NAMA chairman, Frank Daly delivered a speech this morning to the newly formed Society of Chartered Surveyors in Ireland (the body representing the merger of the old SCS and the IAVI). The speech will be remembered for placing in the public arena firmly for the first time a commitment for NAMA to provide funding to potential buyers. There are enormous competition, policy, economic and political ramifications from this commitment.
There will be further analysis later of the speech which is available here (and an accompanying press release from NAMA is here)
UPDATE: April 12th, 2011 NAMA’s announcement that it will act as a source of liquidity to potential buyers is understandable but troubling. NAMA might have done itself some favours by providing more detail because the average punter in the street might think “hang on! We got into this mess by allowing unfettered availability of credit to create a property bubble”. NAMA probably – and this is speculation on my part – is thinking of buyers of large commercial assets rather than a terraced 3-bedroom with a builder’s finish on a ghost estate in Leitrim, though NAMA didn’t provide any information to dispel that notion.
It is the case that there are very few lenders to buyers of property in Ireland at present. In such cases NAMA can sell to cash buyers or vultures, effectively one and the same and suffer fire sale losses on the assets or it can provide finance which might yield a better price, get some cash into NAMA in terms of the equity that a buyer would advance but the agency would be taking a risk on the resulting loan. So consider the following hypothetical NAMA commercial property
Nominal value of loan – €100m
Price paid by NAMA – €50m
“Cash” offers from vultures today – €30m
Price available at 8% yield – €45m
If a buyer can offer €45m and can fund €15m of that in cash, then should NAMA advance the remainder as a 3-5 year loan? NAMA might say that the market is close to the bottom and that if the rent available was a market rent (as opposed to an Upward Only Rent Review rent) then the interest payments could certainly be covered together with small capital repayments (say €1m per year). And if the outlook is that the property and banking sectors stabilize and the general economy improves then is it better for NAMA to sell to a buyer today who might require some “liquidity assistance” or to sell to a vulture or sit on the asset?
I can see where NAMA might be coming from in the above example. But there is a difficult distinction between providing liquidity to avoid fire sales and providing liquidity to maintain prices at unrealistic levels. And I can see issues for NAMA in how it implements this new approach.
With respect to the remainder of the speech the following was of interest on here
(1) Frank Daly uses his speech to publicly shoot across the bows of developers, telling them that he knows in some instances that they are playing for time and with respect to the 145 developers beyond the 30 in Tranches 1 and 2, and who have loans of €34bn (average €235m), if they don’t submit plans by the end of April, then Frank will have no hesitation in taking foreclosure action. I must say that there is a sense of widespread lack of co-operation from NAMA developers and a sense of desperation on NAMA’s part as what to do next with those developers.
(2) “quite a number of properties will be going on the market over the rest of this year and into next year”
(3) With respect to the funding of purchases, the NAMA chairman used a term that might be new to many : “staple financing”. This isn’t anything to do with buying office supplies but is a term borrowed from investment banking and means the seller finances the purchase by the buyer. The financing initiative is intended for the commercial market but NAMA is also exploring options “on the residential front”. Curiously NAMA suggests working with the two Pillar Banks (AIB/EBS and Bank of Ireland) to “move things along in this area”
(4) You have to admire the courage of Frank with talking up the property market – we are now back at commercial prices level suggested by long term correlation with GDP, office vacancy rates in Dublin are stabilizing, and office and retail yields are back at levels seen in the pre-Boom 1990s. On commercial property he concludes “without wishing to assume the precarious mantle of forecaster, I would suggest that there is limited downside for the commercial property market from current levels” which sounds a little like “a day like today is not a day for sound bites but I feel the hand of history upon our shoulders” On the residential side, he repeats the claim that in November 2009, prices were already down 50% and he wheels out the old line that the recovery will be patchy and certain areas will recover first – namely, certain parts of Dublin (where co-incidentally NAMA has a massive stock). His view is that most of the fall in residential property has already taken place. As that good-time girl, Mandy Rice Davies might have said “He would say that, wouldn’t he”. He concludes by saying that there is certain property which can only be sold for what you can get for it – code for “fire sales”
(5) It is now “high time” to get on with a register for both commercial and residential property transactions.
(6) Whilst stressing that he “is not commenting on Government policy”, Frank advocates a speedy resolution to the Upward Only Rent Review changes presently being discussed. Frank is also concerned about the effect consequent litigation might have on the property market. Frank didn’t mention the fact that commercial property in NAMA’s portfolio might drop 20%-plus in value if the changes are enacted.
(7) Frank refers to the fact that NAMA has actually introduced an innovation to property in Ireland by creating property receivers which are cheaper than corporate receivers. How well the new arrangements will work remains to be seen but from first sight, it seems like a surgical way of dealing with the problems of distressed property loans in a cost-efficient way. I don’t think NAMA has received much credit for this innovation which is a shame.
UPDATE: 13th April, 2011. Of all the newspaper articles carrying the “NAMA to provide property finance” stories in today’s Irish media, Barry O’Halloran’s article in the Irish Times seems to provide most details though his reporting of NAMA’s loans in general is rubbish – he claims the agency has acquired €88bn of loans for €37bn is just plain wrong, NAMA has acquired €72bn of loans for €31bn. Barry seems to have information that was not provided via the speech or press release by NAMA yesterday, namely that NAMA is intending to provide finance to banks who can then lend on to borrowers, that banks have a liquidity problem while at the same time NAMA has a cash mountain of €1bn, NAMA’s funds might allow banks reduce LTV requirements for mortgage borrowers which would mean a smaller deposit was required and that the plans are unlikely to be finalised before the end of the summer and would require Government approval.
It will be interesting to see how they intend to provide finance to buyers. Seeing as it takes months for NAMA to agree to allow a borrower to sell an asset, will the buyer have to wait years for NAMA to approve finance to support it’s purchase? If NAMA’s primary objective as reiterated by Frank today to “recover the ~€30bn paid to the institutions plus whatever it invests to enhance the assets” why is the disposal process taking so long? Would it not be a sign to our partners in the IMF/ECB/EU that we were serious about debt reduction if NAMA began to dispose of the assets it has purchased at a profit and repaid the bonds. From my conversations with NAMA developers, it seems nobody (from top to bottom) in the agency wants to make a decision on anything. This continues to be a national tragedy.
Hmm… I’m a little like Thomas on this one.
I’m a great believer in the adage: “Don’t listen to what they say, watch what they do”. And what they are doing is telling all their borrowers not to ask for funds as they will not be provided. So are the borrowers to be excluded from the proposed provision of liquidity that Frank now says will be provided to a “purchaser”?
The plot thickens, as the so called “final contracts” with debtors and their wives seem to have been quietly dropped (a few signed MoUs, but refuse to sign the contracts) and the emphasis is now on mandating all the rental income to NAMA.
A case of “follow the money”, perhaps. I see the hand of the IMF, because our lot are not that bright.
Frank is wrong about residential. Especially Dublin residential.
I was traversing through South Dublin recently and, having made a slight miscalculation, had to make a u-turn. I turned right off the Rock Rd. into “Elm Park” to rejoin the dual carriageway heading north. Seeing that the development was no longer closed off, I ventured into its depths. It is massive. And it is empty. Completely empty. There must be a couple of thousand units in there – seriously. It felt like one of those iconic videos of Chinese ghost developments.
Anybody who proclaims “the bottom” of residential – particularly “South County Dublin” residential – should be forced to drive around Elm Park and explain exactly how it’s going to play out.
The development itself http://goo.gl/maps/L8vr
This is utterly insane. Teh state giving money to developers to buy land off the same state. There can be no doubt remaining that NAMA is nothing more than a bailout fund for the property owning classes in Ireland.
Why should a public body knowingly inflate property price–this is exactly what they are doing here. Inflating prices. Tenants will have to pay higher rents, and potential homeowers (those who remain) will have to pay more for homes. And the taxpayer will have to stump up yet more billions for NAMA.
The only people who benefit from this are the property owning classes!! It’s manifestly apparent who NAMA is operating on behalf of.
@OMF & Jake, Understand where you’re coming from but how would you deal with the dilemma in the above example – would you sell the asset for the fire sale price of €30m or sell it for €45m but provide €30m of staple finance? It’s probably a trilemma because NAMA might be able to just sit on the asset and hope the market improves.
But what would you do if you were NAMA in the above situation?
Personally, I’d snap up the €30mln and say:
“Thanks boys, best of luck, you’ll need it. NEXT!”
@Cesar, so you’d throw away €15m
Unless of course you didn’t think the buyer would pay back the €30m loan. But think about that, if he didn’t pay back the loan, NAMA would repossess the asset and sell it for however much it could get, let’s say €25m. So NAMA would have the €25m and also the €15m deposit from its original buyer. Still think that accepting the €30m would be the better deal for NAMA and if so why?
I wouldn’t sell at all. I’d sit on the property and squeeze the loan owner until they burst.
I string the owner along until the property appreciated in 10 years time. Then, just as they were due to finally make money on it, I’d up my loan rates, bankrupt them, then sell the asset myself for a tidy profit.
Or at least, those are the kind of shenanigans I would be up to if I was a proper private business and not what appears to be a government funded retirement home for scattered-brained civil servants and washout bankers. The idea of giving someone money to buy something off you is an idea worthy of Grandpa Simpson, not an multi-billion euro institution. They won’t even take money when it’s on offer and are instead giving even more away! Unfortunately for the taxpayer, NAMA is less than driven when it comes to securing value for the public which is ultimately funding all their Florida roadtrips.
By the way NWL. I stand by my earlier statement about Transition Year students being able to do most of these jobs. There isn’t a TY student in the country who would have proposed this scheme, for fear of being jeered out of it unmercifully my his classmates the next morning!
@OMF, Aah so you think there will be a recovery by 2020? Let’s look at that. NAMA and the SCS think that commercial property will on average drop 20% in value if Upward Only Rent Review leases are changed as is the commitment from the government, most recently articulated by Ministers Shatter & Bruton last week. Commercial rents have been dropping 20% annualised in each of the last four quarters. By all accounts there is an imminent shortage of prime and third generation office space in central Dublin but outside these categories there is still serious oversupply. Rents in Northern Ireland, prime Belfast are about half those in prime Dublin. The latest forecast from the IMF is that we won’t even get below a 3% deficit:GDP by 2016. There is more than an outside chance we will default on sovereign debt. Our corporation tax arrangements are under constant pressure from our friends in Europe.
So let’s say you sell today for €45m or wait for 2020. The €45m might be worth €30m in a couple of years as UORR changes take effect and we live out the tail end of the depression. In the subsequent eight years prices need rise by 5.5% per annum compound in each of those 8 years. And as landlord you may also need refurbish during that period.
And if you hold onto all of the properties until 2020 then there will be a glut in short period that would depress prices further.
So you’d still hold tight on all NAMA properties?
I would still hold tight to the properties, as that enables me to hold tight to the owners as well.
Remember, what is the point of loaning money to a buyer if the buyer is going to go bust anyway? NAMA cannot and should not act as a refinancing house for troubled property owners. Selling today for €45 million is not the same as selling today for €15 million and loaning out €30 million. That is the same as just lending out €15 million and losing the property as well.
Why not just hold onto the property and squeeze the owner? You can drain them dry over 15 years AND keep the property just in case, instead of chasing them up for your loan money and owning no property when things go belly up. Let’s not forget that the owners ALREADY got a loan of which the property was collateral. It makes no sense to give them back that collateral and another loan as well.
If the state defaults, or there is a recession, or there are upward only rent reviews, then the property owners will default on their loans anyway. The difference this scheme makes is that under it, when they do, NAMA will no longer have the properties, and so no hard assets when coming out of whatever crisis awaits us.
I’ve tried spinning this scheme around in my head with all the accounting tricks I know and it just refuses to make sense. There is something deeply wrong with the inner workings of NAMA if it sees fit to produce a concoction like this.
@OMF, I don’t understand you
(1) “what is the point of loaning money to a buyer if the buyer is going to go bust anyway” – NAMA gets €15m in cash and can also foreclose on the building if the new buyer defaults. So NAMA ends up with €15m cash and the original building. The “point of [NAMA] loaning money” is to enable a better, perhaps non-fire sale, price to be achieved.
(2) “That is the same as just lending out €15 million and losing the property as well.” don’t understand that. In the example, NAMA lends €30m (or more accurately, just receives €15m in cash and the remainder as a loan commitment. At no point does NAMA take €30m from its cash reserves and give that to anyone).
(3) “Why not just hold onto the property and squeeze the owner” Because prices might continue to decline and at some point NAMA needs to foreclose and sell. And if NAMA does this in 2020 for all properties then there will be such a glut of supply on the market that prices will collapse again, even further.
(4) “You can drain them dry over 15 years AND keep the property just in case” I think NAMA is facing up to the fact that most developers haven’t a snowball’s chance in hell of repaying the original loans, that some loans are non-recourse, that the documentation in some loans is not of sufficient standard to litigate and if it is, it’s touch-and-go whether or not the developer will walk away scot free, that loans are ring-fenced in a limited company incorporated in Luxembourg/Delaware/BVI, that personal guarantees are effectively worthless because developers have few personal assets and have transferred main assets to spouses several years ago as a genuine precaution against a downturn (as opposed to being specifically to avoid paying creditors) and our bankruptcy legislation protects the family home. And in these cases there is nothing to “drain” and avoiding foreclosure just means that NAMA exposes itself to future price drops.
(5) “The difference this scheme makes is that under it, when they do, NAMA will no longer have the properties” Don’t understand that because if the new buyer defaults then NAMA has their €15m deposit AND the building.
(6) “Let’s not forget that the owners ALREADY got a loan of which the property was collateral. It makes no sense to give them back that collateral and another loan as well.” I think you’re assuming that NAMA is selling the property back to the original owners, which I think is contrary to NAMA’s stated policy. And I think that would cause an outcry. In the above example Developer A has the €100m with NAMA and defaults. NAMA sells the property to Developer B for €45m. NAMA pursues Developer A for as much of the €55m shortfall as possible. If Developer B defaults then NAMA has a €15m deposit AND the building which it will presumably foreclose on.
I can see where NAMA is coming from, but there is a need to distinguish between fire sale prices and “normal market prices”, because the “normal market” may be offering low prices NOT because of an absence of credit but because prices are low and many see them going far lower and no buyer, residential or commercial wants to catch the proverbial falling knife. If NAMA making credit available leads to a better price then that is fine but there needs to be safeguards that NAMA is not just distorting the market in the same way the banks supplying abundant cheap credit in the 2000s fuelled the original property boom.
@OMF
Unfortunately, NAMA is but a small part of the oligarchies fun and games for the masses. Very sad, indeed, but little hope for change.
Mr Daly was addressing the Society of Chartered Surveyors in Ireland. The reckless banks lent billions against the surveyors valuations. These valuations were the greatest work of fiction in the history of the world property market, and played a central role in the greatest bank crash in the history of mankind. The surveyors lobbied the government not to ban upward only rent reviews(UORRs). Toxic Irish lease law i.e upward only rent reviews tied to long leases are not tolerated in any third world country or any other eurozone country.
This toxic lease law did not just destroy the retailers ,it was the rocket fuel for the valuation model which created the monster commercial property bubble. On page 123 of the book the Fitzpatrick Tapes Mr Fitzpatrick states “Our exposure is not to the building,its to the money that comes from the leasing of it. If the value of the building goes down,it dosn`t matter. We will still get our loan repaid“ Fitzpatrick was nothing if not consistent in this, one of his core philosophies.
Fitzpatrick.Fingelton and Gleeson lent tens of billions against these toxic leases not against the properties. You couldn`t get these dreaded leaes in any other eurozone country. This dreaded lease law destroyed our country.
I sincerely hope Mr Daly is not listening to the Society of Chartered Surveyors and their pseudo academics who played a central role in the destruction of our country.
@John, whilst our leases might be out of step with the rest of Europe, they are akin to the UK from whom we have borrowed much legislation and legal practice. UORR leases protect landlords and arguably surveyors act more in the interest of landlords than tenants – that will be vehemently denied, but anyone who has watched court arbitration (as opposed to the usual arbitration) will not be surprised to see the landlord’s expert surveyor produce a valuation twice that of the tenant’s and in my experience the court tends to determine closer to the tenant’s. That is the nature of clientelism and the truth is that the tenant will be a one-off or, at best infrequent, client whereas the landlord is your bread-and-butter. That’s the perception at least and I would say there is more than a grain of truth in it. Also, even the rumour of the Government dealing with UORRs has been enough to deter buyers who naturally fear the asset will be worth far less in a year’s time and property firms depend on transactions to generate fees and protect livelihoods.
I thought the NAMA chairman was restrained in his criticism of surveyors yesterday. He acknowledged that they value according to what the market will pay and fundamentals play little part in that (putting a valuer’s hat on, the rules that are to be followed ultimately boil down to what a willing buyer and willing seller will agree in an open market transaction where both have access to perfect knowledge). So when NAMA’s Head of Portfolio Management valued Burlington Plaza for Paddy Kelly in 2007 at €350m (according to Paddy Kelly at Glenties last year), that price was reflective of current prices at that time. The fact that Burlington Plaza is reportedly worth €80m today is not necessarily a criticism of John Mulcahy – that’s just how valuers value. In the same way accountants value historically, which is why you had a fine and dandy annual report from Irish Life and Permanent on 30th March, 2011 and the next day the stress tests revealed the company needed €4bn to retain a banking licence.
The tone of comments on here of late has changed slightly. Normally reasoned and stringently neutral and to be praised for their insightful and incredibly well-informed nature. However some of the newer. Comments such as above just don’t seem to get it! Towing the populist line of a vast conspiracy led by comically villainous developers! The truth is very different. NWL don’t be too confused there seems to be a crossover of commentators from some of the more wildly rabid forums!
@Eamon, that might be a bit unfair. I agree with you in that it is at this stage tiring to regard developers as “comically villainous” , knowing what we all know now. That said, NAMA developers have huge debts which the State has seen fit to acquire. And developers, like any business people, will tend to protect their wealth to the greatest practical extent. And when we all see developers still enjoying what is for many a luxurious standard of living and we hear of wholsesale transfers of assets to spouses and at the same time, every citizen is picking up the cost of bailing out the banks to replace capital lost from loans that have gone bad, you can hardly blame people for being suspicious and wanting to ensure developers don’t walk away from their obligations. Wanting to “drain” developers when you’ve lost your job, are paying more tax or face interest rate hikes from banks trying to recover losses is hardly unexpected.
You could almost say that “Revenge is not a policy” in the same way that “Anger is not a policy” but let’s not forget that the Government explicitly stated that developers would not be buying back their own developments. But we know that may be cutting off our noses to spite our faces because the original developer might be able to pay the best price because he knows the development best. This would be in a situation where the developer’s original loan was non-recourse or ringfenced to a particular limited company. So there is an element of revenge even in Government policy.
So comments that might be regarded as anti-developer are welcome as long as they don’t break comment-posting rules and this blog is not here to persecute any individual or group. As always, comments that back up opinion with facts, figures or argument are most welcome.
My comments were not intended as pro-developer, I merely sought to highlight some of the more outlandish commentary seen in some posts – yours excluded – here and in the press.
I fully understand the need for people to be held to account, however does the fact that developers are excluded from purchasing back their own assets not open another can of worms? As yesterday’s ruling on fair procedures shows are they not entitled to their own constitutional rights and protection of the law? They cannot be excluded arbitrarily -no matter what the public would like. Legislation cannnot hold them to a different standard as everyone else, excluding them as a ‘class’ from certain rights?
It behoves us to ensure that this remains the case or the courts could be very busy in future months…
@Eamon, didn’t mean to suggest your comments were pro- or anti- developer at all. I think you may be right about yesterday’s judgment which is taking a great deal of time to study, but the access to fair procedures including consultation where you might be negatively affected might indeed be a can of worms and I would not be surprised to see further litigation surrounding this principle.
It looks as if it will be tomorrow before there is a review on here of the Paddy McKillen judgment – press reporting today is very light indeed. You might, in the meantime, take a look at analysis of the judgment by Paul McMahon at
http://www.extempore.ie/2011/04/12/dellway-v-nama-initial-summary-of-second-round-of-judgments/#more-1040
The point of hanging on to buyers seems more about vengeance and revenge, two fine pillars on which to form a business model! The taxpayer will be well served!
Ireland is not a member of the sterling area ,Ireland is a member of the eurozone group of 17 countries with a total population of 330 million people. In the eurozone all countries have the same currency, the same central bank i.e.the ECB ,the same interest rate and similar commercial lease law.
There is one exception to these four characteristics-Ireland has entirely different commercial lease law to every other member of the eurozone. In the rest of the eurozone commercial leases are short say five to ten years with break clauses and rents are annually reviewed using the CPI. Take France as an example. France has 3/6/9 leases. The tenant agrees a rent and a nine year lease with break clause in years 3,6 and 9. The rent is reviewed annually by say the CPI . All other eurozone counties have similar type leases.
Irish commercial leases are say 25 years long,no break clauses, and rents are reviewed every five years using upward only rent reviews. In the period 19995 to 2005 rents in say Grafton Street rose 300% ,inflation was say 30% and freehold property yields were as low as 2%. Longterm high street freehold property yields over the previous 70 years were 6%.
The Irish surveyors lobbied the government not to ban this toxic lease law. The reckless Irish banks lent against the toxic leases not against the property , and this was the rocket fuel for the commercial property asset valuation model which created the monster commercial property bubble. If we had regular eurozone lease law it would have been virtually impossible to have had commercial property bubble. Ireland is alone in the eurozone to have had a comercial property bubble. It was entirely a function of the toxic Irish lease law.
The Surveyors value property on the most recent price achieved, not on its underlying value based on the NPV of the future stream of income etc etc. Say if a fool gave you a five euro note for a one euro note–then a surveyor would value all other one euro notes as five euro .
Say if a fool gave 100 million for a standard Grafton Street freehold which we all knew was only worth 20 million euro, then a surveyor would value all other freeholds on the street at 100 million. Say if a gullible tenant
agreed the highest rent in the world on Grafton Street–then the surveyors would insist on all other tenants paying this absurd rent at their next rent reviews.
Believe me -the surveyors destroyed the Irish ecoonomy and have created a nightmare for every Irish citizen. These geniuses are now advising Nama—the lunatics have taken over the asylum–the horror story continues.
@John, whilst agreeing with a lot that you say, I would point out that surveyors are required to use market evidence to justify valuations. A “fool” as you say may indeed overpay on a single transaction but surveyors should be able to differentiate between an outlier special status transaction and “the market”. Now if “the market” is mostly comprised of fools that overpay then that is still the market. And using that approach there were perhaps 300,000-plus fools that overpaid for residential property in the mid 2000s. Expecting valuers to ignore market evidence in favour of some fundamental approach is too much I think. RICS valuers worldwide adopt a more or less standard market-based approach to valuing. Valuers look stupid when markets overheat or crash, that’s the nature of things and I’d be willing to bet that there may be valuations today which in five years time will prompt someone to say “what eejit valued that property so low in 2011”.
“surveyors are required to use market evidence to justify valuations”
I’m curious. Do valuers ever use discounted cash flows to assess values and, if so, do they make projections of likely values and yields? If they do, do they take account of cycles or do they they just use straight edged rulers to make their projections? It sounds to me as though the latter were used during the boom and little cognisance was taken of cycles.
@Brian, yes valuers do use lots of different methods to help with valuing. But market evidence comes into every one of them. Take a “discounted cash flow” which might look at future rental income on a commercial property. The rental income will be “market based” in that it is either what the property is presently generating or what the market presently suggests is appropriate. Do valuers take account of property cycles? Again yes, but a value is something which a willing buyer and seller agree when both have this theoretical concept of perfect knowledge. Was a average home in this country worth €313,000 in 2007? Yes because that’s what willing buyers and sellers were transacting at, at that time. Was €313,000 out of kilter with long term averages? Yes in the sense of multiples of income or rental yields. But it’s not the job of a valuer to tell the market that it’s wrong and that it should revert to some fundamental notion of rent yields, income multiples or affordability.
I think you expect too much from valuers of property which you wouldn’t expect from valuers of shares, cars, boats – why should property be different. A valuer trying to tell the market that it is wrong and should revert to some fundamental calculation is akin to Canute telling the tide to stop.
The banks lent billions against the surveyors valuations. The surveyors were driving the bus and they drove it straight over the cliff.
So are you saying a sensible buyer should discount the professional valautions and make their own more prudent valuations?
I thought that commercial property investment was (usually) longterm and would be valued/priced as such.
@Brian, you could well do your own calculations though you would still need access to market factors like rents. So let’s say you came up with your own valuation of an average property in 2007 at €200,000. And you said to the seller that €200,000 was your final offer as this was based on long term fundamentals. The seller would have been mad, would he not to have sold for €200,000 when he could have achieved €313,000 elsewhere? So the buyer would simply have been frozen out of the market, a situation with which I know some will now be very pleased (almost to the point of smug satisfaction in some cases, no offence!) If the whole market adopts some fundamental approach then yes you might get fewer bubbles and crashes, but that would run counter to free-market principles and it is human nature to place subjective values on personal assets like your home.
As regards long term investment valuations as opposed to the valuations that would have mostly pertained during our boom, then even there you would have had valuations based on existing rents. Was it the valuer’s job to predict the state of the economy a few years hence when rents have collapsed by 50%? When the good and great were predicting soft landings and where most economists were mute on the catastrophic ballooning of the credit and property bubble? Again I think you ask for too much.
@NWL The oil industry is one of the most free markets that you could think of. At the exploration and production end, it fully understands cycles. Even though the price of oil is currently close to US$120, no professional valuer of oil reserves would use this when making an investment case. Most probably, they would be thinking of a long run price of about US$80 and a NPV for oil in the ground of about US$5-15 depending on location etc.
I don’t think I ask too much for professional property valuers to be realistic about prices. What is that phrase about knowing the price of everything and the value of nothing?
NWL, I don’t want to distract you any more on this as you do much more useful things than responding to my rants.
My last word on this matter. Found this item on an investor forum whuch I think is very relevant to our discussion. Just substitute “Mr Valuer” for “Mr Market”.
“Benjamin Graham’s 1949 book, The Intelligent Investor has been described by Warren Buffett as the best investment book ever written. Not surprising since Graham was Buffett’s mentor and to this day, he is considered to be the archetypal value investor.
Graham states:
“Basically, price fluctuations have only one significant meaning for the true investor: They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.”
In his book, Graham introduces us to his now famous metaphor “Mr. Market” which explains how stock markets operate and demonstrates his point that a wise investor will always choose investments based on their fundamentals uninfluenced by the whimsicle nature of market sentiment.
In these testing times, the “Mr Market” metaphor offer a great lesson. It goes something like this:
Imagine you have a business partner and his name is Mr. Market. Mr. Market, is a very reliable guy, he turns up every day at the office and tells you what he thinks your share in the business is worth.
Usually, the price he quotes is reasonable enough. However, Mr Market suffers from what we now call “Bi-Polar Disorder” accompanied by rather wild mood swings – which makes him extremely temperamental.
So when ever Mr. Market is brimming with optimism or in the depths of depression, he will quote you a price that, according to Graham “seems to you a little short of silly.”
So Intelligent Investors should never let themselves fall under Mr. Market’s influence or we will suffer from the same mood swings. Instead, we should learn to take advantage of Mr Market and sell to him when he quotes us silly high prices and buy from him when his price seems just too cheap.
But the best thing about Mr. Market is that he doesn’t give a damn whether or not you choose to buy his interest or sell him yours. You can never hurt his feelings. It’s up to you whether or not you take up his offer. He will keep turning up at the office every day, offering to buy or sell at wildly different prices. It’s always the same good business it has always been. That doesn’t change. It’s just that, depending on his mood, sometimes Mr. Market is optimistic about the business and on other days he’s very pessimistic.
As long as you can determine the value of your business based on its fundamentals, then you will be able to take advantage of Mr. Market’s lamentable condition. Always remember that Mr. Market is there to serve you and not to guide you.
@John Corcoran. “Toxic Irish lease law i.e upward only rent reviews tied to long leases are not tolerated in any third world country or any other eurozone country.”
Actually, they are standard in the UK.
Our legal and investment legacy comes from our historical connection with the UK. The law has changed and new property investment market lease terms are now more akin to those in the “Eurozone”.
What we are talking about is enacting retrospective legislation on the remaining legacy leases that probably have on average 8 -10 years remaining.
Are you as a taxpayer prepared to pay compensation to the landlord when the government reduces the rents and values of these properties? A lot of that benefit will accrue to multinational tenants who (in general) have no issue with the lease and contract that they signed.
It is the compensation issue that will be tested in the courts.
BTW, all this “bash the greedy developer” stuff is getting a bit tiresome. NAMA is at present implementing a policy that is based on vindictiveness. Frank Daly is its chief proponent. It is a policy that has been fanned by the media and at its most virulent would like to see most of the developers sleeping in a doorway in Capel Street.
It is the main reason that it has not been possible for NAMA to reach an sort of contractual conclusion with the developers. At present, there is a simmering hostility between NAMA and the developers although a cloak of restrained politeness has been retained.
This civility will not last as the relationship deteriorates by the day. Cracks are appearing in the last few weeks. As witness to this, I reiterate once again that despite huge pressure, no contracts have been concluded between NAMA and their debtors.
NAMA does not seem to realise that the developers talk to each other and they grow stronger in their resolve. It will be interesting to see the medium term future when the developers adopt the role of “poacher” rather than “gamekeeper” and there is a consensus to boycott the purchase of other developers assets. It’s going to get more like “The Field” IMO.
Plus ca change…..
BTW, I am surprised that it needs to be said once more, but the debts that the developers had were private debts. A matter between them and their banks. They did not pass them on to the taxpayer and ask the citizens of Ireland to pay them.
The Government did.
“all this “bash the greedy developer” stuff is getting a bit tiresome.”
Agree. Let them just pay their debts and then we can all move on. If they can’t or won’t then they must take their medicine and accept the consequences.
I do think that this is the point…
If NAMA had never been created then developers would have worked with their banks. Some would have fallen but others would have survived. NAMA is not a safety net that they are happy to be caught in! By their nature they would have been happier to take the risks with their funders than left to the foibles of former consultants, agents and enemies now turned civil servants – some of whom, if anecdotes are to be believed – are on a mission to ensure they are made to feel pain regardless of its effect on their ability to ensure a return to the taxpayer.
@NWL ‘RICS valuers worldwide adopt a more or less standard market-based approach to valuing.’
Well yes.
I’m personally aware of a ‘well know and respected’ surveyors firm that ‘sold’ a development (say €40m for arguments sake, not the correct figure) on behalf of a client. The next tender price was over 50% lower (@jc & @nwl ‘fools make a market comment!). A bank lent the purchase price to the buyer based on a ‘RICS’ surveyor report, from the same ‘well know and respected’ surveyors firm, that the bank commissioned from them. The reports ‘magic number’ matched the purchase price exactly without offering a shred of realistic evidence as to why.
In a nutshell, the funding bank and the purchaser relied on a valuation report done by the vendors surveyor, perfect knowledge indeed.
Just because things ‘should’ happen in a certain way (even in RICS world Ireland) doesn’t mean that they have, the are, or they will.
@BF ‘So are you saying a sensible buyer should discount the professional valautions and make their own more prudent valuations?’
Armed with the above (currently anecdotal) tale, what do you think?
Personally I think FD comments are worrying. International property investors don’t seem to be ‘active’ in Ireland yet so any proposed scheme NAMA scheme will assist ‘local’ buyers to ‘take over’ the tiger developers/banks remains will be to the benefit of institutional investors, pension funds, (anyone else you can think of?, say NTMA on behalf of the NPRF) etc.
And sur’ give them pillars a slice of the pie (maybe I’ve watched too much scully and moulder).
AIB and Anglo have already tried to do what NAMA are now proposing. This is a decent analysis of it:
http://www.sbpost.ie/newsfeatures/property-grab-gets-green-light-47241.html
One of the reasons why transactions aren’t happening is that international investors and lenders believe that NAMA is an attempt to manipulate the market. So now, to encourage transaction volume, NAMA is proposing to manipulate the market even further. Brilliant!
Sounds like the makings of either a ponzi scheme or market manipulation using taxpayers money.
@All, if we all want NAMA to get the market moving and not sit on assets for 10 years and release them in a glut which will just collapse prices further, then are there any alternative suggestions?
There are those who will say that NAMA should just auction property to the highest bidder but if lack of credit is a factor as in the example in the entry above, then NAMA will sell the asset for €30m even though another buyer might be offering €45m but require €30m of credit.
I can see huge policy & competition issues with the NAMA proposal. But what else can they do if, as the agency claims, buyers can’t access credit?
“Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers’ goods industries.
Mises, then, pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank. What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers’ goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom.
Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, “laissez-faire” policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.”
Murray Rothbard
Full essay:
http://mises.org/daily/3127
@NWL
They should do nothing. They’ve already done too much.
NAMA are just playing for time (to quote Frank) and making it up as they go along. No one at any level wants to make a decision. I am aware of 2 offers for portfolios in excess of what NAMA paid that the department of finance are sitting on. These portfolios don’t need finance or NAMA to staple finance and they are being stonewalled by NAMA/the department because they are afraid to make any decision. The sums offered are in excess of €500m and from credible bidders. One of the bidders told me the agency is ‘under-resourced and delinquent and no-one seems to have any urgency or commercialism’ What exactly are we telling the IMF/EU/ECB? “Cheques in the post”??!
Do you have evidence for this? If so, why are you sitting on it instead of making it public as you should? If not, then you shouldn’t be spreading idle rumours.
On a side note, I’m rather surprised at just how little is leaking out of NAMA and the Irish banks. Even the Nixon whitehouse had serious trouble keeping its skeletons in their closets. Yet BoI, Anglo, AIB, Nationwide and NAMA are for all intents and purposes, information super-fortresses. There hasn’t been a drip of a leak out of any of them in three years.
And the idea that NAMA doesn’t leak…. are you joking me? Simon Carswell and Emmet Oliver might as well be on the payroll of the NAMA PR team. My 85 year-old grandmother does a better job of holding water….
“Let them just pay their debts and then we can all move on. If they can’t or won’t then they must take their medicine and accept the consequences.”
Oh dear, Brian. This reflects the vindictiveness of which I speak. Nobody likes to have unpaid debts. It is a matter of self pride. But I question whether the above unforgiving sentiments reflect Christian values.
I would refer you to Matthew 18:21 – 35 written some time ago in October, 28 AD.
The Parable of Unmerciful Servant
21. Then came Peter to him, and said, Lord, how oft shall my brother sin against me, and I forgive him? Till seven times?
22. Jesus saith unto him, I say not unto thee, Until seven times: but, Until seventy times seven.
23. Therefore is the kingdom of heaven likened unto a certain king, which would take account of his servants.
24. And when he had begun to reckon, one was brought unto him, which owed him ten thousand talents.
25. But forasmuch as he had not to pay, his lord commanded him to be sold, and his wife, and children, and all that he had, and payment to be made.
26. The servant therefore fell down, and worshipped him, saying, Lord, have patience with me, and I will pay thee all.
27. Then the lord of that servant was moved with compassion, and loosed him, and forgave him the debt.
28. But the same servant went out, and found one of his fellow servants, which owed him a hundred pence: and he laid hands on him, and took him by the throat, saying, Pay me that thou owest.
29. And his fellow servant fell down at his feet, and besought him, saying, Have patience with me, and I will pay thee all.
30. And he would not: but went and cast him into prison, til he should pay the debt.
31. So when his fellow servants saw what was done, they were very sorry and came and told unto their lord all that was done.
32. Then his lord, after that he had called him, said unto him, O thou wicked servant, I forgave thee all that debt, because thou desiredst me:
And when we think that we as a nation are looking for the same mercy from the indebted position that our government placed us in when the socialised the banks’ losses. Maybe we also should remember to “do as you would be done by.”
But back to the developers, who are not being given the opportunity to work through the loans and repay their debts. Their banks are insolvent, have reneged on earlier funding commitments made and NAMA is selling in the market at whatever a purchaser is prepared to pay.
The developers will turn poachers, because under the Constitution they cannot be discriminated against and in the end they are the only purchasers for the cesspit that is the property market in Ireland.
The London properties are already being discounted in the market there because of the NAMA association and Ireland is commonly referred to amongst the UK estate agency community as “Namaland”.
Says it all really.
WSTT, you say “nobody likes to have unpaid debts. It is a matter of self pride.” It much more than the deflated egos of reckless borrowers. The unpaid debts have been incurred in a completely overgeared chase for profit by a tiny minority which has landed the country as a whole on the brink of insolvency. That takes some doing.
I’m very sorry to hear that it has damaged the self-pride of these debtors. Maybe, the damage and destruction has been been sufficient for some of them to strive to pay back the maximum possible without regard to the legal niceties and in accordance with Christian values.
Brian,
The developers didn’t land “the country as a whole on the brink of insolvency.”
Money lending is a business, a very old business. The main skill required is the accurate pricing of risk. Some lenders are smart and make money. Other lenders are not smart and lose money. That’s capitalism – the survival of the fittest. The Irish government decided use taxpayers money to prop up unsound, poorly run businesses (the banks). That’s what has brought the country to to the brink of insolvency.
To give an analogy, if a venture capitalist didn’t know what he was doing and lost money investing in startups would you blame him or the entrepreneurs he invested in? If the government then used taxpayers money to prop him up, would you still blame the entrepreneurs?
Yes I do have evidence but there is the little matter of anonymity and professional self-preservation. And I have plenty more examples of how NAMAs stalling/lack of resources is costing the taxpayer money. NAMA have said they “will not be held to deadlines or have their hands forced” but what they haven’t seemed to grasp is that inaction can cause losses as well.
* For example there are alot of sites that were bought in 2006/2007 where planning permission is now expiring. Without planning permission the value of these sites is at least 20% less.
* Also delays in agreeing commercial leases where the tenant has found other premises costs income
* several examples last week in the UK where NAMA caused sales to fall thorugh because they could not approve the deals before the stamp duty increased from 4% to 5% on purchases over £1million.
* Over 1 year on and STILL no agreements signed with any developer.
* NAMA jumping up and down like a giddy child when they make a few quid on the low-lying fruit.
* Frank Daly has been rolling out the same comment about being close to agreeing deals for 6 months now
But I believe change may be afoot. The new administration were swift to deal with the banks, maybe the winds of change are now seeping through the sixth floor on Grand Canal Street….they bloody well need to
@BR
“Over 1 year on and STILL no agreements signed with any developer”
The press releasee by Treasury/REO this week in relation to its debt restructuring is revealing when it says
” As previously indicated, the Group submitted a comprehensive business plan in May 2010 for NAMA’s review. The initial evaluation process is now complete resulting in a signed Memorandum of Understanding, the terms of which are non-binding and intended to form the basis for further negotiations. NAMA will monitor the Group’s subsequent performance to ensure that it adheres to targets contained in the Memorandum of Understanding and, subject to the further negotiations referred to above, binding facility agreements will be entered into.” http://www.realestateopportunities.co.uk/News.htm
This reminds us that there are three documents which comprise “agreement” which are (1) Memorandum of Understanding (2) Heads of Terms and (3) Final Agreement and that each needs to be signed by (1) NAMA (2) the developer (3) potentially the developer’s wife
NWL, I don’t know if you are agreeing with my point or not. But you have to agree that by doing nothing NAMA is damaging the value of it’s security where action is required. The agency is clearly under-resourced and it is beginning to cost us in terms of realisable value of the underlying assets.
@BR, I am most certainly agreeing with your point on NAMA not signing an agreement despite having started to take over Tranche 1 loans in March 2010 & I cited the Treasury announcement this week to illustrate that although a Memorandum of Understanding might be signed, that is not the same as a binding agreement. On your general issue that NAMA is under-resourced, plainly with 100-150 staff directly managing 175 borrowers with €61bn of loans with little or no third party support, NAMA is woefully under-resourced, As I understand it proposals are being advanced to farm out the management of the assets to 3-4 asset management companies which might help.
As regards your specific claim that NAMA/DoF might be sitting on €500m proposals, who knows. The Citibank building in Canary Wharf that Derek Quinlan/Glenn Maud are selling, was bought for GBP 1bn in 2007 and I guess is worth not far off that today with a rent roll of GBP 57m and rising. NAMA has been beset by bottom-feeders/vultures/call-them-what-you-will and it wouldn’t surprise me if the agency has just issued a holding note to the potential buyer whilst the marketing of the property is arranged to ensure the price is maximised. I can well imagine buyers offering €500m for a trophy London docklands building that is worth more than twice that and I don’t think NAMA has to provide curbside service to those offers. On the other hand there may well be reasonable offers sitting on NAMA’s desks that the agency’s failure to action mean we’re losing out. This is where a proper Auditor and Comptroller General would come in, to determine what was happening and if the delays were justified or not.
“I’m very sorry to hear that it has damaged the self-pride of these debtors. Maybe, the damage and destruction has been been sufficient for some of them to strive to pay back the maximum possible without regard to the legal niceties and in accordance with Christian values.”
Ah yes, a bit like the Irish taxpayer and the sovereign debt really.
rothbard on mieses, music to the soul….
@Frank
@Frank
Bad analogy. VCs are in the “pure” risk business whereas banks are not (or shouldn’t be) – they expect in 99% of cases to get their money back with interest.
No one argues that developers and bankers should be free to play their capitalist games with each other – survival of the fittest etc. Unfortunately, a cabal of reckless (not all)developers and greedy (almost all) bankers totally overreached themselves to such an extent that the Government had no option (as they saw it) but to step in using taxpayers money to try and sort out their unholy mess and save the banking system. You cannot blame the Government for doing that and then claim that it was they brought the country to the brink. That’s spin and denial and deflecting from the fact that if the defaulting developers had run their businesses properly (as 99% of business people do) they would be able to fully repay their loans and there would be no problems.
Brian,
Capitalist games? 99% of loans are typically repaid (regardless of underwriting standards)? Lending is not a “pure” risk business? Cabal? Reckless? Greedy? Government had no option? Cannot blame the government?
Are you an aspiring journalist? If not, I hear KafkaNAMA are hiring.
Sorry..but…are you serious?
This has to be the revelatory thread outside p. Kelly! In the know and those not…if the public only knew they would be happy with NAMA…doesn’t mean to say that it is right or constitutional
NWL
You’ve been very good in your analysis up to now – but you’ve dropped the ball big time with this one!
If you substitute shares for property and Anglo for NAMA then you’ll realise you’re basically advocating a share support scheme – like the Golden Circle.
These shenanigans are basically what got us in the mess in the first place.
I’m sure if you asked Seán FitzPatrick and David Drumm in March 2008 whether what they were doing was insane they would have said it was a liquidity issue, that the share price was artificially low because of this and that the part-financing by the bank, of the chosen few, to buy it’s own shares wasn’t an attempt at price support but merely a prudent exercise to ensure no firesale prices affecting the wider set of shareholders.
That didn’t work out too well.
@Michael,
You might want to explore the concept of “staple financing”, an established arrangement in investment banking whereby the seller helps with the financing of the purchase. Staple finance was the term used by NAMA chairman, Frank Daly when announcing the proposal. Yes, staple financing does support prices artificially in the sense that the next best alternative *might be* a fire sale to a cash buyer which would be less than the financed sale. But whereas financing a sale can be illegal with some transactions, some share support schemes for example, it is part and parcel of other transactions and is perfectly legal. As I say, I would advise taking a look at the concept of “staple financing” before writing it off. Here is a link to a short article on “staple financing” which might be a new term to some.
http://www.investopedia.com/terms/s/staplefinancing.asp
Have you any suggestions as to how NAMA can protect prices where absence of credit is identified as a key challenge? In other words what would you do in the above scenario where the cash buyer is offering €30m but the credit buyer is offering €45m (€15m cash and needs a loan for the €30m remainder)? Do you have alternative suggestions as to how NAMA can avoid fire sales where credit is absent or do you think NAMA should just sit on the assets and sell them in a glut in 2020?
NWL,
I thought Staple Financing would more appropriately describe a situation where a financial intermediary would arrange for the seller a package and present this optional financing as a way of setting the bar for others interested parties to accept or improve upon with their own packages i.e.:
The intention is to bid up the selling price amongst a group of interested parties.
This is a long way from what NAMA seems to be offering.
They are the financial intermediary, the seller and the only package on offer.
Any bidder looking in from the outside will look and see a state body working hand-in-glove with state banks to rig the market for state owned property.
Who’s going to bid against NAMA?
More importantly who’s going to work with NAMA to buy the properties?
Well, again anyone looking from the outside will see a coterie of “develepers” within NAMA as the chosen ones.
So again I would say to you that this situation is a lot more akin to the insiders in Anglo getting financed by Anglo to support Anglo.
As for the lack of credit and avoiding fire sales – this is the yang to the ying of €400M Glass Bottles and €300M D4s.
It’s all artificial price support – except it’s a National Asset Management Agency using state funds to finance the sale of state owned loans via state-owned banks to state-supported developers.
The price ends up being something far worse than a fire sale in my eyes.
I don’t think NAMA can avoid fire sales – hence I won’t offer an alternative – because the only alternative at the moment is the madness outlines above I’m afraid – and that’s crony capitalism under state control.
@Michael, thanks for that and for an interesting link which further examines the nature and role of staple financing.
But to come back to the question of fire sale versus NAMA lending. Using the example above (asset worth €100m nominal, bought by NAMA for €50m and two offers, one cash at €30m and one of €45m being loan and €15m cash), if I understand you correctly you would sell to the buyer offering €30m cash. By doing so you would forego €15m of a cash deposit from the alternative and if the alternative defaulted in a few years, NAMA could foreclose and sell the property again to recoup its €30m loan. That’s what you’re saying? Seems like NAMA would be disadvantaged in such a situation, no?
@NWL
In the scenario you outlined NAMA is taking a €5M loss with buyer 2’s €15M cash and financing the €30M.
NAMA should really get buyer 1 on the hook and book a €10M profit.
So you could make the case that accepting buyer 2 is in effect losing €15M on the deal.
But buyer 1 would go from 100% ownership to 50% – so what’s in it for them? If they can make the deal work at €30M, why should they consider the debt servicing on the extra €30M. What conditions would NAMA offer to make this work for buyer 1. Would they let the €30M ride interest-free?
Alternatively the €30M finance that NAMA would be bringing to the table – that’s borrowed at a certain percent, so surely they would have to insist that buyer 1 should cover this IR+1% at least? Otherwise taking the €30M cash and paying down NAMA’s own debts might be the correct commercial play, no?
Anyone offering 66% of the asking price in cash isn’t necessarily someone I would turn my nose up at in preference to someone offering 33% with a leveraged play funded by me. Anyone doing the leveraged play would be seeking to flip it for the capital appreciation within the timeframe of the loan agreement if they wish to beat a cash-only play surely?
So to my eyes, NAMA is, in effect, beating on the bottom of the market being in – whereas a cash-only player is seeking yield.
Which player makes for a healthier ecosystem?
@Michael, here’s the reality. NAMA valued the loans by reference to 30th November 2009 and paid a Long Term Economy Value premium on top. Irish commercial property has declined 12% since November, 2009 and LTEV was an average of 10% so getting €45m today would be a great deal for NAMA. Yes, it would be better if NAMA recouped its outlay but coulda/woulda/shoulda – the reality is that the asset is worth less than NAMA paid for it. NAMA can
(1) Hold on to it and see a 20% decline perhaps in the next couple of years if Upward Only Rent Reviews kick in. If prices for the next 8 years rise by 5% per annum then NAMA might be back to square 1 in 2020.
(2) Sell it for €30m cash
(3) Sell it for €45m of which €15m would be cash and NAMA would loan the remaining €30m – actually, NAMA wouldn’t actually give money to anyone, it would just accept €15m and a loan commitment to NAMA by the buyer for the remaining €30m.
You’re not really answering the question, you’re just hoping prices will come back and here’s the dark reality – they mightn’t. And if you’re thinking “well prices must come back at some point even if it takes 50 years”, then remember than NAMA pays 1.5-10% on its bonds/subordinated bonds per annum so that purchase price of €45m is costing NAMA perhaps €3m per annum. NAMA may need maintain and incur expenses on the property. So even in 50 years with an average inflation rate of 2% NAMA might not be in any better position than it is today.
I don’t understand some of what you have written above. But based on the above three scenarios and ignoring prices woulda/shoulda/coulda recover, what would you recommend NAMA does?
@NWL
To answer your question “What would you recommend NAMA does?” – I would recommend they take the €30M and pay down their debt.
If, as per your assumption, a default by the €45M leveraged play happens, say 5 years out, then NAMA will have paid (using your €3M pa interest) €15M to fund this – which wipes out the initial cash input.
If they accept the €30M cash and pay down their debt, then they’ve saved an extra €15M in interest payments in those 5 years.
So taking the €30M in cash actually makes them the €45M.
@Michael,
Aah, but if NAMA gets €15m upfront from, let’s call him Developer B, then the interest bill should be slashed by 1/3rd if they use that €15m to redeem NAMA bonds. So over 5 years they would only pay €10m on the outstanding €30m (the loan), in this example. But presumably there will be some payment from Developer B during those five years, if only of interest. And if there was no payment then NAMA would foreclose after a couple of months.
Whatever way you cut it, NAMA gets an upfront cash payment and a lien over the property so if the higher amount is not paid then NAMA forecloses.
Still think option 3, selling to the cash developer for €30m makes the most sense?
Yeah – I was keeping it simple – as I didn’t want to complicate the issue too much.
I’ve done a spreadsheet incorporating the capital appreciation/depreciation, IR-free/IR+1% costs, etc. and can post the ins-and-outs of some of the variables that come in to play if you wish
Safe to say, I’m sticking with the “take the money and run” approach.
Anything else runs the risk of much longer term commitments and expenses than initially get forecast due to the fact that, as the lad Macbeth would say,:
@Michael, I am coming at this believing that if credit is genuinely a problem for buyers to the extent that the only buyers are cash buying vulture funds, then NAMA could generate a better return from selling to a credit buyer with NAMA providing the credit because there aren’t practical alternative sources. I might be wrong but if NAMA gets a sufficiently large deposit and manages the loan closely AND the difference between a credit buyer and a cash buyer is sufficiently large, I don’t see where the break in logic would be. There are policy and competition issues and there needs to be monitoring to ensure NAMA is not distorting the market in the same way cheap credit in the 2000s inflated our property bubble.
If you want to put your spreadsheet on line so we can take a look at it, that would be great. You can use an online sharing service like google docs. Or alternately you can email it to jagdipsingh2008 [at] hotmail [dot] co [dot] uk and I will ensure it is put online.
@Brian, I don’t believe that it was a bad analogy. The banks chose to make the loans. Every loan is a risk. I’m sure that the building societies and the banks expected to get their money back when they lent at the top of the residential market.
Are the homeowners to be blamed for paying the market price for the homes that they bought at that time? And if they default because their homes are underwater and they have lost their jobs and have no income, should the blame for the mess we are in fall on them too?
Our Taoiseach even suggested that he did not know how people who engaged in moaning about the economy did not commit suicide. If that is not inciting every business person and citizen of the State to “fill your boots. The party is not over”. I don’t know what is.
As O’Reilly on Fox TV says, it’s a “no spin” zone to say that the government socialised the banks private losses and made us as a nation, insolvent. So “yes” the government do carry blame especially for spreading the disease to the populace. No one else did that.
Hi WSTT
It took two to tango. The banks certainly made VERY bad lending decisions by ignoring traditional lending criteria and ignoring the fact that they were lending to a group of people (more gamblers than business people) who were creating bubble/ponzi schemes and engaging in massive ego trips and spending sprees. Did none of the developers’ advisors say stop or did senior managers not express concerns. Presumably, if they did, they were not listened to and/or got fired. Did these guys never hear of overgearing, overborrowing, business cycles, 101 economics etc. They just pushed the envelope till it burst. And, what is strange for me is that these guys may still be running their businesses (thanks to Nama), waiting to secure massive forgiveness and then maybe hoping to buy them back at firesale prices so that they can start the merrygoround again. I am equally amazed that so many of the bankers, administrators and other who oversaw the frenzy are still around or drawing huge pensions.
As some people paint it, the developers were merely innocents abroad. This may be true as I have heard reports of bankers kidnapping developers and forcing them to to sign loan agreements, dispense with paper work, inflate projections, jack up prices, make ridiculous bids, duplicate security, provide personal guarantees etc. It must have been very painful for them.
@NWL
Google Docs version here:
https://spreadsheets.google.com/ccc?key=0Av_2AjYKm-PvdFM3TFpLS1l6b055d3ZRdGxDQ3g5OGc&hl=en_GB
@Michael, thanks for the spreadsheet. As is often the case with other people’s spreadsheets I am having some difficulty understanding what is represented. What I hoped it might show is the three scenarios we discussed (1) NAMA doing nothing with the asset and sitting on it (2) NAMA selling it for €30m cash and (3) NAMA selling it for €45m with €15m received in cash and the remainder as a loan commitment from the buyer.
(1) I’m lost because you show two buyers and if I understand the spreadsheet one is paying 45 with 15 in cash and the second one is paying 60 and 30 in cash.
(2) What does cost to NAMA represent? I know that should have an obvious answer but NAMA paid 50 for the loan and is getting either 30 cash (1) or 15 cash (2) So NAMA has 50-30=20 worth of bonds on which to pay interest in (1) or 50-15=35 in (2), not 30.
(3) What do you mean by “IR-free” and “IR+1”
There are a few other questions but if you could clarify the above, that would help and I’d hate to see a spreadsheet on which you seem to have spent some time go to waste.
I’ve set the spreadsheet to be editable to the email address you posted above – you should be able to see all the formula. I will email it to you as well.
The box at the top has 4 possible permutations:
– A cash buyer @ €15M
– A cash buyer @ €30M
– A cash+NAMA funded buyer @ €45M
– A cash+NAMA funded buyer @ €60M
The €15M cash buyer is immediately knocked out by the €30M buyer.
The €45M buyer is the only other bidder at the moment.
The €60M bidder is a thought experiment – if NAMA is committed to a €30 funding arrangement and has two cash bidders on the hook, with only one of them seeking extra funding, then what would happen if NAMA could bring the other to the table as well.
The NAMA cost of funding is whatever you wish to set it at and the Interest rate they could charge to someone they fund is this rate +1%. The yield the borrower needs to cover the funding and to make a profit is the borrower’s rate +4%.
I set a stand-alone price inflation/deflation rate at 2%
I know you’re talking about the initial cost to NAMA being €50M and the funding cost being this minus whatever cash – but I would disagree with this. Whatever cost NAMA paid is irrelevant, as far as I’ concerned. Their cost of funding, in my scenario, is the amount they’re investing in the new venture.
The first “NAMA IR-free” number is NAMA eating the cost of funding, holding the cash and off-setting the cash against the cost of funding at the end of term.
The second “NAMA IR-free” number is NAMA eating the cost of funding but this time paying down the debt using the cash and showing any surplus at the end of term.
Alternatively the other option is the cost to the borrower of funding – with NAMA either charging the full cost of funding or the cost minus the paid-down debt.
The option of NAMA eating the cost of funding is there to show what NAMA may need to do to make it’s funding option attractive to either borrower.
The capital appreciation/depreciation numbers are profits/costs the borrower should want in play on any deal – with NAMA eating any depreciation and the borrower taking any profit.
The reason for the IR-free and the capital depreciation plays is because with a 5-year horizon being set by the funding term then the yield numbers need to exceed the funding cost and any depreciation if the borrower is to cover the cost and seek to sell out of the deal before the term is up.
The concern is that the only big buyer in 5 years may be NAMA – as it continues to be the monolith dominating the commercial property market.
If it has to offer preferential terms like low/ir-free loans and depreciation free capital investments then it’s going to be very hard for any other lender to compete.
If it doesn’t offer these type of rates then it’s going to be very hard for any borrower to make the yields to cover the funding costs for such a short funding horizon.
Which means we would see NAMA morphing into a long-term lender or being stuck in having to continuously roll-over generous/loss-making short-term funding.
Hope this clears things up a bit!
@Brian. Your arguments are too generic. Are all Germans Nazis? All Aussies uncouth? All Irish drunks? All developers greedy?
@Brian,
Real estate development is a craft that is usually learnt the hard way. Typically a developer will start off in the construction business and then slowly start buying his own property and building his own developments. He’ll take a few hits early on and if he survives he’ll get wiser. The biggest lesson is not to over leverage.
Lenders can’t be expected to really understand real estate development so they have to use tried and tested rules. The most important rule is the developer has to have ‘skin in the game.’ Some of the basic rules are as follows:
– 50% LTC on raw land
– 65% LTC on developments
– 75% LTV on stabilized cash flowing assets
– Borrower needs to maintain 10% liquidity
– Borrower’s net worth needs to be at least equal to his development loans
I know for a fact that these rules weren’t adhered to by the Irish lenders. They also didn’t properly verify PFS’s, underwrite transactions, or maintain loan files. Most of them were in their 20’s & 30’s. They were easy marks who didn’t really know the business. In UK & the US, they would sometimes do deals that local lenders wouldn’t touch. I could rattle off a laundry list of dog sh*t they have on their balance sheets in FL, CA, MA, IL, etc. Worse than that, they had hubris. My dad used to say the worst kind of fool is a fool who doesn’t know he’s a fool. They thought that they were winning clients because they were better bankers than their local competition.
Therefore, how can you blame the developers? In human nature/capitalism/business/poker/etc. when you are doing business or negotiating with a party who’s not on their ‘A’ game you take advantage of them. That’s business and to think otherwise is naive.
@Frank
“He’ll take a few hits early on and if he survives he’ll get wiser.”
You’ll like this one:
Journalist: What’s the secret of your success?
Entrepreneur: Two words.
Journalist: What would they be?
Entrepreneur: Right decisions.
Journalist: And how do you learn to make right decisions?
Entrepreneur: Experience.
Journalist: How do you get this experience?
Entrepreneur: Two words.
Journalist: What are they?
Entrepreneur: Bad decisions!
@Frank
Thanks for the insights into a developer’s rules. Clearly many (not all) developers ignored your rules and overleveraged by a whopping amount and used their access to easy debt to create a huge bubble. That is hardly sensible business practice.
I buy a car and crash it when over the limit. Do I blame the drink or car manufacturer? I gamble (closer to your linking of business and poker) and lose a packet. Do I blame the dealer? I borrow money, over bid for land and build properties that are grossly overpriced and which no one wants? Should I blame the bank? I don’t think so.
As I see it, we are only taking about a few hundred borrowers who were major contributors* to the crisis. Lets remembers that many, many thousands of other major business people didn’t participate in the madness. I cannot name one FDI firm or quoted public company (aside from the banks, Arnotts and Boundary) that got involved in this but I’m sure that we could all name established major firms in the construction industry that ran a mile.
It may be human nature but surely there is is more to business than pulling strokes to take advantage of people, unless, of course, one is a quick-buck merchant and can use other people’s money. Maybe I am naive but it appears that several handfulls of “business” people have inflicted most serious damage on the State, dumped their toxic debts onto the entire population and have (in some cases) walked away. Even from the perspective of an ultra-capitalist, it cannot be sound business to destroy your market. Seems that lessons on ethics, governance and prudent management might be helpful for some people.
* We are talking about developers here and I don’t excuse the bankers, regulators, media, Government and politicians from their contributory roles.
@Brian,
You make one very good point, I’ll give you that. “It cannot be sound business to destroy your market.” I agree with you. National security has to trump everything else especially if you believe you are part of the nation, in a Westphalian sense. However, that requires leadership/patriotism. Ireland lacks either, except on the fringes.
See Fredrich List, Alexander Hamilton, and especially Henry Charles Carey.