Tuesday 10 December 2019

Emmet Oliver: We'll wait years to see if NAMA was right choice

ACCUSTOMED as we are to instant reactions these days, many commentators get deeply frustrated when it comes to NAMA, the €72bn loan agency set up in 2009 by the last Government.

The modern media demands a type of black-and-white morality, where every government initiative is either greeted with unreserved delight or with outright hostility. Something is either a good idea or a bad idea, no ambiguity can be tolerated.

But as NAMA publishes an account of its first year in operation, we are fast realising that the loan agency cannot really be judged in 2011. It probably won't even be possible to evaluate the agency's strengths (or weaknesses) five years from now.

Eight years from now is more likely to yield a fully considered view because around that time the agency is due to be dissolved, with all its assets sold off and its liabilities paid down.

At that point, it will be clear if the late Finance Minister Brian Lenihan made the right call by setting up the asset management company at the height of the banking crisis.

For now, all that can be reasonably done is to sketch out the kind of outcomes that are possible for this giant agency, which has so much power but also so much debt.

The key to its success or failure is the price of property, and the key to that is economic growth. At this point, virtually no one has visibility on either.

•The optimum outcome for NAMA

Under this scenario, NAMA would return a profit of at least €3.9bn after repaying all its liabilities using the money generated from assets sales. This scenario is based around a decent recovery in property, where banks start lending again and the supply of new housing is kept in check. It would probably also involve government incentives aimed at property ownership, like mortgage interest relief. Effectively, in this instance, NAMA would have paid the banks for the €72bn of loans it bought at a discount, but also managed to generate additional money from the sale of properties to leave the agency with a welcome surplus.

In that case, the agency would go into a voluntary liquidation and any residual value left on its balance sheet would accrue to the State.

This is only likely to happen if the property market turns up over the next eight years. Under a business plan released last year by NAMA, a 10pc uplift in the property market -- from November 2009 prices -- must take place for such a profit to occur. But the big question is whether it will be possible for prices to be ahead of 2009 when the full impact of the property downturn had still not happened by that point.

Having said that, eight years is a long time and NAMA will be confident that even with further budgetary adjustments, the outlook for commercial and residential property should start to turn long before this. That is more likely when it comes to commercial property than residential. This second market is ruled by three things: jobs, finance and, of course, that elusive commodity, confidence.

NAMA has one advantage in that its portfolio is not solely Irish and every year that its Irish assets fall in value, some of this damage is offset by gains in its British and European portfolios. Ultimately, this could be the strongest protection NAMA has from a falling Irish property market.

According to NAMA's own figures, 38pc of the portfolio it took over from the banks is situated in the Britain and this market is proving very resilient. In addition, the NAMA portfolio is concentrated in the London and south-east market where prices could recover strongly.

While the British housing market is known for its volatility, experts believe that Britain actually suffers from a long-term housing shortage in terms of its population.

•The pessimistic outlook for NAMA

In this scenario, NAMA expects to make losses of €800m. However, losses in a worst-case scenario -- similar to a bank stress test -- are likely to be far higher.

NAMA believes it can break even once it gets what it calls "long-term economic value" for its assets. This concept is controversial, but put simply it is the kind of price that assets normally sell for, according to historic norms.

It also assumes that banking conditions are routine and not stressed like they are at present.

NAMA claims in its worst-case scenario it will fall short of "long-term economic value" by 10pc. It is, of course, possible that it could fall a long way short of this.

The Irish assets could be hugely overvalued, even eight years from now. If the land component in particular falls once more and doesn't stage any kind of recovery, NAMA could be looking at losses of several billion euros.

If that happens it has two defences. One is that it won't pay banks all the money they were originally promised. It does this by not paying out on subordinated bonds the banks are currently expecting to receive payment on.

The second defence is more controversial -- it can levy the banks with a tax on their revenues and recoup the money.

The danger here is that the banks will simply pass this onto customers.

It is also likely to spook investors in the banks and dent their share prices.

With the Government owning large segments of the banking sector, the main loser of such a levy would actually be the Government itself.

•The neutral outcome for NAMA

This is probably the most likely outcome. It means NAMA would simply get long-term economic value for its assets, according to historical averages, but no more.

It would mean the property market over the next few years would increase probably by around the rate of inflation. It would also mean that house completions in Ireland would remain very low and the Government would broadly stay out of the market.

It would also mean economic growth of about 3pc a year, with tax reliefs and other property-based incentives either not offered at all or only on a modest scale.

Clearly, this scenario envisages less explosive growth, in the British market in particular.

This market is likely to slow down next year, for instance, due to government-led austerity and also because the British commercial property market is very heavily borrowed.

Irish Independent

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