Tuesday 28 March 2017

The right moves: Nama's development problem

The Treasury Building on Grand Canal Street Lower where NAMA is based. Photo: Tom Burke
The Treasury Building on Grand Canal Street Lower where NAMA is based. Photo: Tom Burke

Paul McNeive

The planning application for "The Exo", a 17 storey office tower at The Point Village is a welcome addition to the supply line, given the shortage of city centre space. The application has been made by the receivers, Stephen Tennant and Paul McCann of Grant Thornton, and funded by Nama.

However, assuming planning permission is granted, what will be the next step?

Nama want to be seen to be stimulating development but they have no brief to develop speculative buildings, that is, to commence development without a tenant signed up. Despite the strong demand for space in the docklands, building Ireland's tallest office tower is inherently risky and taxpayers would certainly wonder if that was an appropriate route for their money. Furthermore, the Receivers could never undertake the development as Receivers are personally liable for debts incurred and they would never take on such risk.

Therefore a mechanism will have to be found which strikes a balance between maximising returns to the taxpayer, getting the site developed quickly and attracting developers and funding. Arguably, Nama will have added value to the site by securing planning and one option would be to simply offer the site for sale. However, it's not certain that there are enough developers surviving, with the development finance available, to create competition for the site and maximise the price.

A likely solution is to offer the site to developers by way of a license or long lease. This allows the receivers/Nama to insert conditions, such as a right to repossess the site if the development hasn't been completed within specified timeframes. This also reduces the financing demands on the developer as he doesn't have to pay for the site upfront. Nama are already exploring this route with "Project Wave" which is the site beside the new Central Bank building, also on North Wall Quay. In that case it is understood that Nama will receive a "ground rent" once the site is developed.

Other examples of buildings being developed on land which is leased are rare and they usually occur where an occupier wants a certain site, which the owner doesn't want to sell, but will take rental income.

Another option is to invite developers to make their bids on the basis of what share of the income from the completed building will be payable to Nama under the license. This method was used very successfully in the development of the office building occupied by Three, on the opposite side of the river. In that case, several developers competed for the right to develop the site on the basis of returning shares of 20pc to 30pc of the rent generated to the freeholder.

Once the building is developed and the ground rent or share of rents from tenants is flowing, Nama could sell on its interest. However, these mechanisms inevitably create a "marriage value" where the interest retained by the freeholder (Nama) will have a higher value to the developer/owner of the building, than to the general market. A likely solution for Nama is to collect their share of rent whilst waiting for the market and availability of finance to improve. They can then put their interest on the market and force the developer/owner of the majority of the income stream to pay a premium price to gain full control of the property.

Nama will be relying heavily on the Receivers and their Agents for advice but whatever mechanism results, the speedy construction of a landmark office tower will be a welcome addition to docklands

The return of queues to buy new homes on some developments over the weekend, with some phases selling out, reminds me of the challenge to agents in deciding on launch prices. Property is of course price sensitive and the agent must find a balance between achieving momentum with early sales, and maximising returns to the developer. The same question arises for launches of schemes of small office and industrial units.

Agents can find themselves in an impossible position on this. I have seen developers complain when their schemes sold out on the first day, on the grounds that the units were underpriced and they have "left money on the table." But, there is no worse client than the developer whose launch produces disappointing sales and the agent is accused of overpricing.

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