Nama's new business plan anticipates that the agency would lose €800m in a worst case scenario, which is pegged at a drop in property prices of 10%. The problem for Nama is that two-thirds of the portfolio is already in that position. Nama values loans based on their worth last November and since then property prices have fallen by an average of about 10%, with development land dropping even more than that. The overall portfolio won't reflect that drop off though because prices have surged in Britain and to a lesser extent in Europe. However, the reality is that property prices will now have to rise 20% in Ireland over the coming decade in order for Nama to break even on the portfolio here.
Both the Department of Finance and Nama have stressed that any shortfall will be made up by a levy on the financial institutions in 10 years' time but that is based on the incredibly optimistic premise that they'll still be in business. Will Irish Nationwide and Anglo even exist at that stage? And with AIB still a candidate for eventual nationalisation it is hard to believe that if it was privatised afterwards any new buyer would be willing to take on legacy issues such as an unknown future Nama liability.
The major revelation at last week's briefing was the scale of ineptitude at the Irish banks. Nama has discovered that some developers were not paying back loans from the Irish financial institutions but were paying overseas banks that had been joint lenders. Nama will now take charges on the rent rolls, something which the banks should have been doing in the first place. Brendan McDonagh said he doesn't know what the developers were doing with the money, and wouldn't rule out the idea that some were using it to fund their lifestyles.
Nama says it will work with certain debtors when they "are co-operative, make full disclosure and are realistic in terms of asset funding and of the lifestyle implications for them of Nama support". That means offloading the big company cars and the art collections.
Tranche 2 is due to be transferred at the end of the month and expect the discount to be well over 50% as sources say the developers in this tranche have much more exposure to development land. Rumours that haircuts of 99% were being applied in the case of some land were denied by Nama's John Mulcahy last week who said that the average discount on land is between 60% and 70%.
There is also some criticism about the comparative inexperience of large scale valuations amongst some of those carrying out reviews although Mulcahy said this isn't a problem as they have a matrix of values and valuations that fall outside this which are red-flagged.
Somewhat surprisingly it looks like development land will be one of the first things flogged off by the agency. It said last week that it will seek to reduce its exposure to undeveloped land and partially-completed developments "as soon as is feasible", via public auction, where appropriate. They will also enter joint ventures for the development of some of the land – this is likely to take the form of Nama receiving an upfront payment and retaining a stake in the scheme. For those projects that are viable, the agency is going to loan money at a margin of 2.5% above the prevailing market interest rate. "New money is a limited and expensive resource," it said, adding that the return required by Nama will increase commensurate with the risk associated with the asset.
The anticipation had been that some of the overseas investments would be amongst the first assets to be sold and while development land now looks like it is the focus, there is a reasonable expectation that some of the UK assets will be put on the market before the end of the year, particularly given that the traditional selling season in London runs from November to March.
For the hotels sector, it's a different story with a raft of closures now likely. "Where a number of Nama-funded hotels are competing in a location where there is only potential for a single facility, Nama will make its decision based on the optimal commercial outcome," the business plan states. They will stand as symbols to the industry's tax-break driven insanity, one that contributed to the downfall of nearly all of the developers.
Will Nama's biggest client be us?
Will the state end up being one of Nama's biggest clients? As part of its new business plan, the agency said it will engage "proactively" with government, local authorities and state agencies in relation to their possible need for land.
It will be offered to them at a minimum reserve price for four weeks "subject to a definite decision, contract and closing period of 90 days", prior to open market offering.
The state overpaid during the boom for land around the country as part of Charlie McCreevy's decentralisation policy. Many of those sites are currently empty or underutilised due to the failure of the initiative.