Archive for the ‘NAMA valuation methodology’ Category

Ronan Lyons the respected DAFT.ie economist has today produced a very helpful calculator to help residential property buyers in their rent-v-buy decisions. You can find the calculator here. There may be some bugs to iron out though Ronan has also produced a google docs spreadsheet which set out the full workings and you can find a link on his post also.

Having run a number of computations based on actual asking prices and rental prices from DAFT.ie, the picture that emerges to me is that either property needs to drop substantially or rents need rise substantially to get to the point where the rent-v-buy economics get into equilibrium. With a potential review of the Rent Assistance program by the government and  falling wages (mainly referring here to the Governor of the Central Bank seeking a 20% reduction in wages from a speech earlier this year to restore competitiveness) it is hard to see how rents will rise unless there is a societal acceptance that rents are presently pitched at too low a level.  In simple terms therefore it would seem that a further a property correction is more likely if the economics of buying-v-renting are paramount and if there is to be an economic balance. David McWilliams writing in today’s Independent echoes this point by proposing that the average home has to see a 45% drop  before the rent-v-buy decision comes into equilibrium. The graphs referred to in David’s article should become available here.

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Arguably NAMA’s lead-valuation expert, CB Richard Ellis, has today published its periodic report into the Dublin office market and notes that the vacancy rate has dropped marginally from 23.45% to 23% of stock over the quarter (not a colossal change though it is the first drop in over 2 years) and that rents for some prime locations and quality offices are creeping up marginally (though other locations and poorer quality accommodation are continuing to see falls).

Elsewhere in the Dublin residential market, an upbeat picture is painted for property sales in some parts of the county. Estate agents have reported renewed interest and a shortage in some subsectors. However despite the optimism imparted by the gloss, beneath lies the reality that potential sellers are not putting property on the market because of price falls (although not referred to, possibly because of negative equity issues) and some of the shortage is because buyers will not enter the market at existing asking prices. Also of note is that apartments appear to continue their fall from grace except in prime areas – again not cited in the report but privacy, management charges, lack of development control, neighbours and some poor quality construction may further reduce the appeal of apartments. As always the concern over the lack of a proper public register of sales makes any properly-objective assessment of the market impossible.

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Ever since the NAMA announcements in respect of the first tranche of loans on 30th March, 2010, there has been debate about how NAMA calculated the Long Term Economic Value, the Current Market Value and the consideration paid. The summary of the figures from NAMA on 30th March, 2010 are shown here. It should be stressed that the Anglo numbers are estimates and subject to audit and the latest from NAMA is that it may be several weeks before Anglo’s first tranche loans are transferred.

The NAMA Act and the LEV Regulations give some overall guidance as to how the CMV and LEV are calculated. However debate flowed, for example on the irisheconomy.ie website as to how the consideration paid was derived. There was also intense debate about the “haircut” or the discount being applied to NAMA loans as it was felt this would indicate the NAMA floor for CMVs and may point to where the property market will bottom out.

With respect to the last point, NAMA is expected to purchase €16.03bn of loans in the first tranche. It is not known whether these loans include rolled-up interest or to what precise assets they relate to (though in aggregate terms we know from page 2 of the NAMA first tranche press release that of the projected €8.5bn payable as consideration payable that €5.5bn was classed as “investment property”, €1.3bn classed as land including land where development was less than 30% complete, that €0.8bn was classed as hotels, €0.5bn as land where development was more than 30% complete and lastly €0.4bn was classed as residential property for resale). However IF

  1. The first loans related 100% to residential property
  2. The first loans include the same proportion of loan and rolled up interest as indicated in the draft NAMA business plan (ie €68bn of loans and €9bn of rolled-up interest)
  3. The first loans were granted at a Loan to Values of 77% as indicated to be the estimated overall LTV in the draft business plan
  4. The first loans are representative of the loans, LEVs and CMVs in the planned subsequent transfers.
  5. The first loans were on asset values which were in proportion to the aggregate asset values in the draft NAMA business plan (ie values at origination of €88bn, implied peak values of €120bn) – note that the implied €120bn is rarely referred to in the media which often refers to the €88bn as being the peak value with the curious implication that every single NAMA loan was taken out during one month in 2007!  I cite as a source a statement from Brian Lenihan in the Dail on 12th November, 2010 when the following exchange took place between FG Deputy Kieran O’Donnell (the full record of the day’s exchanges are available here) :

Deputy Kieran O’Donnell: Did the Minister look into the legal structures of the banks in terms of offshore subsidiaries, where those offshore subsidiaries are located and whether there are legal disclosure requirements in respect of those countries? The figure of €120 million as the gross loan book was mentioned by the Minister on a number of occasions. That loan book transpired to be €77 billion. That is a difference of  €43 billion. That is a 36% shortfall which is significant and requires explanation.

Deputy Brian Lenihan: The €120 billion included was a notional figure, based on the value of the collateral at peak; it was not a book value. It added to the book value the actual peak value of the property in measuring the decline since. This is important. This was part of the debate before NAMA but it was never suggested that this figure was the actual book value.


NAMA is placing a current market value (CMV) of €45bn (€16.03/77 * 68 = 14.2; 68/14.2 * 1st tranche CMV 9.44) on assets that were worth €88bn at origination and €120bn at peak, in other words NAMA is valuing at 62% off the peak value. The original NAMA business plan was accompanied with the message that NAMA had to see a 10% total rise in asset values over 10 years to break even (IF THE NAMA LOAN DEFAULT RATE WAS 100%, NOT 20% AS IN THE DRAFT BUSINESS PLAN, AND THAT INSTEAD OF RECOVERING LOANS FROM BORROWERS NAMA HAD TO SELL OFF THE ASSETS).

The following is a copy of an email exchange with NAMA which throws some light on the calculation of the consideration paid. It would appear to this author that the “potential legal haircut for defects in title or security” will only be known to NAMA and there may be other inputs to the calculation as well.

In respect of communication with NAMA, it is probably worth remembering Enda Kenny’s statement in the Dail on 23rd March, 2010 when he questioned how NAMA could operate with 65/70 people when Goldman Sachs were managing a similar scale of asset value with 3,000 people. No doubt they are very busy people indeed and I have redacted the name of the person at NAMA who provided the information but as shown on NAMA’s own website they have a general email address of info@nama.ie. I suppose it’s also to be borne in mind that NAMA has many critics, some of whom might use any information from NAMA in a deliberately malign way.

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This is the startling news from Lisney’s published in today’s Independent which claims that Zone A rents in Dublin are now set at between €4500-6000 per square metre per annum and fell by almost 11% in the first quarter of 2010. Lisney’s also point to the unprecedented number of available units on Grafton Street.

What does this mean for NAMA and its valuation date of 30 November 2009? If commercial values have been determined by reference to rental yields and rents are now plummeting the fear is that we have substantially overpaid for these assets.

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So said Brian Lenihan in the last hour in a press conference making reference to the NAMA press conference earlier today. Why the consideration paid by NAMA is less than the Long Term Economic Value is unclear at this point – presumably if another party has a first charge then that might reduce the consideration paid. This is very important arithmetic and no doubt this point will be considered in the coming days.

Much has been made today of the 47% haircut (46.5% to be precise but given that Anglo is an estimate the point is moot) but is the truth that the haircut is 34% (€10.51bn LEV cf €16bn loanvalue)?

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Hours away from the news that the first tranche of NAMA loans (estimated at €500m after haircut – €1150m before) have come across to the State, serious questions are arising as to whether the five NAMA financial institutions (BoI, AIB, Anglo, INBS and EBS) are selling designated loans to third parties below face value.

Today’s Sunday Times reports on the finances of one of Ireland’s most prominent property tycoons, the widely-respected Derek Quinlan. The Times claims that a third party investor has approached Anglo to buy the estimated €300m personally owing by Derek Quinlan to Anglo. The assumption must be that the third party has made an offer less than the face-value sum outstanding but more than the likely sum to be offered by NAMA. If the sum offered was equal to or more than the face value of the loan then why would Mr Quinlan not arrange for the loan to be paid off in full in concert with the third party? If the sum offered was less than the NAMA offer why would Anglo even contemplate it?

An ugly conclusion suggested by the above scenario is that (a) the State-owned Anglo is contemplating selling NAMA-bound loans and assets to private third parties at a loss to the State and (b) depriving NAMA of not-so-toxic assets.

The scenario outlined above is possibly not unique. BoI and AIB have reportedly reduced the value of their NAMA-bound loans – in the case of AIB by €1bn and BoI by almost €4bn since last September. The portmanteau explanantion has been that some borrowers have paid off loans or refinanced loans in order that they don’t come under the aegis of NAMA. A question that needs to be asked is whether BoI and AIB have sold these loans at less than their face value – if it emerges that developers are able to buy back their loans from NAMA financial institutions at less (and in some cases far less) than face value and avoid the fairly draconian procedures suggested by NAMA the consequences would be explosive.

UPDATE: 25th March, 2010, The Irish Times reports that two assumed NAMA-bound developers, Paddy McKillen and Joe O’Reilly, were attempting to sell assets in London which were backing loans from Ulster Bank. The article states “by selling the properties now, Mr O’Reilly and Mr McKillen ensure the money from these investments cannot be used to service any debts that may be destined for the toxic loans agency”! This pre-NAMA period is a bit of a twilight zone for banks and developers and it is to be hoped that when NAMA eventually conduct audits of banks that they ensure there was no activity which disadvantaged the taxpayer. Developer action doesn’t appear to be restricted prior to NAMA transfers save for the usual insolvency laws.

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We may find out soon how INBS’s loans will be treated by NAMA in the coming days but today’s “revelations” in the Independent really should not come as any surprise to those in the property business and discussed in some detail here weeks ago. I presume there is a typo in the line “The National Asset Management Agency will not apply a far larger discount on Irish Nationwide than any other institution to reflect the nature of its lending and equity participation deals, particularly into the UK” and the ‘not’ should read ‘now’. Anyway we should find out in the coming days what the haircut on the first tranche is proposed at.

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So says a mortgage broker involved in selling a scheme of 28 apartments in Mullingar for between €69,950 for 1-bed, 48sq metre, apartments to €82,450 for 2-bedrooms to €98,000 for 117m 3-bedrooms. The scheme is in the hands of a receiver and not one of the 28 apartments has yet been sold.

To this author, the prospect of paying €130/psf for an apartment in a distressed scheme in Mullingar with unspecified management charges and uncertainty over neighbours and empty units, I don’t see much difficulty at all with seeing prices going lower, much lower.

To take a look at the development and its advertisement on DAFT click here.

UPDATE: According to the Independent today, all 28 flats sold over the weekend and indeed an additional 18 were sold presumably from a new phase of the development. Whilst there is debate over the size of the excess potential supply in the State, there is no doubt that it is significant and against our population changes (the latest statistics would indicate a marginal increase in 2009/10, the lowest in 20 years) we may get a better picture of supply and demand for housing later this year.

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Aside from the cost of the review by the valuation panel which could run to 10s of €k, then no, there would appear to be very little downside and given the colossal sums involved a dispute might make good financial sense. So how will the dispute procedure work?

It’s all contained in Chapter 2 of the NAMA Act (section 119-127). In the following, I use EBS for example purposes only.

  1. EBS receives the Acquisition Schedule (AS).
  2. EBS has upto 14 days to raise a dispute with NAMA with respect to an asset valuation.
  3. NAMA, upon receipt of the dispute can decide to (a) remove the asset from the AS and continue on as normal (b) revoke the AS in its entirety and start again or (c) acquire the asset at the price in the AS and serve EBS with a Completion Notice (CN).
  4. Upon receipt of the CN under 3(c) and if EBS wishes to pursue the matter (why wouldn’t it?) then EBS must within 14 days of receipt of the CN raise a dispute in respect of the ENTIRE portfolio in the AS, not just an individual asset AND the individual asset dispute raised by EBS in 2 above must be greater than 12.5% of the total value of the portfolio.
  5. Upon receipt of the portfolio dispute notice from EBS, NAMA will pass the dispute to the Valuation Panel (VP) for review.
  6. EBS have upto 28 days from the date they receive the CN to pass all documentation to the VP that they wish considered as part of the review.
  7. NAMA have slightly more time to submit to the VP the documentation they want considered as part of the review – 28 days from when EBS notified them of the dispute under 4 above.
  8. The VP can make documentation from either side available to the other side.
  9. If either side, NAMA or EBS, wish to comment on the documentation received under 8 they will have 7 days in which to do so.
  10. The VP can request additional information from EBS or NAMA
  11. The VP have then upto 90 days (which can be extended by the Minister of Finance – “the Minister”) to make their determination TO THE MINISTER.
  12. The Minister has upto 28 days to either accept the VP’s valuation or he can send the matter back to the VP and tell them to reconsider. The VP can ignore the Minister and confirm the valuations as previously or they can modify their determination. The Minister gets one bite at this apple so if the second time round the VP comes up with the same valuation or indeed a different valuation then that is it.
  13. The Minister confirms what the VP have decided and if it is greater than the NAMA value then NAMA must compensate EBS for the difference. NAMA can choose to do that with a cash or cash equivalent OR NAMA can return an asset to the value of the difference.
  14. EBS picks up the cost of the entire review unless the VP comes up with a value which is higher than the NAMA value

Risks to EBS would include the cost of the review and the possibility of NAMA repaying the difference by way of an asset which EBS may not want. The VP would appear not to have an option of determining a value below that of NAMA so there is only upside for EBS in that respect. If an asset was worth €100m at origination and was granted a €77m loan (a 77% LTV) and NAMA valued the loan with a 40% haircut at €46.2m and EBS valued it with a 30% haircut at €53.9m, then would the cost of a VP act to prevent a dispute? I don’t think so and in these circumstances it would seem advantageous for EBS to lodge the dispute.

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With the emerging rumours that the first NAMA loans will be bought in April or May 2010, the response from Minister of Finance to a question from Deputy Deidre Clune on 10th March 2010 (not 11th March as reported in the Sunday Times) may have a significant financial impact on taxpayer risk in NAMA.

The question and answer

64. Deputy Deirdre Clune asked the Minister for Finance the latest estimate of the decline in the value of property here which is likely to underlie the National Asset Management Agency loans. [11571/10]

Minister for Finance (Deputy Brian Lenihan): Section 73 of the NAMA Act sets out that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. NAMA have set this date as 30 November 2009. It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations. Valuation will be in accordance with recognised red book valuation standards, European valuation standards, or International valuation standards, as appropriate to the locations where the property is situated. The valuation process for the eligible bank assets will be certified by independent experts and validated by the Financial Regulator to ensure that the NAMA valuation methodology is robust and credible.

What Section 73 of the NAMA Act says

73.—(1) NAMA may specify a date or event by reference to which the market value of a bank asset or type of bank asset or property or type of property is to be determined.

(2) Under subsection (1) NAMA may specify different dates or events for any or any type of bank assets or property.

(3) Under subsection (1) NAMA may specify a date before the coming into operation of this Act.

(4) The specification of a date or event under subsection (1) has effect for the determination of a market value for any purpose under this Act (including for the purposes of Chapter 2 of Part 7).

Let us also remind ourselves of the objectives of the NAMA legislation

2.—The purposes of this Act are—

(a) to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State, and

(b) to address the compelling need—

(i) to facilitate the availability of credit in the economy of the State,

(ii) to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy,

(iii) to protect the State’s interest in respect of the guarantees issued by the State pursuant to the Credit Institutions (Financial Support) Act 2008 and to underpin the steps taken by the Government in that regard,

(iv) to protect the interests of taxpayers,

(v) to facilitate restructuring of credit institutions of systemic importance to the economy,

(vi) to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy,

(vii) to restore confidence in the banking sector and to underpin the effect of Government support measures in relation to that sector, and

(viii) to contribute to the social and economic development of the State.

So why was the 30th November, 2009 chosen by NAMA and what has happened to property values since 30th November, 2009?

In answer to the first question I do not know. As far as I am aware NAMA did not publicly announce the fact it was choosing 30th November 2009 as the valuation date and the first time this has become known, as far as I know, is via the Oireachtas question above. I could speculate that NAMA needed to choose some date, otherwise there would be endless disputes as to falls and rises to the present day. However in light of what has apparently happened in the property markets since 30th November, 2009 shouldn’t NAMA be changing the date (there seems to be no legislation to prevent it from doing just that) to 15th March, 2010 for example?

In terms of what has happened to property prices since November 2009 the picture is universally consistent – they’ve fallen significantly. The ESRI/Permanent TSB Index revealed that residential property fell by 3.6% in December 2009 alone and the rate of falls were accelerating (September -1.1% , October -1.8% , November -3.1% and December -3.6%). In February 2010 ESRI/Permanent TSB announced that they were suspending their index and would henceforth be producing quarterly indices with the first in April 2010. There is no other formal index. However the median view of a group of property pundits in January 2010 was that prices would drop by 9% overall in 2010 with the suggestion that prices might recover towards the end of the year, thereby suggesting a greater than 9% annualised fall in the first part of the year. Since November 2009 therefore the suggestion is that prices have dropped 5-10%. IPD the publisher of commercial indices suggests that commercial property fell by 4.9% in the last quarter of 2009 and there no suggestion that the falls have reversed though the rate of fall was moderating to an annualised 20%. Would it be safe to speculate therefore that commercial property has dropped 5% in the last 3 and a half months?

Overall what these figures suggest, if I can attempt a response to Deputy Clune’s questions is that the assets that were worth €88bn at origination and which were worth €47bn last September 2009 and less than that in November 2009 are likely to have dropped a further 5-10% or €2.3-4.7bn (based on September 2009 estimates) and this is what NAMA will overpay by today in terms of Market Value.

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