Shock as man whose job depends on property transactions criticises ratings agency prediction of further price declines

If the average mortgage-bought property is down 49.9% from peak, and mortgages represent 70% of the market, then in order for the market overall to be down by an average of 60%, cash-bought property would need to have declined by 83.5%

It was the excellent Daily Business Post which first picked up on ratings agency Moody’s pronouncements yesterday on Irish property, mortgage arrears and the economy generally. Moody’s said that in light of the present peak to trough decline of 49.9% recorded by the Central Statistics Office between September 2007 and April 2012, that Moody’s believed prices would decline another 20% to give an overall decline of 60% from peak.

“Misinformed” says Mark Fitzgerald of DTZ Sherry Fitzgerald, Ireland’s largest estate agent continuing “the evidence of the market, which we experience every day, is that house prices in Ireland have already fallen by an average of 60 per cent and in some places by as much as 65 per cent” Hmmm, an estate agency dissing a report that prices are still not stable, which means there will be reluctance for buyers to take the plunge. And plunges are needed if there are to be property transactions, on which estate agents depend for their dinner.

Here’s why I think Mark Fitzgerald is “misinformed”

The CSO says prices are down by an average of 49.9%. The CSO analyses mortgage-based transactions only and specifically it covers eight of the mortgage lenders in the State including Bank of Ireland, AIB, PTSB and Ulster Bank. I think it is fair to say the CSO has a reasonable reputation for the accuracy of its statistics and certainly the CSO property index series showed a close correlation to its predecessor which was produced by the ESRI in conjunction with PTSB.

The problem with the CSO analysis – prominently disclosed by the CSO itself – is that it excludes cash transactions. We know back in 2009 that cash transactions accounted for just 6% of the market. We don’t have more up to date information from the Revenue Commissioners but estate agents have filled the gap and were suggesting earlier this year that cash now accounts for 25-35% of the market, I believe it was Sherry Fitzgerald itself which claimed the 30%.

So if the mortgage market accounts for 70% of the market and mortgage-bought property is down 49.9% from peak, then how much would cash-bought property need to have declined to give you an average of 60%? Answer 83.5%! Or 70% of 49.9% plus 30% of 83.5%  gives you an average decline of 60%.

A 83.5% decline for cash-bought property? Maybe, but somehow that seems more “misinformed” than Moody’s could ever be. I mean why on earth would a mortgage buyer pay €50,100 for a house when a cash-buyer could get the same house for €16,500? Or more realistically using national averages, why would a mortgage buyer spend €150,000 on a house when a cash-buyer could get the same house for €50,000? Ignorance? Maybe, but surely a mortgage company’s valuer would know the prices being achieved and wouldn’t approve the €150,000 price if the cash price was €50,000?

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Delays at NAMA (part 1 of 2)

Given that we have bugger-all information on individual NAMA sales and the NAMA financial accounts are so top-level and distorted by accounting convolutions that it is difficult to assess performance, another way of judging NAMA is to examine performance against deadlines. You might recall that when the European Commission originally approved the NAMA scheme in February 2010, it placed a deadline of completing the acquisition of loans by NAMA from the banks, of February 2011. It is not exactly clear when NAMA completed the acquisition of loans but it appears to have been between December 2011 and March 2012. So NAMA was about a year out on that deadline.

All NAMA acquisitions need to be approved by the European Commission, and there have been unexplained delays with these.

It was August 2010 when the European Commission approved NAMA’s valuation of the loans it acquired in what was known as “Tranche 1” in May 2010 – these loans had book values of €15.3bn. It was November 2010 when the European Commission approved NAMA’s valuation of the loans it acquired in what was known as “Tranche 2” – these loans had book values of €11.9bn. It was in NAMA’s Annual Report for 2010 which was published in July 2011 that the Agency said “At the request of the Minister for Finance, the transfer of the third and fourth tranches was accelerated as part of a bulk transfer in the last quarter of the year [2010]. By end-June 2011,full due diligence will have been completed on the third and fourth tranches which comprise nominal loan balances of €19.2bn (and a consideration of €8.42bn). This brought the total volume of loans that had been subjected to full due diligence (Tranches 1 to 4) and individual loan valuation to €46.4bn (with a paid consideration of €21.4bn, a discount of 54%). The current market value of the property in Tranches 1 to 4 was €21.5bn. The due diligence process for the rest of the acquired portfolio continues and, depending on the timing of the submission by the PIs of full legal and property due diligence, NAMA would expect to complete all valuations by the final quarter of the year [2011]”

But since November 2010 – 19 months ago – there hasn’t been a further mig from the European Commission as regards approval of those subsequent transfers. Why is that?

On Tuesday this week in the Dail, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan for an update on NAMA’s progress with obtaining European Commission. The upshot is that the final acquisition values haven’t even been submitted to the European Commission. And as for Tranches 3 and 4 which NAMA said it had completed due diligence and valuation in June 2011 – 12 months ago – there is no explanation for the delays in getting European Commission approval. The full exchange is here

“Deputy Pearse Doherty: following the recent publication of a special report by the Comptroller and Auditor General, if he will advise when European Commission approval of the National Asset Management Agency’s loan acquisitions is expected for tranches three onwards; his views on whether the high level of State-aid identified by the CAG as having been given by NAMA to the participating institutions is preventing the granting of Commission approval.  [27952/12]

Minister for Finance Michael Noonan:Bank assets were acquired by NAMA using a valuation methodology approved by the European Commission and in line with Part 5 of the NAMA Act and valuation regulations made by the Minister for Finance in March 2010. NAMA advise me that final valuation of all Tranches was completed at the end of March 2012 and as final acquisition schedules were completed, they were copied to the European Commission. In the meantime, auditors for NAMA and for the Central Bank have been carrying out due diligence work on the transfers. I expect that work to be completed shortly. Following that my Department will be in a position to submit, in tandem with a report from the Central Bank, final notifications to the European Commission. At that point, the timing of approval for Tranches 3 onwards will become a matter for the European Commission.

With that in mind, I have no reason to believe that questions of State aid involved in the NAMA scheme is a factor in the timing of the approval process.”

In other words there was no explanation as to why Tranches 1 and 2 were approved by the European Commission in 3-4 months but Tranches 3 and 4 still haven’t even been submitted for approval even though the due diligence and valuation was completed in June 2011.

It was recently revealed in the Comptroller and Auditor General’s report that NAMA had paid nearly €5bn in state-aid to the banks for the loans that were being acquired – that’s a partial total and may rise – which came as a (nasty) surprise on here. Minister Noonan suggests above that state-aid levels have not been an obstacle to securing European Commission approval. But he still doesn’t provide an explanation for the delays.

So in the absence of meaningful information on NAMA’s disposal of assets, you might conclude from the above delays that there is cause to worry about the Agency’s management and performance.

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Why didn’t NAMA need to get EU approval of its staple financing initiative?

Some of this blog’s audience will have little experience or interest in commercial property, and may be more interested in residential property and NAMA’s activities in that area. In truth, NAMA’s 13,200 Irish dwellings represent a small drop in an ocean of 2m Irish dwellings of which 290,000 are vacant and where there is a vacant overhang estimated to be 80-100,00 dwellings. Given that NAMA has until 2020 to deal with Irish residential property, the annual impact of its activities in this area will not be huge. Contrast that though with commercial property where NAMA says it paid €9.25bn for loans relating to Irish commercial property, property now estimated on here to be worth €6-7bn. Given the total Irish market was worth less than €0.5bn in 2011, you can readily see that NAMA is a major, if not dominant, player in commercial property or Commercial Real Estate (CRE) as the professionals call it.

So NAMA’s introduction of so-called “staple financing” or “vendor financing” in 2011 for its CRE was noteworthy. “Staple financing” is where NAMA converts part of the sale price into a loan which the buyer pays to NAMA over a period of years. For example, NAMA might sell a property for €100m and the buyer puts down €30m in cash, the remaining €70m becomes a loan which the buyer pays to NAMA, with interest, over a period of years. So far we know about one NAMA property sold with staple financing –One Warrington Place bought byUS investor Northwood earlier this year for about €27m.

NAMA also has a financing scheme for residential property which it launched in May 2012, generally called the “negative equity mortgage” but referred to by NAMA as the “80:20 Deferred Payment Initiative”. This was initially announced in the first half of 2011 but it took a year to get approval for the scheme, including approval from the Competition Commissioner at the European Commission – a formal request for the approval documentation has been made on here and the results are expected next week.

But NAMA didn’t seemingly seek European Commission approval of its staple financing arrangement, which may have a far greater impact on the Irish property market than the negative mortgage product for residential property. This absence of approval may shortly become a problem for NAMA.

NAMA’s competitors are privately asking how they can compete with NAMA in disposing of their property when, because of their smaller size, lack of Government backing, lack of cheap financing – remember NAMA is mostly financed by “senior debt” bonds which cost NAMA about 1% per annum – they can’t offer their property with staple financing.

On Wednesday this week in the Dail, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance, Michael Noonan to lay before the Dail the standard terms of a NAMA staple finance deal. Minister Noonan said there wasn’t a standard set of terms. The full exchange is here

“Deputy Pearse Doherty: the full terms under which the National Asset Management Agency provides staple financing or vendor financing to buyers; and if he will lay a copy of the standard terms for the provision of such financing before the Dáil.  [28479/12]

Minister for Finance, Michael Noonan: I am advised by NAMA that there is no single standard set of terms for stapled debt which NAMA may offer to parties acquiring commercial property from NAMA borrowers or receivers. Terms quoted will vary to reflect the attributes of various commercial property categories and individual properties, the varying strengths of tenants and leases, and the strength of counterparties/property purchasers. NAMA advises that only strong and reputable counterparties will be considered for stapled finance. For instance, NAMA advises that for prime investment properties, that is properties whose investment characteristics include, for instance, good location and strong tenants on leases with long maturity at realistic rents, which would qualify for the most generous loan terms, NAMA may offer up to 70% of the purchase price for a period of 5 years at a typical interest margin of 3% over cost of funds.”

Financing Irish property, residential or commercial, is notoriously difficult at present with suggestions that only Bank of Ireland, and to a much more limited extent UKlender Barclays Bank, active in the CRE market. NAMA has announced that it will make €2bn available for staple financing which means that perhaps one half of its Irish CRE portfolio will be sold with this benefit. NAMA says it doesn’t have standard terms so we don’t know, for instance, if it requires guarantees or security over borrower assets. The absence of EU approval of NAMA’s staple financing scheme is curious and NAMA may find itself on the wrong end of a competition challenge in the not-too-distant future.

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Has NAMA quietly conceded it stands to make a €2bn loss?

Seems so.

To recap, NAMA bought €74bn worth of loans from five banks – AIB,. Anglo, Bank ofIreland, EBS and INBS. NAMA paid €32bn* for these loans, comprising €30bn in so-called “senior debt” and €2bn in so-called “subordinated bonds”. The intention was that NAMA would generate at least enough from its activities between now and 2020 to pay off the €32bn. In fact, according to the first NAMA business plan, the expectation was to pay off what NAMA paid for the loans and make a profit of €5bn. In NAMA’s second business plan the projection was to pay off what NAMA paid for the loans and make a profit of €1bn. It now seems that NAMA’s outlook has taken a turn for the worse with NAMA expecting to pay off the “senior debt” but there is, remarkably, no word about “subordinated bonds”

On Tuesday this week, the Sinn Fein finance spokesperson Pearse Doherty asked Minister for Finance, Michael Noonan to comment on NAMA’s prospects in light of the recent Comptroller and Auditor General report which said that NAMA will face considerable challenges in meeting its profit objectives over its lifetime. The Minister trotted out the by-now traditional NAMA mantra of it being confident the Agency would break even, but there was a nuanced change in the statement in that there is no longer any reference to “subordinated bonds”, only to the “senior debt”. The full exchange is here (with emphasis added)

“Deputy Pearse Doherty: following the recent publication of a special report by the Comptroller and Auditor General, if he will confirm that he accepts the judgment that the National Assets Management Agency will face considerable challenges in achieving its income goal in order to break even by 2020; if he will confirm that if there is any shortfall in NAMA’s financial position by 2020, it is the State that will underwrite any loss.  [27947/12]

Minister for Finance, Michael Noonan: I am advised by NAMA that its Board has recently completed a review of its strategy and has re-affirmed its expectation that NAMA will at least break even over its projected ten-year lifetime, meaning that it is on course to recoup for the taxpayer, at a minimum, the Senior Bonds issued as consideration for acquired loans in addition to recovery of its carrying costs and the working and development capital expenditure it has advanced to debtors. Based on the Agency’s record to date, I have no reason to doubt the Agency’s confidence that it will achieve its targets over its lifetime.

I refer the Deputy to Section 225 of the National Asset Management Agency Act 2009, which sets out the circumstances in which a surcharge may be applied to the participating institutions if there is a shortfall in NAMA’s financial position following the completion of NAMA’s operations. Section 225 was included specifically to avoid a situation where the State would have to underwrite any loss that NAMA may make.”

So what happens if NAMA doesn’t generate enough to repay the “subordinated bonds”? The good news is that it is the banks which will need write off the unpaid bonds as a loss. The bad news is that we own Anglo and INBS 100%, AIB and EBS 99% and Bank of Ireland 15%. Bank of Ireland has only €280m of the “subordinated bonds”, so the vast majority of the loss will fall on the shoulders of the taxpayer. Of course, Minister Noonan made reference to “at a minimum” and “at least break even” in his response, but the quiet dropping of reference to the “subordinated bonds” will give support to those who are pessimistic about NAMA’s prospects and they may see this as a deterioration in the outlook for NAMA.

* To be precise, up to March 2012, NAMA had issued €30.23bn of “senior debt” and €1.594bn of “subordinated bonds”. NAMA has so far repaid €1.25bn of “senior debt” meaning that there was €28.97bn of “senior debt” owed by NAMA in March 2012.

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NAMA to provide bespoke financing for residential purchases

In 2009 when NAMA was a glint in Peter Bacon’s eye, who would have thought that NAMA might itself become a major new lender for Irish property? So far we have two announced initiatives from NAMA

(1) Staple or vendor financing which applies to commercial property, and this is where NAMA will defer part of the purchase price. So if you buy a €100m commercial property from NAMA, then you may have to pay NAMA €30m in cash today, but the remaining €70m will be treated as a loan which you pay to NAMA over a period of years.

(2) The 80:20 Deferred Payment Initiative which was launched last month and which applies to residential property in theRepublic ofIreland. This is where NAMA will sell you a property at a set price, but if the value of the property declines over the next five years, NAMA will give you a refund. So you might buy a €100,000 property from NAMA today. And if the property has dropped in value in five years time by say €15,000, then NAMA will give you a refund.

However it seems that NAMA is set to provide bespoke financing options for residential purchases. On Wednesday this week in the Dail, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance, Michael Noonan if NAMA had financing products other than staple financing and the 80:20 scheme. The Minister replied that so far NAMA hasn’t but that NAMA “would not rule out in individual circumstances arrangements that include an element of deferred payment in respect of residential property transactions” Here is the full exchange (with emphasis added)

“Deputy Pearse Doherty: if the National Asset Management Agency provides or has provided financing to purchasers other than staple financing for commercial property and the deferred payment initiative for residential property.  [28480/12]

Minister for Finance, Michael Noonan :I am advised by NAMA that it does not and has not provided financing other than staple financing for the purchase of commercial property under the control of its debtors and receivers. Similarly, NAMA has advised that in the case of purchases of residential property controlled by its debtors and receivers the Agency does not and has not provided financing.

The Agency has recently introduced its 80:20 Deferred Payment Initiative, which has been launched on a pilot basis in respect of 115 houses in Counties Dublin, Kildare and Meath. Financing under the Deferred Payment Initiative is currently available from one of Bank of Ireland, AIB through its mortgage subsidiary EBS, and Permanent TSB with normal lending terms applying. It should be noted that this is not mortgage financing by NAMA as the source of the financing on that Initiative rests with the banks. NAMA is, in certain circumstances, willing to fund the purchase of commercial property under the control of its debtors and receivers through staple financing. Applied to the right product and right purchaser, staple financing provides, I am advised by NAMA, an opportunity to bring more buyers, including international buyers, into the Irish commercial property market.

I am advised by NAMA that it would not rule out in individual circumstances arrangements that include an element of deferred payment in respect of residential property transactions controlled by its debtors and receivers. NAMA have advised that they will look at other requests for financing on a case by case basis.”

It is interesting that NAMA denied that in respect of “residential property controlled by its debtors and receivers the Agency does not and has not provided financing” because the speculation going around Dublin is that a substantial property on one of the capital’s best roads was recently sold in a NAMA transaction which involved the purchaser getting a loan from NAMA of nearly €500,000. It would seem from the above response that such a transaction has not occurred unless NAMA is being (very) Jesuitical in the difference between “financing” and “deferred payment”. And indeed it would seem that there is a difference in NAMA’s mind between “financing” and “deferred payment” because in respect of “financing” it says it “does not and has not provided financing” yet in respect of “deferred payments” it says it would not rule out such requests. The interpretation on here is that “deferred payment” equals a form of “financing” which is why the title of this blogpost is worded as it is. In the sense that a deferred payment may be for variable amounts at variable interest rates for variable periods of time, it seems valid to characterise such arrangements are “bespoke”.

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