A billboard in Dublin comparing Nama to the computer game Grand Theft Auto

Most of the discussion about Nama so far has centred on whether to set it up or not. Now that it does exist, it is important that the debate should move on to what the state should do with it. Most importantly, the taxpayer has to decide what to do with the huge portfolio of property that Nama will control by the end of 2010. I have a few suggestions.
At the outset, it is important to question whether the taxpayer has got a good deal or not. If I was offered a near-monopoly of all development land in Ireland at 50c on the euro, at interest rates of 2% less than the going rate and using somebody else's money (in this case the ECB), I would take the vendor's arm off. It can be argued that the state has the makings of a good deal.
My views of the parameters of the Nama portfolio are set out in the table (right). Recent figures from Nama have deepened our knowledge of that portfolio but only to a limited extent. As such, the table is no more than an educated guess.
The table throws up three categories of property asset. The viable category comprises properties that are well let both in Ireland and overseas. Tenants are contracted to pay rent and are likely to continue to do so. Almost all are commercial investments (as opposed to residential) and have been dragged into Nama because they are owned by people who have less successful loans that form part of the other categories. The assumed yield at time of original purchase is 3.5%.
Manageable portfolios comprise properties that are not capable of paying all of their interest bill or of paying back any capital. However, over time (and this is critical) they have the potential to trade out of their difficulties. This can be achieved either by completion of further phases of development or by a general improvement in the economy over the next three to five years. The assumed yield is 8.5%. These are likely to be split evenly between commercial (which will need rent reductions to survive) and residential (which need time to recover their latent potential).
The 'No Hopers' are properties with no medium-term prospect of being developed profitably. They include the half-built 'ghost' residential estates, badly located retail developments and leisure/hotel developments that were driven by tax incentives rather than by market demand. Their prospects are bleak.
So what should the taxpayer do? My view is that we can do two things relatively quickly. This view is based on the logic of any prudent property developer facing unsustainable debt liabilities – sell what you can and reduce your debt before the bank does it for you. Accordingly, I have two suggestions.
Firstly, Nama could decide to sell off viable assets on the international market. If Nama launched an investment vehicle consisting of these properties wrapped in a government rent guarantee for about five years, I believe it would sell and sell well. The portfolio would have a good geographical spread (US, Europe, Britain and Ireland) with good covenants, and there is a mountain of cash out there looking for a good home.
It is priced at a 4% yield – competitive compared to government bonds, which have no rent increase potential. This would generate cash of €15bn.
Secondly, Nama could decide to transfer the 'No Hopers' to various state and voluntary bodies which could put them to good use. Such sales would be "at cost" which equates to about 25% of book value, and among those who might be interested would be local authorities, housing associations, voluntary groups, community initiatives, the HSE and a whole host of public and private organisations which could use these sites to good effect. For Nama, it would eliminate the annual cost of managing these sites.
At the end of this process, the taxpayer will be left with Category 2 assets at a net initial cost of €17bn – still a burden, but a lot more manageable than the €40bn the taxpayer started out with.
However, there would be an annual rent roll of €1.3bn. This could be used to pay the annual interest bill of (say) €500m. This leaves €800m to invest in the portfolio on an annual basis to bring individual properties up to saleable quality in the medium term.
Such a proposition would make any bank manager smile

Barry Boland is a developer, town planner and chartered surveyor