an EU/IMF bailout, has 13% unemployment, has seen a collapse of over 20% in GNP, the virtual implosion of its property and banking sectors and has seen the return of the scourge of emigration. Foreign media crews seem unable to file a report without some video of a windswept ghost estate in Leitrim to underline our excess housing supply and the real retrenchement in credit availability has clipped our wings and our reputation abroad. And against that background, NAMA is bravely stepping forth to manage its loan book and the underlying assets. Indeed according to NAMA, some €2bn of sales were made in 2010, though most were through the NAMA Participating Institutions (AIB, Anglo, Bank of Ireland, EBS and INBS).

Last week, Britain’s Property Week broke the news that NAMA had appointed receivers to companies within the Beetham Organisation group and NAMA now seem to be in control of two valuable assets a couple of hundred yards from the landmark Gherkin in the City of London (the Matrix Building on Aldgate High Street and the Trinity project opposite). And despite the hiccup at the Supreme Court last week, NAMA appears to be in the driving seat as regards the lending to Paddy McKillen’s Maybourne group of hotels (Claridge’s, the Connaught and the Berkeley) and is reported to be studying an offer by the Barclay twins for Derek Quinlan’s 35% stake in the Maybourne group. Sean Mulryan’s interests on the banks of the Thames are also said to be up for grabs in debt-for-equity swaps. So will NAMA face demands from the market place to offer easier terms, a NAMA knockdown? Well one thing is for certain, the UK market, although buoyant has certainly not returned to the dizzying heights of the mid-2000s when credit was easy and the economic future was bright. That said, most property companies are advising that the London market in particular is healthy – property powerhouse and NAMA adviser CB Richard Ellis’ recent Central London office overview painted a picture of a vibrant market seeing annual rent increases of 19.9% in the City and a recovery in transaction levels with foreign buyers particularly active.

But before Christmas we had a chilling insight into the mindsets of certain buyers when Blackstone’s CEO and co-founder, Steve Schwarzman said “we’re basically waiting to see how beaten up people’s psyches get, and where they’re willing to sell assets” and “you want to wait until there’s really blood in the streets” when talking about distressed asset opportunities in Europe (Ireland in particular). I think it is fair to say that many buyers, particular those of nondescript second tier assets will be holding out for deals and the NAMA brand in that context will only remind the market of an agency with huge portfolios and a strict mandate to dispose of property and a distressed national economic context. NAMA is more likely to dispose of assets where there is a ready market and where there has been some recovery. The UK meets both criteria having seen a 10% rebound in commercial property prices since the NAMA valuation date of 30^th November, 2009 and where the economy is making a slow recovery, helped by enormous quantitative easing. Will buyers look for the NAMA knock-down? I would have said yes which makes the management and marketing of any opportunities all the more important for the agency.

The Paddy Premium may have been a myth but it would surely be unforgivable to have paid a premium on purchases and then offer a knock-down on sales.