NAMA – I told you so from the beginning

Ivan writes another prescient piece on the economic disaster that Brian Lenihan was advised to initiate

Doomed NAMA does not have expertise to carry out its task

By Ivan Yates

Thursday, April 21, 2011

The hoopla emerging from Friday’s distressed property auction in the Shelbourne Hotel obscures huge headaches for the new Government.
They seem unaware the National Asset Management Agency is a dysfunctional monster. Urgent clarity is required as to how it will achieve the implementation of its second business plan. What precisely is its role? A debt collection agency? A property development corporation? The state’s bad bank? The only certainty at this stage is that it has failed to achieve its original objectives as set out in 2009.

NAMA’s purpose was to take toxic loans for overvalued property off the balance sheets of guaranteed banks so that they would not be nationalised. We now know the only two surviving banks will be in state control. AIB is 92% state owned. BofI has to raise more than €5bn with a current market valuation of €1.5bn. The rest are nationalised and being wound down. Given the state could have dealt with these loans inside nationalised banks, the premise of NAMA can be questioned as an enormously costly bureaucratic vehicle.

The first critique of NAMA relates to the capacity of the organisation’s board membership and executive. There are less than 20 organisations globally with a real estate asset base on the scale of NAMA. NAMA’s board of Frank Daly, Eilish Finan, Michael Connolly, Peter Stewart, Brian McEnery and Willie Soffe have no particular skills in treasury operations, real estate, fund management and capital markets. What qualifies the country’s former top tax collector to oversee NAMA? The chairman sees debts owed like unpaid tax. This will turn Nama into a liquidation agency instead of an asset management agency, with property-related skills.

To comprehend how NAMA is heading for the rocks one must appreciate how unattainable their business objectives are. NAMA acquired €71bn of loans at a cost of €31bn in Government bonds. There is a common misnomer that this was ECB finance, when in fact it is underwritten by the tax payer. NAMA proposes to recover assets valued at €46.9bn between now and 2019. This year and next they plan to dispose of €8.44bn of property. Their portfolio comprises 59% assets in the Republic of Ireland and 36% in Britain. The historical peak year for Irish property investment sales was in 2006, with a total of €3.3bn. In 2009, the comparative figure was €92m. Get the point? NAMA’s level of property disposal is just not achievable.

The property market is paralysed. Banks are contracting loan books and are unable to lend. Large surpluses of property are due to come to the market from distressed sellers outside NAMA. High unemployment and emigration, along with pay cuts, future tax increases and higher interest rates all serve to depress underlying demand. It will take the equivalent of Friday’s auction (82 properties yielding €14.5m) for every working day over eight years to clear NAMA’s stockpile. The sheer scale of the overhang of NAMA’s estate is mind-boggling. NAMA’s actions will have a mega effect on the market.

The programme for Government sets out no strategy for NAMA. Other than kick-starting property sales, insistence on the highest standards of transparency and platitudes about ghost estates — FG and Labour have yet to clarify their policy direction for NAMA. This vacuum and the necessity to restore a functioning property market are key immediate challenges for Kenny and Gilmore. All we know for certain is that previous terms of the EU/IMF bailout for NAMA have been aborted. The plan was: tier one tranche (top 30 developers’ loans); tier two tranche (next 145 developers), followed by tier three comprising €16bn of loans for smaller developers with valuations less than €20m. This latter group are now to be left with banks or a Special Purposes Vehicle, but not proceeding to NAMA.

NAMA has been extremely slow and indecisive. They have missed their own deadlines by several months. They are still only dealing with the business plans of the top 10 developers, with an average loan of €770m. The next tranche of 20 developers with an average loan of €645m have been told to wait until next February for further correspondence. No one knows when the remaining 130 clients, with an average loan of €110m, will get concrete decisions. Additional problems in assessing possible defects in security and title with loan collateral have yet to be established. An overall policy in relation to NAMA’s 83 hotels remains unclear.

Initial debates in 2009 about NAMA revolved around the level of impairment or haircut to be applied to toxic loans. The underlying contentious issue of “cash for thrash” still remains unresolved. The original premise of NAMA was based on LTEV. Remember that? Long Term Economic Value based on the mythical notion of “uplift”, from God knows where. This was resolved by Section 73 of the NAMA Act which established November 30, 2009, as the legal baseline date for property valuation. Recent international stress tests suggest that property price declines may continue until December 2012.

There is still an absence of accurate residential transaction data. We don’t know what the Current Market Value of NAMA’s estate is and whether their “worst case scenario” of an overall €800m loss is excessively optimistic. NAMA is set to spend €270m on professional fees. Their disposal of the Montevetro office block in Dublin to Google for €99m has been hyped as success — one swallow does not make a summer. Machinations of NAMA still lack transparency. They are making it up as they go along, last week floating the idea of being a mortgage provider. No details, only vague references, have been made to a 30% joint scheme with AIB and Bank of Ireland. Meanwhile, they must shift more than 10,000 apartments.

This Government inherited NAMA. So far they have merely put a halt to grandiose plans. There is no coherent state scheme for lease law reform and market rents of commercial property. By the end of 2012 NAMA’s business plan will have crashed in terms of asset disposals. Radical and fundamental appraisal is now required, involving game-changing solutions. The principal capital market options must include NAMA establishing new joint venture property funds with foreign investors who operate on a global scale.

The scale of NAMA’s asset recovery programme has not been fully absorbed in the corridors of power. The NAMA board and executives do not have the expertise, experience or capacity to carry out the task. The overwhelming objective of attracting such heavy investment in Irish property must now be acknowledged. Oversupply of housing and office accommodation, poor growth prospects, collapsing domestic demand, limited public capital investment and slow recovery in consumer spending means there is a risk premium in holding Irish assets. Floods of forced fire-sales seem inevitable. It’s time to negotiate with credible real estate organisations from China, EU, US and Middle East, which have global scale.

A multinational approach, based on a handful of separate funds to be established must replace the present doomed agency.

This appeared in the printed version of the Irish Examiner Thursday, April 21, 2011