The right moves: Nama making good progress
It is impossible to comment on the Irish property market without referring to Nama. Nama activity has ratcheted up and they are making inroads into the €31bn of taxpayers' money used to acquire property-backed loans from insolvent banks.
The recent publication of its annual report for 2012 allows us to look at the big picture.
Nama's objective is to repay the €31bn by 2019/2020, and they say they will have recouped about a quarter of this by the end of the year.
(I have written off any prospect Nama has of recouping the full €74bn which the banks lent – to our great cost.)
Nama has done the obvious thing by selling where the market is best and has concentrated on sales of assets in the UK, with 75pc of last year's proceeds coming from there, as has been the case since Nama was set up in 2009. But most of Nama's assets are in Ireland, where most sectors of the market have been in decline since 2009.
So what are the prospects for Nama recouping its outlay on home soil?
Most of the Nama property assets were valued as of November 30, 2009 and it's difficult to get a firm fix on the agency's valuations. Many commentators feared that Nama would overpay for assets and following a couple of rounds of 'haircuts', when the enormity of the bank losses became apparent, the definition of 'market value' was then complicated by the debate about the 'long term economic value' of properties.
Whilst Nama may have felt it was overpaying for some property-backed loans, they were buying a 'loan' and in some cases there was the prospect of retrieving money from collateral offered by the borrower under the loan agreement.
However as the economy and the market played out I suspect that very little money was recouped by calling in securities.
On the other hand, Nama took a hard line when buying in partly-built developments. I know of some schemes where banks had lent millions of euro for infrastructural works but Nama paid the bank nothing for that loan on the grounds that the asset was unsaleable.
The agency took 'impairments' of about €1.2bn over 2011 and 2012, i.e. reduced the value of its assets. Nama carried out a review of some land asset valuations in 2011 and this possibly accounted for some of those losses as land values have declined most.
If one wanted to be critical, one could question why assets which were valued in 2010 (as of 30 November 2009) were already being written down by 2012?
The standard Nama valuation template requires valuers to assess the future value prospects and risks for each property, so either some of the valuations weren't great or Nama had to acquire assets at a price which they probably feared would fall.
Whilst analysing Nama's valuations is foggy, a bright star has been the explosive return of demand for investment property.
This is largely because values have dropped 50-60pc and now represent good returns. Overseas funds, confident about the Irish economy, are competing for quality property coming on the market and prices are rising. Nama has taken advantage of this and has been selling large portfolios of loans (probably close to €2bn to date).
Excluding loan portfolio deals, it looks like the strong investment sales total in the entire Irish market in Q1 will at least have been repeated in Q2, representing €700m in deals so far this year.
Nama's strategy must be to get as much good investment property on to the market as it can this year before some Funds lose interest and the CGT break expires.
There's a long way to go to recoup that €31bn plus costs and big ticket portfolio deals are the quickest route there. The Government is moving to allow the establishment of Real Estate Investment Trusts (REITs) – funds in which small investors can buy shares. REITs need to hold large, good quality income-producing properties.
Nama could encourage some borrowers holding assets too large for the Irish investment market down the REIT route. Wherever liquidity comes from, Nama will have to start making profits on commercial assets to offset losses on secondary land and apartments.
Some see REITs as desirable because they allow investors exposure to property, without having to borrow from banks to buy properties outright.
Thus there would be less bank leveraging and less risk of banks collapsing. Which brings us back to Nama.