Friday 24 November 2017

Richard Curran: Nama's vista is deeply worrying

CRYSTAL-BALL GAZER: Nama chief Brendan McDonagh has looked into the agency's future and doesn't like what he sees
CRYSTAL-BALL GAZER: Nama chief Brendan McDonagh has looked into the agency's future and doesn't like what he sees
Richard Curran

Richard Curran

NAMA has become a zero-sum game – and that's official. Brendan McDonagh, the head of the national agency, told an Oireachtas committee last week that it was now aiming to break even by 2020 – rather than make the €1bn profit that had been included in its earlier business plan.

If we were not so completely saturated with bad financial news about property developers, usually involving the word "billions", we would realise just how grim this assessment from McDonagh really is.

When originally set up, Nama produced a business plan, suggesting it would make about a €5bn profit. This extraordinary piece of fanciful make-believe was later amended and pointed towards a €1bn profit between 2010 and 2020.

The level of return from Nama assets will depend on the performance of loans and the property market in Britain and Ireland over the next seven years. It would be interesting to know what forecasts or assumptions McDonagh has built into the current business plan that he is so pessimistic about the outcome.

This is very worrying. While Nama continues to make operating profits, namely taking in more money than it pays out, further impairment charges keep hampering its financial progress.

By the end of last year, it had made total impairment provisions on its loans of €3.26bn, less than two years after buying them. In effect, this means the agency has overpaid for the assets by €3.2bn.

Of the €70bn in outstanding developer loans at the end of last year, €58.4bn of them were in trouble – either non-performing or just partially performing. The agency took in just €691m in income from that €58.4bn, equal to just 1.1 per cent.

It took in €762m on the €12.4bn in loans that are performing.

This is an appalling mess. Nama has been selling assets en masse in order to bring in chunks of money, which it can then use to pay back the €30bn in bonds it borrowed to buy these assets in the first place. It has already paid back about €7.5bn.

It has brought in around €9.2bn by selling stuff. Around 80 per cent of that has been in Britain, with London accounting for 63 per cent of it. This is because it could find buyers in London, which is a very liquid market.

The London commercial property market is now very much on the up and if Nama could have hung on, it probably would have got a much better price. But it needed the money quickly to start paying down debt.

The problem is that London represented low-hanging fruit. Unless there is a dramatic turnaround in commercial property in Ireland in the next few years, Nama will already have sold off its best stuff.

This may be what McDonagh sees in his crystal ball seven years down the road – and it is spooking him.

Imagine McDonagh is right and this is a best-case scenario. In 2020, we will look back at how Irish citizens took on the risk of setting up the biggest property agency in the world, with over €70bn in loans, financed by €32bn in bonds, paid back the €32bn and the interest and then shut up shop.

We would have absolutely nothing to show for it. The opportunity cost – namely what could have been done with that money – will be enormous.

No housing bubble here

IT is hard to take concerns about a possible property bubble in Dublin too seriously. Some of those now warning about a bubble were saying, not that long ago, that Irish house prices could continue to fall for 20 years.

Yes, Dublin house prices have risen by 10 per cent in the past year – but the actual number of houses being sold remains relatively low.

Plus, you have to add the role of cash buyers into the mix. The CSO figures reflect mainly mortgage-related transactions, not those bought without borrowing.

Why do we worry about house price bubbles? Because a bubble is based on speculative enhanced demand for real estate, especially housing, that is often created through artificial means – such as tax reliefs, low interest rates, over-borrowing or a flood of available credit.

If Dublin's prices are rising, on low volumes and with lots of cash buyers, the scope for danger is greatly reduced.

But also look at where house prices are. They have fallen by 50 per cent from peak and Dublin is back up by 10 per cent in a year. If you remember your sums from school, you will realise this does not mean prices will be back at peak levels in five years.

A house worth €100,000 in 2007 falls by 50 per cent to €50,000 by 2012. It rises by 10 per cent, so it sells for €55,000, still 45 per cent below peak.

Some of the headlines here are mimicking those regarding London, where the situation is completely different. Prices there are higher than they were at the peak of the boom in 2008 and rising by 10 per cent per year.

Foreign buyers, mainly from Singapore, Malaysia, Hong Kong and China, accounted for nearly 75 per cent of all new home purchases in central London last year.

Cash buyers represented over one-third of all London purchases. Plus, the British government has been subsidising the mortgage market with a cheap money programme that it is only now being forced to reconsider.

The Dublin property market is just waking up from a coma, not running the four-minute mile.

Eircom has its work cut out

Despite putting up a good battle to retain broadband customers, Eircom continues to shrink every time it reports financial results.

Post-examinership, under new ownership and management, the former State company is aggressively cutting costs, while also finding the money to invest in new product offerings, like 4G.

Its debt level may have shrunk by over €1.4bn but so too have all the other metrics. In the year to June, revenues continued to slide to €1.39bn. That is down €430m since 2010 and €700m less than it generated before the recession. Ebitda, the earnings benchmark favoured by balance sheet acrobats, was also down to €487m. That is a decrease of €182m in just three years.

Each of the post-privatisation owners of Eircom has had a "big idea". The Providence consortium loaded it up with debt but also got it back into mobile. BCM loaded it up with more debt and wanted to break it up but couldn't. STT wanted to invest in new products, but couldn't live with the crippling €3.7bn debt.

Presumably, the new consortium of owners wants to cut costs while also investing in products in a delicate balancing act. They hope this will stop the company shrinking and rediscover some kind of equilibrium – then sell it.

They have their work cut out.

Sunday Independent

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