Saturday 17 March 2018

The right moves: Nama, Project Eagle, and conflicts of interest

Mick Wallace raised the issue in the Dáil
Mick Wallace raised the issue in the Dáil

Paul McNeive

Allegations of "conflicts of interest" inevitably arise in a fast moving market with large amounts of money at stake. The furore surrounding Nama's "Project Eagle" sale of the loan portfolio for 850 properties is a spectacular example. The whole controversy is under investigation but it appears to me that commentators may have missed a couple of points.

The "Project Eagle" loan portfolio was originally valued at €5.7bn, so following its sale to Cerberus for €1.6bn, it is absolutely proper that Nama should account for the sale process and demonstrate that it achieved the best price for the taxpayers.

The allegations raised by Independent TD Mick Wallace that approximately €9.8m in an Isle of Man bank account was for the benefit of third parties connected to the deal and the resignation of the managing director of the purchasers local firm of solicitors are extraordinary and must be investigated. There is no evidence or proof that Nama or any party has acted improperly but Nama will be at least embarrassed again by the involvement of former Nama staff with potential purchasers of Nama assets.

Unusually, there appear to be no "estate agents" involved in the deal at all. Given that this was a sale of a property loan book, Nama, routinely, were advised by Lazards. It occurs to me that Cerberus, the purchasers, must have taken some local advice on the values of the underlying property assets. This would usually be done on a "sampling" basis e.g. one apartment in every block would be valued, even if only from "the kerbside." Purchasers of loan books generally like to know a "baseline" value for the properties, their building cost, their value with vacant possession etc. A missing link in all this is "Who was providing property advice to Cerberus"?

The biggest loss to the taxpayer will be if anyone managed to see the portfolio bought for below market value. Furthermore, whilst €9.8m is small in the context of the deal, if the purchaser incurred non-routine costs, it can be assumed that that money could have been payable to the taxpayer as part of the price.

The lack of finance and credit in all aspects of the development process were among the topics discussed at a seminar on construction last week. The event was organised by Finance One Capital and provided insights into aspects of the business which are little understood by many in the industry.

Setting the scene, Willie Aherne, director of Bruce Shaw, pointed out that the Irish turnover of our top 15 construction firms fell by 73pc, from 2007 to 2014. This caused damage to the balance sheets and credit ratings of many firms in the sector and, for some, those issues are restricting their ability to exploit the upturn. The value of construction output has risen strongly this year to €12.5bn, which at 7.5pc of GNP is still well below industry norms of 12.5pc. The CSO are predicting that the ratio next year will rise to about 8.1pc of GNP

Speaking on procurement, Martin Stonehouse of Healy Kelly Turner and Townsend said that the financial stability of both contractors and suppliers is a crucial part of the process. Concluding, Mr. Farrar warned that some companies have ignored their credit ratings, which became impaired during the recession, and that is limiting expansion. His advice is to restore and maximise credit ratings and credit insurer limits, to operate bond facilities of relevance and real value and to examine trade financing options such as niche funding and supplier payment guarantees.

Property valuations in Ireland centre on definitions of "open market value." The Institute of Professional Auctioneers and Valuers (IPAV) say that following the financial crisis, a new system of valuation "Mortgage Lending Value," mostly applying to commercial properties, is gaining currency in Europe. Under this system, IPAV say the value of a property is determined by an assessment of future marketability, taking into account long term aspects of the property such as local market conditions, current use and possible alternative uses.

To examine this alternative, IPAV will host a "Valuation Summit" entitled "Mortgage Lending Value-Are We Ready" on November 4. Speakers include Luca Bertalot, chief executive of the European Mortgage Federation, Reiner Lux, Managing Director of HypZert German Bank Valuers, and economist David McWilliams among others.

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