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Archive for May 21st, 2011

Remember the giant “Grand Theft NAMA” poster (pictured here) over the entrance to the POD nightclub on Harcourt Street? Plainly inspired by “Grand Theft Auto”, Rockstar Games’ massively successful video game that features guns, gangsters, fast cars and faster women, the picture of the poster in situ was widely circulated and somehow captured the public’s imagination. Because in Grant Theft Auto, you’re not the traditional good guy as you do the bidding of the bad guys, which seemed to match the unsavoury perception of NAMA.

But is there the potential to produce a better NAMA video game? I think there is, and it may be a serious proposition. Just think about what “asset management” means in the context of NAMA; the agency will have a lifespan of 7-10 years apparently, it has acquired €72bn of loans for €31bn, it is dealing with 850 separate debtors, it has up to €5bn that it can make available to help finish out developments, it currently pays a relatively low rate of interest on its funds. And the over-arching objective for the agency? To maximise the return for the taxpayer (or “citizen” as Vincent Browne would say or “resident” as Constantin Gurdgiev would say to correct him). Because of its emphasis on Net Present Values, it might be more precise to describe NAMA’s objective as maximising the Net Present Value of the assets it manages. The concept of “Net Present Value” forces NAMA to take account of inflation and cost of its funds.

Now to spice up the game you’d have to have lots of variables, interest rates, inflation, economic growth in different market sectors (countries, regions, type of property), exchange rates, credit supply, population growth, credit worthiness of developers, credibility of developer business plans, this list would be practically endless and of course you could throw in a few wild cards, sovereign default or EU-wide quantitative easing, for example. And your options on each property would be the same options available to NAMA (a) sale (b) mothball (c) rent (d) manage (e) develop (f) demolish. Given the national obsession with property, the game could be more popular than sports manager games are in other countries.

One of the first people that might benefit from the game might be Minister for Finance, Michael Noonan* because he had seemed incredibly keen that NAMA start offloading loans and property in theUK. Heck, even NAMA itself might benefit because we understand that of the €3.3bn of disposals approved by NAMA, the “majority” are in the UK. The reasoning goes that the UK market is in a healthier condition than the Irish market, that since mid-2009 there has been a general recovery in commercial property prices and residential has suffered far less thanIreland. And London in particular has sprinted ahead and is regarded as humming right now, with lots of buyers and a perception of undersupply. So surely, it makes sense for NAMA to dispose of assets in the UK (and London in particular) now as opposed to (a) disposing of Irish assets which continue to drop in value or (b) holding onto UK assets until some time in the future? Well, that appears to be the reasoning accepted by both NAMA and, until recently at least, Minister Noonan.

And here’s why that reasoning might well be faulty. Consider the following table which shows two loans acquired by NAMA – one is secured by a property in Dublin and one secured by a property in London.

To illustrate the principle, let’s attach numbers : both €150m loans were acquired by NAMA for €100m each which broadly equates to the values of the underlying properties in November 2009. Since that date the Dublinproperty has dropped to €85m and the UK property has increased to €120m. That’s the position today. The table also shows the projected value of the underlying properties in 2013. The Dublin property drops to €70m and theUKproperty has increased to €150m. Now if you’re playing the asset management game, which property would you dispose of now?

Minister Noonan and NAMA would seem to think you dispose of theLondonproperty and book the €20m profit today and hold onto the Dublin property but if you do that you will book a loss on the Dublin property of €30m in 2013, and a net loss between both properties of €10m. On the other hand, if you sold the Dublin property now, you would book a €15m loss but you would book a €50m profit on the London property in 2013, giving you a net €35m profit overall.

Which is better, a €10m loss or a €45m profit? It’s a simple question with an obvious answer but NAMA’s present actions suggest it’s a valid question. Of course which of us knows what the future has in store. But that’s the skill of asset management. Recent reporting on theUKcommercial property market sheds light on the range of issues that confront any asset manager.

First up is a Standard Life research note examining property investment as a hedge against inflation and concludes that during the next five years in the UK, commercial space will only grow by 1.5% per annum, the lowest rate of growth in supply in the past 35 years, which will serve to prop up capital values, indeed Standard Life sees capital values increasing by 2% per annum above inflation for the next five years. Rents are seen to rise by 2.5% per annum above inflation, giving an overall real return from property of 4-5%.

Next, a review of the central London office market in Q1, 2011 from BNP Paribas Real Estate which concludes that the outlook in London is quite rosy with limited new supply, rental growth, a vacancy rate of just 7.2% which is set to reduce and prime yields of 5.25% in the City and just 4% in the West End.

Then we had the former RICS president, Barry Gilbertson who gave a presentation two weeks ago inLondon where he pointed to evidence of pressure on banks to promptly bring their distressed loans and foreclosed property to market which might tend to push up supply. That of course would be a concern for NAMA who might find it had tough competition potentially fuelling a medium term over-supply of property.

Earlier this month the Driver Jonas Deloitte survey of London construction in the pipeline found there may well be shortages of property for some years to come, which might consequently boost prices in London.

De Montfort University’s periodic report on UK commercial property debt, reported on in detail by Britain’s  Property Week yesterday, claims that there is GBP £145bn of debt that needs to be refinanced between 2011-2015 including GBP £49bn in 2011 alone. Which, when taken with credit constraints, may lead to more distressed loans and property making its way onto the market, thereby pushing down prices. Furthermore there is GBP £207bn of lending onUK property and that excludes NAMA’s loans, and more than a fifth is in default or breach of loan covenant.

Next we have a Fox News Report which claims theLondon market is “booming” (it’s “humming along” would be a better description, it was booming in 2006). The report again emphasises the shortage of quality space inLondon following the financial crisis that hit the UK in 2007, and which consequently led to a dearth of new construction. Land Securities PLC is quoted as saying that there is still strong investor demand which is pushing prices up.

And all of the above is focussed on commercial property. In the asset management game, you will need also consider the macroeconomic outlook, and possibly the best place to start might be the UK’s Office for Budget Responsibility whose March 2011 forecasts were of average GDP growth of 2.5% per annum in the next five years, inflation falling from 4% this year to remain at a target of 2% for most of the following four years and steadily rising base rates.

As you can see, playing the asset management game can get quite complicated when you need try to call the market in the future. Against that, NAMA has self-imposed disposal targets which will see a 25% reduction in its assets by the end of 2103. There is political pressure for NAMA to start disposals now. Against that, NAMA must redeem its bonds by 2020, and at present that is really the only absolute constraint (and even that could be made flexible by some form of substitution of NAMA’s funding). It’s a difficult game and all the while NAMA will have commentators keeping track of its disposals and comparing its actions against when future circumstances become known. Let’s hope the agency has the necessary expertise.

* During the general election campaign, FG was indicating it would impress on NAMA the need to start disposing of assets with the UKseen as a more attractive market to sell into at present. Since getting into government, FG has become less decisive in its language. It was reported that on 15th April, 2011 Minister Noonan ordered NAMA to sell €2.7bn of commercial and residential property as “soon as possible”. Two weeks later in a written response to a Dail question, Minister Noonan was more circumspect when he said “NAMA has a commercial remit and it is a matter for its Board, as informed by property market expertise, to determine the scale and timing of proposed assets sales and its strategies in the various markets in which it operates. The actual level of sales achieved over the coming years will depend on market conditions as they evolve. To the extent that NAMA can realise cash from the sale ofUK assets, it will be in a position to make corresponding reductions to its debt. The Board has a stated target of achieving 25% of debt reduction by 2013 and this includes assets across its entire portfolio”

UPDATE: 26th May, 2011. Property Week reports of a major disposal in London by NAMA Top 10 developer, the Cosgraves, though it is not confirmed if the property was subject to a NAMA loan. The property is Jubilee House at 197-213 Oxford Street has been sold to Zara fashion chain founder and world’s seventh-richest man, Amancio Ortega. The price is reported to be GBP £165m (€190m) representing a 4.4% yield, which is considerably cheaper than the going rate of 4% in London’s West End at present. In the last six months, the Cosgraves have generated some €315m on Oxford Street from three sales (1) 301 – 307 Oxford Street sold for GBP £95m last December 2010 (2) 215-219 Oxford Street sold in October 2010 for GBP £55.1m also to Amancio Ortega and (3) this current sale for GBP £165m.

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There have been a number of statements from the IMF this week which suggest an apparent change in tone towards Ireland’s financial difficulties, now that former managing director and, by the bye, French presidential candidate, Dominique Strauss-Kahn (DSK) has departed the IMF to reconcile himself with the consequences of what took place in his New York hotel room only a week ago. DSK has been replaced on an interim basis by John Lipsky, the American economist with an earlier career with global investment banks. The IMF yesterday announced a recruitment process for DSK’s permanent replacement and say they hope the new appointee will be in place by the end of June 2011; according to the media, frontrunners include the current French finance minister, Christine Lagarde but other names in the frame include former UK prime minister, Gordon Brown as well as non-Europeans like India’s Montek Singh Ahluwalia. Tradition has been for a European to hold the top job at the IMF whilst an American holds top post at the World Bank but that seems as appropriate today as the ban on theUK monarch marrying a Catholic.

This week saw a raft of statements from the IMF that directly dealt with Irelandor which certainly pertain to our difficulties. On Tuesday, the IMF announced that it had agreed to release the next tranche of bailout funding which we had requested to be brought forward. That Tuesday statement by the IMF was quite upbeat about the efforts already made by our country to confront our difficulties. I was impressed by what appeared to me to be the IMF sticking its head above the parapets and suggesting that a medium-term ECB facility for our banks was necessary in order that our banks could return to the market for funding. This seems new and potentially creates a rift between the IMF and EU approach to Ireland. We still don’t know exactly what happened the week of the stress test and bank restructuring announcements at the end of March 2011 but it seems that we were desperately seeking a commitment from the ECB for a medium term facility then; remember the ECB is presently providing some €80bn of short-term liquidity funding to our domestic banks and is additionally authorising our national Central Bank of Ireland to provide €70bn of emergency liquidity assistance to our domestic banks. This short term financing is undermining our banking system and as Greece is finding out in quite graphic detail, being in hock to a lender that can pull the plug in seven days is reckless for a nation. But back in March 2011, the ECB unceremoniously dashed any hopes of a medium term facility with its statements in response to the 31st March restructuring announcements. Well, thank God at last that the IMF is making it plain that a medium-term facility is necessary.

But there’s more. Yesterday, the IMF released its first and second review staff report for Ireland and held a telephone press conference to respond to questions. And what a difference in tone! Back in March 2011 when the press asked the IMF about burning bondholders, the questioner was accused by the IMF of asking a “have you stopped beating your wife” loaded question and the question went unanswered. Yesterday the following exchange took place

Press: And you seem to be implying that you also understand or believe this and that without burden sharing from bondholders, be they bank bondholders or people involved in the bank bailout or whatever, without thatIreland’s prospects are very grim.

Ajai Chopra: Second, European partners need to make clear that for countries currently with programs there will be the right amount of financing on the right terms and for the right duration to foster success. In other words, the countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible. The resulting uncertainty affects not only these countries but through the high spreads and lack of market access it increases the threat of spillovers and creates downside risks to the broader euro area. Hence, these costs need to be shared including through additional financing if necessary.

I thought this was ground-breaking and signaled as clearly as possible that the IMF was now taking a position, regardless of whether or not it was at odds with the EU. And for good measure, the IMF was clear that “an increase in the corporate income tax is not a part of the EU/IMF supported program because we did not see such a tax increase as consistent with the overall goals of the program in restoring growth.”

The interim IMF boss was also speaking this week and his speech to the IMF Annual Meeting of the Bretton Woods Committee is also relevant to our circumstances when John Lipsky said “Turning toEurope, several peripheral euro area countries today remain in critical situations. And there is no easy solution. Without any doubt, the primary responsibility for restoring their economic health lies with the peripheral countries themselves. Difficult and demanding measures will be required in order to avoid an even more serious crisis and to restore economic health. At the same time, there are compelling reasons for their European neighbors and the global community—operating through the IMF—to support these countries’ reform efforts. The only viable option forEurope today is a solution that is comprehensive and consistent—and that is also cooperative and shared. Such a solution inevitably will include: (i) strengthening area-wide crisis management frameworks; (ii) accelerating financial sector repair; (iii) improving fiscal and macroeconomic coordination; and (iv) promoting high-quality growth.”

Sadly the IMF is the junior creditor in our bailout having a maximum commitment of €22.5bn compared to the maximum of €45bn being advanced by the EU. But securing IMF support for a degree of burden-sharing, for a medium term ECB facility and the maintenance of our corporation tax rate (and by implication its base) should bolster our efforts to emerge from the financial crisis and repay our sovereign debts and share in the repayment of our bank debts. It always struck me that our negotiating team last November didn’t recognize differences in the stances of the various parties and consequently didn’t even begin to exploit those differences. It was also striking that the IMF was hitherto at pains to avoid the perception of any rift or difference of opinion with the EU; the last week has reversed this perception and it is to be hoped that our current negotiators are capable of recognising the changes and developing a strategy which might exploit those differences and deliver a bailout which is sustainable.

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