Nama has no incentive to make profits on its property portfolio

Two property funds raised €600 million from investors in the space of a couple of hours last Friday for the purposes of investing in Irish real estate. It is welcome, and almost unimaginable, news when you consider the pit of despair into which the country slumped in 2009. But like any gift-horse it probably does warrant a full dental exam.

It is not the funds themselves – Irish Residential Properties REIT and Green REIT that merit scrutiny – it is the circumstances that led to them and various others queuing up to buy Irish commercial property assets that we should be looking at. And what you are really talking about here is the National Asset Management Agency’s management of the market.

The question that arises is whether Nama under-paid for the banks’ property assets in 2009 and is now selling them too cheaply as it rushes to wind itself up ahead of time with a small surplus.

The beauty of the Nama structure – if that is not a contradiction in terms – was that, in theory, it should not have mattered if they under-paid or over-paid for the assets they took off the banks.

Valuation
This is because the tax payer, who owned – or was a major shareholder in – the banks, was on both sides of the deal. What ever we might lose on the banks' roundabout would be made up on the Nama swings. If the loans were sold too cheaply it might mean bigger losses for the banks but in theory bigger profits for Nama. What this meant in practice was that Nama could get on with its intended purpose – cleaning the banks up by taking over their commercial property books – with out anyone having to get to worried about whether the assets were correctly priced.

That is not to say that there was no thought given to the price. A formula was used to establish the market price with some allowance made for long-term value. It was the best shot under the circumstances, which were unprecedented: the economy was cratering, the banks were failing and the country was being squeezed out of the debt markets.

Fast forward almost five years and much of the negative sentiment towards Ireland has been reversed and international buyers can now see real value.

They can also work out roughly what Nama paid for its assets through informed guess-work and the limited amount of information in the public domain about the haircuts applied to the bank’s loans.

They will also be aware that Nama only has to get back what it paid for the assets. A surplus would be nice, but when Nama was born in the dark days of 2009, the idea that it would make a big profit seemed fanciful.

They also know that Nama exists only through the grace of Eurostat who have ruled that, because of a technicality, its debts do not count as Irish national debt. Although this is unlikely to change, any serious assessment of the investment case for Irish bonds has to factor in Nama's €37 billion worth of debt. In practice this means that Europe and the Government want Nama wound up as soon as possible.

This all amounts to quite a powerful imperative for Nama to not focus on long-term value. If that was its focus , it would look at the wall of money coming its way and think about how to push up prices.

Prod with a pitch-fork
But when your mandate is simply to get out of the market without the tax payer incurring a loss – which was something of a poisoned chalice in 2009 – then you will focus on getting stuff out the door.

And when you consider that Nama seems to have a second, somewhat unofficial, mandate to stimulate the moribund commercial property sector – and, by extension, the wider economy – getting the maximum price for every single property is not necessarily the be all and end all.

Commentators struggle to describe Nama and frequently look to the beasts of Greek mythology for metaphor. It has been likened to a chimaera, a hydra and various other monsters. What they are trying to get across is that it was created in a hurry, under great pressure to do several difficult jobs against a bleak back ground.

It is truly a Frankenstein and while we should all be relieved that it has not gone mad and killed all the villagers, we should not be afraid to get the pitch fork out and give it gentle prod and ask whether its mandate should not be revisited in order to focus on extracting more value over a longer time frame.