Friday 20 April 2018

NAMA sales should make all companies nervous

The Irish economy and companies here are drowning in sea of property write-downs in the wake of the biggest property crash this country has even seen.

From golf clubs to hotels, pubs and even hospitals, the write-downs seep through even the most robust financial statements.

Some firms have taken the write-downs early, some have taken them only partially, while others have taken none at all -- simply claiming the market is too illiquid.

While the write-downs are not cash items, they destroy companies by wiping out their equity base and making their debt position far worse.

That means getting loan finance from the banks becomes harder and that means cutting costs to compensate.

The net result of this is that the recession doesn't lift, but lingers.

Hence, the valuation of Irish property is far too important to be left to the property industry.

While accountants, auditors and company directors themselves play a part in handling this issue, larger forces -- most notably NAMA -- are also going to have a big impact.

And this impact is either very good or bad, depending on your perspective.

NAMA has become, within a few months, the largest single owner of property in the State.

While it is an asset-management vehicle and ostensibly a hoarder of land and property, NAMA is also a living, breathing business and, as such, it needs to bring in income. Asset sales, at some level, are therefore on the cards. The only argument is over timing.

If, later this year, the agency starts a reasonably sized sale of assets, this could have a cascading effect on property valuations for hundreds of companies.

While mark-to-market accounting isn't a core feature of the accounting code here, property still has to be valued. But the lack of activity in the market to date has allowed some companies to avoid taking write-downs.

Hundreds of companies are simply telling their auditors that they refuse to value their land and buildings, point-blank, because the market is illiquid.

But what happens if NAMA makes it liquid? In that event, companies of all types will be hit, not just those valuing their assets annually.

A NAMA sell-off could also impact on companies trying to sell themselves who are placing a premium on their property assets and using pre-crash assumptions.

Once companies are forced to discover the open-market value of their property assets, balance sheets everywhere will shrink and profit and loss accounts will have a red tinge to them.

The valuation methods in Ireland tend to be crude, but many companies use the comparable method -- where property or land value is based on recent sales.

NAMA sales of apartments, hotels, brownfield land and even investment property could have a decisive impact in this regard.

Of course, NAMA has the ability to sit on assets and that, in fact, is its raison d'être. But sitting on assets for years upon years comes with drawbacks too, mainly economic ones.

Asset prices will essentially be propped up in that event, with a huge overhang of stock waiting in the wings to be released.

That is hardly conducive to normalising the market. It is also not conducive to assuring outside investors that Irish property prices and yields will be dependable and safe over the long term.

Irish Independent

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