The main debate in the media so far has been about the nuts and bolts of the establishment of NAMA and the price the government pays for the banks' loans, be it a 15% or 30% discount.
However, there has been little comment about the practicalities of managing the work out of what will be a giant property portfolio.
There are five critical asset management issues that need to be grappled with and the sooner the better. These are as follows:
1 ) The need to establish a valuation base for land, investment and vacant buildings based on 'real economic values' will be paramount to a successful outcome of the NAMA project. If a 'reasonable' valuation floor is not established and if traditional normal market related valuation principles are applied, then even existing values will vaporise in a fire sale environment. This valuation base has to be different from the traditional approach to valuing property set by the normal mark to market approach by professional property valuers. The market is currently frozen as there are virtually no buyers. If NAMA sought to liquidate the assets underlying the loan books, this would amount to a forced sale environment and market values would be marked down accordingly. This will require some lateral thinking. The phrase 'economic value based on underlying cash flows and broad time horizons' is one used both by the Taoiseach and by the EU in statements on 10 April. Such an approach would be contentious as traditional property valuers will argue that the market is being rigged. I personally see little alternative if there is to be an orderly transfer of assets.
I was interested in how this was done in Sweden with a National Valuation Board setting economic values – or a base for the market. This approach is worth exploring.
2 ) The need to give leadership to the property industry in order to get some degree of confidence back into the market. This is a little understood concept but the significant players in any market generally give a 'tone' to the market and this happens informally and is not market fixing but an awareness of what is reasonable and what is unreasonable by the main players. Back in the 1980s' and 1990 Irish Life and the other institutions, as the market leaders, set the 'tone' of the investment market and the other markets followed. It is a world wide phenomena as evident in New York as in London and elsewhere. This role of providing a tone to the market was taken over from the institutions by the syndications and bankers during the boom and its current absence is partially responsible for the loss of confidence and continuing fall in property values in Ireland. NAMA will, whether it likes it or not, take on this role and if it does so constructively, it may prevent the market going further downhill and help to bring us all back to normality.
3 ) The need to provide a source of finance for would be purchasers. The challenge to NAMA is to shift €50bn of assets off its balance sheet and onto someone else's. This will be impossible unless some other lender, or lenders, provide loans to acquire the assets. NAMA will have to set up or sponsor a 'good bank' or banks to ensure that such funds are available. One of the reasons why values are still falling is because no loans are available to buy commercial property in Ireland. The longer this is delayed the worse the problem will be and compound interest will be reproving itself as the eight wonder of the world!
4 ) The need to provide technical processes to give good legal title to properties caught up in complex legal holdings such as syndicates/partnerships off shore companies etc. A significant number of properties will be held in a complex vehicle which will be the source of delay and litigation in transferring good title in the normal way. NAMA will need to have the capacity to provide good title to properties by some vesting procedure. This could be done in a similar way to the CPO and vesting powers of local authorities when acquiring land for roads etc. (In CPO procedures the clean title goes to the local authority by way of vesting order and the previous owners have to make a case for their compensation to an arbitrator - but do not hold up the title transfer.)
5 ) The need to select management structures for managing the property portfolios. It would be crazy for NAMA to try to take over the management of the bulk of the portfolios now held by the banks. This would take thousands of experienced personnel and involve a huge delay and a long learning curve. A rule of thumb in the asset management business would be that two senior staff are required for each €100m of assets or for €80bn this would imply 700 senior managers. NAMA needs to be strategically focused and as lean and mean as possible not a big bureaucracy.
What NAMA should do is to get robust business plans and disposal strategies, on a property by property basis, from each of the current owners / bankers and then audit those plans within a NAMA policy context. This auditing would be the role of a super 'Credit Committee' within NAMA supported by highly experienced property asset managers. This would involve a tight team of financial and property experts either employed directly or as outside consultants.
Finally the need for a policy context by NAMA for managing out the properties by the asset managers will be critical to the success of the overall project. If for example all the asset managers put all their assets on the market at the same time, there would obviously be a conflagration. NAMA will not let this happen. The issue of what prices NAMA will support and what it will reject will have to link into the views of the Valuation Board – if one is established. (Assets classified and bundled before being offered to market at prices to be determined).
There will be many many similar policy matters on which individual asset managers will need guidance on how to formulate their business plans and which will /should be used by the NAMA 'credit committee' to assess those business plans.
The sooner these issues get resolved the better as everyone in Ireland in the property asset management business is in a state of suspended animation and property portfolios are like gardens - they need constant care and attention without which they quickly deteriorate. Some are now being neglected and this will make the resolution all their harder.
Bill Nowlan is a consultant property asset manager and was property director of Irish Life