Loan danger A state agency is set to become Ireland’s biggest landowner. David Thame reports on rising speculation about the possible consequences
Ireland’s roulette economy is about to risk another spin of the wheel.
The €70bn plan to offload badproperty loans into a so-called “bad bank” is intended to rescue the country’s beleaguered financial sector.But fears are growing that there could be serious and as yet unexplored consequences for Ireland’s property markets if the scheme goes ahead -and even worse consequences if it doesnot.
The National Asset Management Agency – NAMA – is the Irish government’s response to the all-but-complete collapse of Ireland’s six major banks earlier this year. Weighed down by loans used to buy land at boom-time prices, the banks have neededmassive state aid.
NAMA will pay €54bn for bad property loans with a face value of €77bn, but with a current value of €47bn, and take charge of their management. Strictly speaking, ownership of the land and property backed by the loans remains with the existing landlord or developers. But with their reputations in tatters, nobody is listening to them any more. The result of this is that NAMA will instantly become, in effect, Ireland’s biggest landlord.
The Dail is considering legislation to create NAMA this month. So far, enormous energy has gone into debating the effects of NAMA on Ireland’s banking and financial sector and whether the 30% “haircut” on loan values is not enough, as the European Central Bank has warned, or too much.Yet, so far, nothing has been said about the consequences of having one super-landlord control most of Ireland’s developable land and many of its completed assets. Some in the upper echelons of Irish property are beginning to worry.
There was a thundering silence when EG asked Sean O’Faoláin, NAMA’s deputy director, to explain what research had been done into the effects of the bad bank plan on the Irish property market, or what policies had been prepared to stop competition from NAMA snuffing out independent landlords and developers.
Meanwhile, Dublin is alive with rumours that a recently imposed ban on upward-only rent review clauses will be lifted to give NAMA a chance to recover from bad loans.
According to CB Richard Ellis research director Marie Hunt, the way NAMA behaves as a landlord and developer is the big question of Irish property.”None of us know precisely what will transpire, other than NAMA will be the biggest owner of real estate in the stateand everyone else will be competing against it,” she says.
“The legislation is only in draft as yet, so we are not sure how it will be enacted. There is certainly huge political opposition to the plan, although noone has come up with a better alternative as yet.”
Hunt’s early guess is that NAMA will play a conservative hand. “While there will undoubtedly be some disposals emerging, the agency has a 10-15 year investment horizon in order to maximise the return to the taxpayer,so we are more likely to see itworking on finishing uncompleted schemes, clearing existing inventory and managing assets over the medium to long term to boost value,” she says.
It is clear -or fairly clear -that NAMA will not be a back-seat driverwhen ittakes control of Irish property.
A Treasury policy document, published over the summer, says: “NAMA will manage these loans so as to obtain the best achievable return from them. In the meanwhile, it will collect interest due and pursue debts so as to ensure its own income stream, and to recoup the government investment over time.”
NAMA’s O’Faoláin explains that Irish banks will play a strictly limited role once they have sold their loans. “NAMA will take the key credit and other business decisions in relation to loans and borrowers. The day-to-day administration work will remain with the banks, and they will operate by reference to service level agreements agreed with NAMA,” he says. In other words, all the big decisions -and many of the small decisions-get made by NAMA.
It is a sign of the sensitivity felt in the commercial property sector that many of the big names in Dublin would not speak to EG.
Fundamental question
Paul McDowell, partner at Knight Frank and head of itsIrish operation, did talk. While he is an enthusiastic supporter of the NAMA plan, he still has questions about the way it will affect the property markets.
“I can’t see that it should make much difference because NAMA isn’t taking the property, only the loan, and management will still be in the hands of the owners, although obviously they will be quite dictated to,” he says.
“From a day-to-day point of view, NAMA shouldn’t change anything, but will it change fundamentals? I don’t know. It may be that those landlords with loans that remain outside the scheme will see the creation of NAMA as an opportunity for them because they will, presumably, be able to remain flexible and react more quickly to the market.
“We just don’t know yet whether a NAMA-backed development will be flexible in the same way, or whether it will take the same kind of risk the private sector would.”He adds: “On the face of it, NAMA has been set up to cut out risks, so it is logical to conclude that itsproperty loan book will be managed conservatively. That gives others a real opportunity.”
Whatever the consequences for property, McDowell is convinced the arrangementis necessary. “We have complete stagnation in the property market and the longer this goes on, the harder it will be to get started again. NAMA isn’t perfect, but it is the only game in town, and we need to get on with it,” he says.
There is certainly some pain ahead, not least from the valuation process which must come before NAMA buys out the bad loans (see below). The extent of the “haircut” on loan values is not clear, although the announcement on 16 September has shown the direction of government thinking.
It is certain, however, that some developers will suffer severe losses. For instance, the early word from NAMA is that many suburban development plots are now effectively unusable and will be valued as farmland. This would cut valuations down to a tenth or twelfth of the original purchase price.
In addition, the Irish government is being urged not to overvalue assets, since this would increase the risk of inflation as the eurozone economy recovers from recession.
Property industry hopes -and fears -are now pinned on John Mulcahy, chairman of Jones Lang LaSalle in Ireland, and now seconded to NAMA to advise on property valuations.
The NAMA plan faces a stormy journey through the Dail. There remain many who doubt that the proposed arrangementcan succeed, and say it risks sinking the Irish economy by pushing it ever more deeply into the red. Ireland’s property people -like everyone else in Ireland -are hoping this time the roulette ball lands on the black.
Valuation ‘haircut’: how shocking will it be?
Received wisdom says that Irish commercial property values have plunged by 50% from the peak of the boom to today’s trough. Loan portfolios are being traded at a 40% discount. So, in the eyes of many, the decision that NAMA’s “haircut” of loan values will be an average of 30% seems like a modest trim.
Dublin agents say it is possible to value fairly yet conservatively. If NAMA assumes, as many observers do, that long-term Dublin office yields of around 7% provide a useful benchmark, with rents around €375-€480 per m2, this would provide a firm but fair foundation for landlords and developers.
However, as CB Richard Ellis’s Marie Hunt explains: “The key point that a lot of people are missing is that each loan is going to be independently valued, and that a different rationale will be applied in each case.
“Therefore, it is impossible for anyone to speculate on what the “haircut” on values will be.”
NAMA invited tenders for its 25 Irish-based valuation contracts in August. The successful firms were due to be announced this week.
A long-term view
The National Asset Management Agency is intended to rescue Irish banks from the weight of loans made to buy land during the boom.
NAMA will buy bad loans from the banks at a substantial discount to their face value, paying for them with government bonds. The borrower, however, will continue to owe NAMA the full face value.
The entire NAMA process – valuation of property, swapping loans for government bonds, managing the loan-backed properties and developments, and taking the profit – is expected to take between 10 and 15 years, perhaps longer.