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Archive for February 9th, 2012

[UPDATE: 11th February, 2012. The transcript of the speech is now available online here. It has some doozies eg “next time you hear some typically anonymous comment about NAMA being slow and lumbering, you can assume that in the background is probably some debtor or indeed low balling investor who is pushing his own financial agenda but is happy to camouflage it in terms of the national interest”]

NAMA’s chairman Frank Daly gave a speech at the Dublin Chamber of Commerce AGM dinner this evening. There was no major theme, just an update on some aspects of the Agency’s activities. The transcript of the speech isn’t available but here’s what we learned:

(1) From March 2010 to date, NAMA has made 6,000 credit decisions. That’s an average of 60 per week or 12 per working day. And each decision is made within an average of six days. Sounds impressive!

(2) NAMA has “agreed” more than 600 developer business plans representing 95% of the Agency’s total loans, by value. NAMA has previously said that an agreement with debtors comprises three documents – a memorandum of association, heads of terms and a final agreement – and that the documents need be signed by NAMA and the debtor and, in some instances, the debtor’s wife. Frank didn’t say today what he meant by “agreed” but I’d wager it means a verbally agreed memorandum of understanding and no more. By the way it’s not clear if “600 developer business plans” means “600 developers” because of the possibility one developer might have more than one business plan. You have eyes in the back of your heads with these people!

(3) With respect to NAMA’s Qualified Investment Fund (QIF), Frank said that the QIF will be “aimed at major institutional investors”

(4) Now this next bit might confuse you. If you were asked how many properties NAMA has foreclosed on, you might point to the monthly foreclosure list and answer “over 1,000”. But in truth NAMA itself has not foreclosed on a single property to date; it has appointed receivers who legally manage a company or an asset to the benefit of creditors including NAMA, but NAMA itself has not taken ownership in a legal sense of a single property. That is set to change and Frank said that the Agency “plans to acquire property assets, on an arm’s length basis, from receivers (or from debtors who cede secured property directly to NAMA) and will package them in various combinations which can then be monetised through sale to investors. NAMA proposes to assemble sub-portfolios based on asset types (office, residential, retail etc) or geographical region (Ireland,Dublin,UK etc) which will be aligned to particular investor preferences.”

(5) NAMA expects to start flogging portfolios of loans “shortly” following the appointment of panels of advisors last month

(6) NAMA has approved advances to developers of nearly €1bn. Now this isn’t news but separately NAMA says that developers are expected to grant charges over €500m of unencumbered assets, and to date developers have granted charges over €221m of unencumbered assets. NAMA is not saying if these two facts are connected. An “unencumbered asset” is something which NAMA as a lender can’t get its hands on if a developer defaults on a loan; examples might include an asset held in a separate limited company or an asset owned by the wife. So what is happening is that developers are putting these “unencumbered assets” into the pot; NAMA isn’t saying if the developers are getting anything in return, but developers as a cohort tend not to be Jainist eejits. Separately NAMA says that it has reversed €160m of spousal transfers.

UPDATE (1): 10th February, 2012. The Irish Times today reports on comments made by Frank on the fringes of the speech last night. The NAMA negative equity product is now expected to be launched in April 2012 and is still awaiting EU approval. Frank expects NAMA to widen the eligibility for staple financing, but no further details are given.  Separately Reuters reports that Frank said “there is strong reason to expect that commercial prices will stabilise this year”. For the very little if anything that it’s worth, that is also the view on here though it must be said that property companies are generally not that confident and it was surprising that the host of market-support measures announced in Budget 2012 – cutting commercial stamp duty from 6% to 2%, abandoning plans to change Upward Only Rent Review terms and offering capital gains tax sweeteners to buyers -led to commercial property prices rising by just 0.2% in Q4, 2011 according to the SCSI/IPD.

UPDATE (2): 10th February 2012. RTE’s Morning Ireland managed to speak with Frank for nearly 20 minutes last night and the interview is available here; the highlights,

(1) Frank expects EU approval of the NAMA negative equity mortgage product in “the next two to three weeks” and the scheme to be launched “late March, early April 2012” and will be piloted with 150 properties
(2) The Qualified Investment Fund will be launched “shortly” and Frank said that the NAMA board had reached a “major milestone” with the initiative yesterday [Thursday, 9th February 2012]
(3) NAMA will be off on a junket to theMiddle Eastshortly to market its wares. NAMA is now happy that international investors are engaging with the Agency and that the initial derisory offers have now been replaced with a more realistic approach
(4) A “handful” of NAMA staff is paid more than €200,000 a year and the average salary for the Agency is less than €100,000.
(5) Frank has apparently criticised the “corrosive cynicism” towards NAMA in this country
(6) Frank has apparently ruled out the possibility of NAMA needing a bailout. You’ll remember that NAMA made a loss of €1.1bn in 2010 and if it makes a similar loss in 2011 then the Agency’s capital – strictly only €100m but NAMA classifies the c€1.5bn subordinated bonds it used to pay 5% of the consideration for the loans it acquired as capital, hmmm –  is likely to be wiped out leaving NAMA in need of more capital. I think this is going to be touch and go. NAMA’s accounting year ended on 31st December 2011, and I was surprised that commercial property did not have more of a rebound in values after the Budget 2012 announcements. According to SCSI/IPD, commercial prices rose a measly 0.2% in Q4,2011 which means that they fell 10%+ over 2011 as a whole. Residential prices fell in Ireland by nearly 20% in 2011. And even in theUK, residential and commercial prices ground to a halt over the year, and in fact property outsideLondon and the English South-East actually fell in value. On the other hand, NAMA is on course to make a €600m operating profit in 2011 (up from €400m in 2010) so even with a €1bn impairment loss for dropping property values, NAMA is probably going to escape needing new capital in 2011. Just.

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“As NAMA has completed its loan acquisition phase and is now concentrating fully on the active management of the assets under its care, the NAMA board, with my agreement, asked Michael Geoghegan, a former CEO of HSBC, to review NAMA and report his findings to me. His report was generally positive but arising from it, I am establishing an advisory group to advise me on NAMA’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets. In making appointments to the NAMA board, the advisory group will help me identify candidates with entrepreneurial and property skills. Recommendations will also be provided by the group on strategies for NAMA to attract international capital to Ireland and to provide advice in respect of lessons to be learned from asset management agencies in other countries. I will issue a direction order to NAMA under section 14 of the National Asset Management Agency Act 2009 setting out the work of the advisory group and requiring NAMA to facilitate its operation” Minister for Finance Michael Noonan announcing a NAMA advisory board during his Budget 2012 speech in the Dail on 6th December, 2011

Minister for Finance Michael Noonan is a great man for appointing people to roles which have yet to be defined. Last July 2011, he made appointments to the newly-created Irish Fiscal Council. Professor John McHale from Galway University, Professor Alan Barrett of the ESRI, Dr Donal O’Donovan lately of Limerick University but formerly of the IMF and a couple of others were all appointed to the Council which was created just in time to beat an IMF deadline. Seven months later, the Council has issued one economic report which proposed a €4bn+  budget adjustment in 2012 and which Minister Noonan ignored. The Council has also issued a report into its own mandate. The Council is still waiting to be put on a proper legislative basis with the passing of the Fiscal Responsibility Bill but alas, they may be waiting some time yet as the Bill is not due to become law until after Q2,2012. I think it can be agreed the Council has not gotten off to the best of starts, though that is not at all the fault of the Council members.

In his Budget 2012 announcements on 6th December 2012, Minister Noonan announced the creation of a new advisory board for NAMA. This came in the wake of a review of sorts of NAMA by former HSBC boss Michael Geoghegan. Over two months later, we are still waiting for the Direction. By the way a “Direction” in the context of NAMA means an order from the Minister of Finance pursuant to section 14 of the NAMA Act. Minister Noonan and his predecessor, the late Brian Lenihan have issued a total of three Directions and which are set out at the back of the quarterly NAMA management report. Whenever the Minister for Finance issues a Direction, it is to be simultaneously published.

But the absence of a Direction doesn’t seem to have stopped Minister Noonan from appointing people to a NAMA advisory board, if you believe the report by Maeve Dineen in today’s Irish Independent in which she claims Gerry Murphy, Denis Rooney and Michael Geoghegan have been appointed. She doesn’t cite sources and the Department of Finance appears not to have issued a statement, but hopefully she’s not just making it up in the same way she makes up NAMA’s Brendan McDonagh as being a former HSBC director – different Brendan McDonagh, Maeve!

Gerry Murphy has his fingers in a number of pies including media, DIY and tobacco companies. But he might be best known on here for his role as a director of Blackstone, the US financial conglomerate which has said some pretty unpleasant things about economically-crippled Europe. Always with one eye on the Northern Ireland dimension to NAMA, the Dublin government has apparently appointed Denis Rooney  to the board and its final member is Michael Geoghegan who has spent his career at HSBC.

So now we have NAMA which has a 9-member board which includes a former IMFer, Steven Seeling, which includes Michel Noonan’s director of elections in Limerick, insolvency expert Brian McEnery. We have a number of NAMA committees which include external members. We have the 700-strong Department of Finance, which has staff largely devoted to NAMA. We have the NTMA whose boss, John Corrigan is a NAMA board member. We have two Oireachtas committees which oversee NAMA. And now we will have an advisory board.  You can’t help but be impressed by the bureaucracy of it all. What we don’t have is a Direction which might shed light on the role of the board and how NAMA will interact with it. Nor do we know if the advisory board’s role will interfere with the NAMA scheme as approved by the European Commission. Let’s hope that the advisory board isn’t still floundering about in seven months time in search of a defined role.

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For anyone who believes that distortions and artificial supports in the Republic of Ireland are preventing residential property prices from reaching a floor, or bottom at which buyers and sellers operating freely with good information agree a clearing price, all they need do is look across the Border at our friends and neighbours in Northern Ireland. According to the latest survey of Northern Ireland residential prices by the University of Ulster in association with Bank of Ireland and the Northern Ireland Housing Executive, property prices fell by 2.6% in the fourth quarter of 2011 and are now down 45.2% from the peak in 2007; the average home in Northern Ireland, according to the survey, costs GBP 137,219 (€163,510). The full report doesn’t appear to be online yet from the University but can be accessed here, and the accompanying press release is here.

On this side of the Border the CSO says that to the end of December 2011, our residential prices have dropped 47.2% from peak and applying the CSO index to average prices recorded in the discontinued ESRI/PTSB survey indicates an average price here today of €165,781 (GBP 139,124). Think about that for a moment.

Northern Ireland doesn’t have our planning system, has a vacancy rate of 6.4% – 758,600 dwellings of which 709,900 are occupied – which is seen as the norm by international standards, compared to 14.7% on this side of the Border – 2,004,175 dwellings of which 1,709,973 are occupied. Northern Ireland didn’t have a Galway Tent though that’s not to say developers don’t have close relationships with politicians. Northern Ireland doesn’t have the euro and can’t blame the ECB for not putting the brakes on cheap German deposits pouring into the country. Northern Ireland has an unemployment rate of 6.8% compared to 14.2% here. And the UK has had inflation of 15.6% between 2007 and today, our inflation is up just 0.5% – yes, really, it recovered slightly in 2011 but had fallen in the previous two years – meaning that in real terms Northern Ireland residential property has declined 52.6% from peak whilst ours is down just 47.5%.

It is generally in a national economy’s interest to have stable and slightly increasing house prices on the condition that prices reflect the dynamics of supply and demand. Temporary distortions and supports can be justified in times of crisis, but our property bubble has seen slow-motion deflation since 2007 and the consensus seems to be that prices will fall 60% from peak, though there are views that we have already overshot and views that prices might fall 80-90%. For those who, for a variety of reasons, try to influence opinion on the Republic’s property market, just look across the Border and ask yourself if it’s not better to see a natural decline at this stage to a clearing price from which a genuine recovery can take place.

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