ANALYSIS:NAMA COULD break even if the properties it is expected to come to own rise in value by close to 10 per cent over the coming decade, Minister for Finance Brian Lenihan said yesterday, writes COLM KEENA
Such an outcome could be achieved if the uplift in property prices keeps pace with the expected rise in the consumer price index over the period.
The assets likely to be taken over by Nama include assets in the UK, continental Europe and the US, where market conditions are generally considered to be more favourable than conditions here.
Should the value of properties outside the jurisdiction rise on average by more than 10 per cent, then that eases the pressure on the Irish assets to perform.
An estimated 66 per cent of the assets expected to be taken over are located here, with 21 per cent being in Britain, 6 per cent in Northern Ireland, 4 per cent in continental Europe, and 3 per cent in the US.
It is likely that the properties outside the Republic will be sold off earliest.
The Minister yesterday quoted both the outgoing and incoming governors of the Central Bank, John Hurley and Prof Patrick Honohan, who have told him: “Having regard to the uncertainty in property price movements, the proposed add-on of 15-18 per cent to the estimated current market price does not seem out of proportion with the range of potential upward price movements, especially when a risk-sharing element is included.”
In fact the add-on to the current market value is approximately 15 per cent, suggesting the two governors may have been asked for their quote prior to the finalisation of the figures included in Lenihan’s speech.
The figures are worked out as follows: the book value of the loans expected to be taken over is €77 billion; the rolled-up interest involved in that figure is €9 billion; so the original book value was €68 billion.
The average loan-to-value ratio is 77 per cent, according to interim work carried out by Nama. This indicates that the original value of the properties the loans are linked to was €88 billion. (If €68 billion is 77 per cent, then 100 per cent is €88 billion.)
Assuming the property concerned, which is in this jurisdiction and others, is down by an average of 47 per cent, then the market value is approximately €47 billion.
However, the Minister and his advisers have taken the view that this value is out of sync with the long-term averages for the markets concerned. Using long-term indices going back decades, and ignoring price rises in this market in the period from 2005, the Minister has decided to add an extra €7 billion to the value of the assets, to reflect what he and his advisers believe is a more accurate reflection of their value.
As part of a risk-sharing exercise, he has decided to introduce subordinated bonds to pay for approximately €2.7 billion of the assets to be purchased from the banks.
This means that the banks will not get paid this amount if the Nama scheme, and the property market, do not perform as it is hoped they will.
So Nama will pay €51.3 billion up front to the financial institutions for the assets.
To get that back, it needs the properties, which have an estimated current market value of €47 billion, to grow in value by €4.3 billion, or approximately 10 per cent.
That’s the scheme in broad brushstroke terms. Of course, as the Minister said, the final figures will only emerge when Nama goes through the 21,500 loans it expects to take on, loan by loan, and gets a clearer view of the state of, in particular, the Irish property market.
Some of the loans will be linked to well-located commercial properties that may well increase in value by more than 10 per cent over the coming decade. Others will be linked to rezoned agricultural land that in truth has no development potential and will resort to agricultural value.
If the property market, on average, falls further, and then stagnates, the exchequer will be looking at potentially massive losses. It all comes down to a number of imponderables: the economic performance of the Republic and Europe generally; and the effect of that performance on the property market here and abroad.