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NAMA – An Irish Solution to Property Debt?

NAMA – An Irish Solution to Property Debt?. Éamonn D’Arcy. Ireland – A Classic Real Estate Bubble. Positive economic conditions promoted real estate investment by firms and household Public policy measures also promoted real estate investment by households

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NAMA – An Irish Solution to Property Debt?

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  1. NAMA – An Irish Solution to Property Debt? Éamonn D’Arcy

  2. Ireland – A Classic Real Estate Bubble • Positive economic conditions promoted real estate investment by firms and household • Public policy measures also promoted real estate investment by households • Cyclical acceleration in price promotes speculation and over-evaluation - volume of outstanding loans increases and mortgage credit accelerates • Lenders contribute to the bubble by supporting demand through arranging finance for potential buyers even for international purchases – Liquidity • Most investors and developers had little supporting corporate infrastructure or access to capital other than through bank lending and majority had little or no obvious professional capacity related to real estate

  3. Real Estate Bubbles are not new! US 1920s – Residential US 1980s – Office Markets Japan 1985-91 – Commercial France (Paris) 1989-92 – Commercial UK late 1980s – Residential Asian Financial Crisis 1997 – Real Estate Bubbles a key feature – Thailand, Malaysia US 2000-2007 Residential Spain 1999-2007 Residential China 2003-2009 Residential Ireland – Residential and Commercial 3

  4. Bubble Impacts • Re-pricing falling capital values • Non-performing real estate loans • Distressed assets • Overbuilding – market consequences • But time-frame of impacts far from uniform • Key influences on market recovery • Growth Context • Institutional Structure of Real Estate Markets • Professional Capacity, Innovation, New Players

  5. The Irish Bubble • Many similarities with the Japanese Bubble • Bubble at the end of a prolonged period of growth • A very speculative bubble • Significant debt burden • Wider problems of economic competitiveness But Japanese Bubble more focused on Commercial Property • In Japan post-bubble real estate problems lasted for over 15 years. • Poor growth rate a key issue • In Ireland exposure to property debt created the need for urgent recapitalisation of the Irish Banking Sector

  6. The National Asset Management Agency (NAMA) • A key element of the Irish Government’s approach to bank recapitalisation • Remit acquisition of performing and non-performing real estate related loans from participating financial institutions • Removes toxic real estate loans from balance sheets • Institution receives a price based on NAMA’s assessment of the assets potential ‘long-term economic value’ • Funds received recapatalise the institution

  7. NAMA Business Model NAMA 1. Bank sells €100m loan to NAMA Bank 2. NAMA gives Bank (say) €60m Government bonds in return 3. Borrower continues to owe €100m to NAMA, despite NAMA only having paid €60m to Bank for the loan Borrower

  8. NAMA- An Outsourced Operating Model NAMA Tax:PwC Master Servicer:Capita Property Valuation:JLL Loan Valuation:HSBC Legal:Arthur Cox NAMA project Audit Coordinator (KPMG) Property valuation: Panel selected Legal DD: Panel selected Loan valuation: Panel of firms assigned to individual institutions Certification by CEO and CFO regarding material accuracy of submission assurance process External valuers Data workstream External solicitors Valuation workstream Legal workstream Loan administration Data flow to NAMA Bankproject Pre-loan transfer to NAMA Post transfer

  9. Asset Transfer • Complex Process • Assessments of asset quality central to the transfer process because of the need to establish long-term economic values • Essential to get this right for the long-run ability of NAMA to achieve its goals • Discounts higher than initially expected • Estimated book value of loans transferred will be in the region of €80 bn. • Approximately two thirds of the assets are located in Ireland with the rest overseas (mainly UK)

  10. Source: NAMA

  11. NAMA – Going Forward • Timing and Characteristics of Irish Economic Recovery • Essential for uplift in asset values given the dominance of Irish assets in its portfolio • Transparency • Asset Characteristics – quality • The need to interpret NAMA as a real estate entity and to plot its future course from this perspective • Learn from global best practice in particular with respect to asset management and disposal strategies • Use it to foster a REIT market? • NAMA as an Opportunity (Vulture) Fund? • Integration of NAMA as a player within the global real estate investment sector

  12. Putting NAMA in a Property Context • NAMA 80.0 (50.0) € Billion • GE Capital Real Estate -84.0 US$ Billion • Unibail-Rodamco 22.3 € Billion • Westfield 28.0 US$ Billion • GIC Real Estate 24.0 US$ Billion • Blackstone Real Estate 23.7 US$ Billion • Hines 22.9 US$ Billion • Simon Property Group 20.57 US$ Billion • Land Securities – 10.0 £ Billion

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