Sunday 26 October 2014

A proposal: how to resolve the growing housing crisis

Developer Noel Smyth thinks Nama should issue licences

Noel Smyth

Published 24/08/2014 | 02:30

Noel Smyth
Noel Smyth

It's generally accepted by all the major commentators and private operators that the country must build at least 25,000 residential units per annum between now and 2030. That's about 400,000 units in all.

A clear alternative to this housing crisis lies with the taxpayers themselves.

In the greater Dublin area alone, the taxpayer owns 25,000 sites through Nama. These sites are ready to be developed and turned into residential accommodation.

The taxpayer has already paid dearly for these sites through the subvention given to the banks and in particular by the Government funding the operation of Nama.

I believe that tinkering with the housing shortage is not likely to result in any drastic reduction in respect of the 90,000 people currently on the waiting list throughout the country, nor will that number change dramatically, unless we take immediate action.

The Government is the ultimate master of Nama and can direct Nama through the Finance Minister as to how it wishes to dispose of its assets. It's in the Nama Act, 2009.

Michael Noonan took a bold decision in February of last year to liquidate IBRC and subsequently ordered the sale of those assets into a market hungry to do business in Ireland. The decision and result was a spectacular success and moved the property market forward, helping our credit rating and creating a bedrock in Irish property values absent in the previous five years.

That market is now fully focused on residential opportunities that are being presented as a result of new demand, especially in the Dublin area. However, it would be imperative that the sites which Nama control are not offered into the market without clear and unequivocal commitments from those agreeing to purchase them. An "opportunistic fund" which is eager to acquire further Irish assets, especially in the residential space, should be encouraged to do so - but with clear terms and commitments to ensure that the sites are built on and delivered to the market in a timely fashion.

There is no point in Nama, in seeking to resolve the housing crisis, selling developed sites to "opportunistic funds" unless it can be guaranteed that these sites will be turned into much-needed homes for those looking to purchase - obviously at the prevailing open market price.

The recent decision by the Government to require Nama to sell "its assets over the next two years" will put severe pressure on Nama for these sites to become part of that "sell-off". With an election looming before the summer of 2016, it is obvious that pressure will mount to have the housing crisis addressed well before that date.

It is doubtful that Section 2 of the Nama Act is wide enough to allow Nama to act directly as builder/developer. Rather, it might direct its connections, whose loans it controls, to give instruction for the development and completion of house units.

However, it would be difficult to see how 25,000 residential units might be built without the support and commitment by established and experienced developers/builders in what, after all, is a rising market. The expertise and, most importantly, the know-how and connections, contacts and experience are now at a premium.

In most instances, Nama does not own these properties. They remain in the ownership of the original borrowers, with Nama having the right to call those loans, appoint receivers/liquidators or bankrupt the borrowers - which, in turn, will require Nama to appoint other professionals with all the increased costs that receivership entails.

In those circumstances, Nama could not enforce any conditions on the site being sold on - and the concern is that opportunistic buyers would acquire these properties and sites, which may then be allowed to lay fallow for a number of years waiting for prices to rise.

It is my belief that Nama is best suited to act as the overseer/controller to ensure these developments are completed, as opposed to endeavouring to develop them itself.

The Act has, in my opinion, unintentionally emasculated Nama, preventing it from being able to ensure that the assets which it now controls and for which there is huge demand can be properly developed and built out.

So I have a proposal.

Nama, through the Finance Minister, could be directed to offer, by way of licence, its residential sites to the market in open competition - but with the proviso that title to the sites will only be made available on 
"practical completion" of the individual houses/apartments in question (that is, a licence to enter the site to build but not to own until "practical completion" has been achieved).

In addition, there would have to be a positive covenant by the purchaser to complete the houses in question within 12-24 months of entering the licence.

The element of "use it or lose it" would be a strong enticement to delivery. It could be a further requirement, as part of this proposal, that the completed properties are rented, albeit at the open market rent prevailing, for up to three years.

The rationale is to provide housing and allow the banks and the market to recover before the sale of these units takes place. At the moment, owner-occupiers are finding it extremely difficult to source lending, and the majority of the housing units being purchased are by investors for cash.

Once the market recovers, lending to owner-occupiers will normalise - and at that point I would suggest that these units be released onto the market for sale.

Nama would be given a credit in respect of the licence fee charged, so that there is no loss to Nama whatsoever - and thus to the Exchequer.

The licence proposal is a refinement of the manner in which local authority housing was developed back in the 1960s and '70s. In those days, local authorities identified a particular site (anything from six to 50 houses), and invited various builders to tender for the building work in respect of those houses.

In those circumstances, the builder paid a licence fee to enter onto the property, but did not pay for the site until such time as the house had been built or had reached the stage of practical completion.

In this way, the local authority was assured that the builder built the house to its specification and that it completed it in a timely fashion. Substitute Nama as the licensor as opposed to the local authority, and the same provision would apply.

By encouraging institutional investors, hedge funds or private individuals to acquire these sites on terms, and to make direct arrangements for their development, building and completion (albeit by 
way of licence), it will ensure that Nama and the Irish taxpayer and new home owners will:

l Get full value now for the sites, in a creative and opportunistic way that uses sites currently owned by the taxpayer to get development under way quickly.

l Ensure that assets which have been taken over by Nama can be developed to alleviate demand and meet both 
economic and housing objectives.

l Give investors the opportunity of investing in the Irish residential market in a 
controlled and equitable fashion, which further allows Nama "to contribute to the social and economic development of the State". (That's Section 2, VIII, of the Nama Act 2009).

l Put thousands of experienced and unemployed craftsmen back to work in the housing industry and finally ensure that at least 25,000 housing units will be delivered to the market in a timely fashion.

It is my view that where Nama leads, other banking institutions - currently sitting on thousands of sites and large land banks - will follow.

The result should be that we will be well on our way to meeting the housing requirement of at least 25,000 residential units per annum, in a fair business and equitable fashion.

Noel Smyth is a principal at Fitzwilliam Real Estate Capital

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