NAMA must take risks
THE Government's announcement that €2bn of development funding will be made available through NAMA to kick start development over the next two years has been widely welcomed. The move was seen as timely and vital given that the banks are unlikely to be diving back into financing major development anytime soon. Budget 2014 identified "badly needed" offices in Dublin and "commercially viable" retail schemes as priorities.
The move was partly a response to warnings from IDA Ireland that the lack of available office buildings in Dublin, Cork and Galway will hamper their work in attracting companies and creating jobs. Overseas companies usually play two or three countries off against each other in negotiating incentives and the IDA are masters at landing the deals. However, the absence of "ready to go" buildings means many companies will regard Ireland as "off the market."
A conundrum arises in that NAMA hardly see themselves as risk taking speculative financiers and will prefer to fund deals where the tenant has signed a "pre-letting", which removes most of the risk. The problem here is that designing, securing planning permission, pre-letting and constructing large office projects takes two to three years and no overseas company will wait that long.
Thus the NAMA funds are unlikely to create empty buildings which the IDA can use to tempt overseas companies and the government is quickly going to have to come up with some way of making capital available for purely speculative development, be it through the state owned banks, NAMA or some new vehicle.
IDA Ireland may have to take the lead and construct the 21st century's version of the "advance factories" which proliferated in the provinces in the 1970's.
NAMA will also restrict development finance to sites where the developer is an existing debtor of the Agency although presumably a future purchaser of a loan on the NAMA books will be able to apply for development funding.
The issue is underlined this week by the loss of ACC Bank and the entering of SIAC Construction into court protection. ACC has gone the way of ICC Bank, having being sold off as no longer required to provide funding into the agricultural and industrial sectors respectively.
They are both now needed more than ever and a prudent state bank providing capital for these sectors, and strategic property development, would benefit Ireland Inc and help protect what remains of our construction industry.
John Mulcahy, Head of Asset Management at NAMA spoke on these subjects in a presentation last week to the Society of Chartered Surveyors Annual Conference. He too believes that the Irish market needs new sources of capital and stressed that NAMA can only fund schemes it regards as viable. He feels that rents "still have a bit to go" but that some commercial schemes are now coming into viability.
John Mulcahy feels that NAMA will take a pro-active role in development projects and would invest "slightly ahead of the curve."
He said that NAMA have capital available but whilst they don't have any projects now, lots of NAMA debtors are working on getting projects ready."
An interesting point he made is that NAMA, like any developer, needs good quality data on which to base its decisions, but most data available in Ireland (economic analysis etc) is historic. He has found that overseas investors are heavily analysing the future of the Irish economy, looking at where we got it wrong and where they can make money. They won't share their future analysis with NAMA as they regard it as too valuable. NAMA have commissioned the ESRI to report on future demand for property with a maximum of one page devoted to "historic analysis."
NAMA will facilitate selling investments into REITs and they prefer selling to investors who will hold properties for seven to ten years as there is no point "wholesaling" properties to investors who promptly resell them at "retail prices" in competition with the agency.
John Mulcahy, formerly Managing Director of Jones Lang LaSalle, was exactly the right man for the NAMA job and they have made more progress than I expected.
NAMA's incoming Head of Assets is Mary Birmingham who is a really smart professional, steeped in property experience. She must ruthlessly reduce bureaucracy and reinforce a dealmaking culture in NAMA. One of her early challenges will be to weigh up how much of a development scheme must be pre-let, so that it isn't regarded as too risky for taxpayers money.