© Henley Business School 2008www.henley.reading.ac.uk

Real Estate & Planning

NAMA – An Irish Solution to Property Debt?

Éamonn D’Arcy

21 April 2023

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Ireland – A Classic Real Estate Bubble

• Positive economic conditions promoted real estate investment by firms and household

• Public policy measures also promoted real estate investment by households

• Cyclical acceleration in price promotes speculation and over-evaluation - volume of outstanding loans increases and mortgage credit accelerates

• Lenders contribute to the bubble by supporting demand through arranging finance for potential buyers even for international purchases – Liquidity

• Most investors and developers had little supporting corporate infrastructure or access to capital other than through bank lending and majority had little or no obvious professional capacity related to real estate

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Real Estate Bubbles are not new!

• US 1920s – Residential • US 1980s – Office Markets • Japan 1985-91 – Commercial • France (Paris) 1989-92 – Commercial • UK late 1980s – Residential • Asian Financial Crisis 1997 – Real Estate Bubbles a key feature

– Thailand, Malaysia• US 2000-2007 Residential • Spain 1999-2007 Residential • China 2003-2009 Residential

• Ireland – Residential and Commercial

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Bubble Impacts– Re-pricing falling capital values– Non-performing real estate loans – Distressed assets – Overbuilding – market consequences – But time-frame of impacts far from uniform

• Key influences on market recovery– Growth Context– Institutional Structure of Real Estate Markets

• Professional Capacity, Innovation, New Players

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The Irish Bubble• Many similarities with the Japanese Bubble

– Bubble at the end of a prolonged period of growth– A very speculative bubble – Significant debt burden– Wider problems of economic competitiveness

But Japanese Bubble more focused on Commercial Property

• In Japan post-bubble real estate problems lasted for over 15 years. – Poor growth rate a key issue

• In Ireland exposure to property debt created the need for urgent recapitalisation of the Irish Banking Sector

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The National Asset Management Agency (NAMA)

• A key element of the Irish Government’s approach to bank recapitalisation

• Remit acquisition of performing and non-performing real estate related loans from participating financial institutions

• Removes toxic real estate loans from balance sheets

• Institution receives a price based on NAMA’s assessment of the assets potential ‘long-term economic value’

• Funds received recapatalise the institution

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NAMA Business Model

Bank NAMA

Borrower

NAMA Perspective

►NAMA controls the relationship with the borrower and makes all decisions

►NAMA receives income on the acquired loan portfolios (usually floating rate plus a profit margin) – to the extent that such is recoverable

►NAMA pays an interest coupon on government bonds (floating interest rate)

3. Borrower continues to owe €100m to NAMA, despite NAMA only having paid €60m to Bank for the loan

1. Bank sells €100m loan to NAMA

2. NAMA gives Bank (say) €60m Government bonds in return

Bank Perspective

►Reduces risk weighted assets (RWA) which have a high weighting for capital ratio purposes (which will somewhat mitigate the impact of any valuation impairment upon transfer)

►Removes the loans from the banks balance sheet that generally cannot be used for collateral purposes to access liquidity with Central Bank or other market counterparties

►Receives government bonds which can be used as collateral with Central Bank or other market counterparties for liquidity (zero weighting RWA)

►Banks will administer the loans on behalf of NAMA but control passes to NAMA

NAMA- An Outsourced Operating Model

NAMA

Legal:Arthur Cox

Tax:PwC

Loan Valuation:HSBC

Property Valuation:JLL

Audit Coordinator (KPMG)

Master Servicer:

Capita

External valuers

Property valuation:Panel selected

Loan valuation: Panel of firms assigned to individual institutions

Valuation workstreamData workstream

Legal workstream

Pre-loan transfer to NAMA Post transfer

External solicitors

Certification by CEO and CFO regarding material accuracy of submission

Loan administration

Data flow to NAMA

NAMA project

Bankproject

assurance process

Legal DD:Panel selected

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Asset Transfer

• Complex Process– Assessments of asset quality central to the transfer process

because of the need to establish long-term economic values – Essential to get this right for the long-run ability of NAMA to

achieve its goals– Discounts higher than initially expected

• Estimated book value of loans transferred will be in the region of €80 bn. – Approximately two thirds of the assets are located in Ireland

with the rest overseas (mainly UK)

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Key Tranche 1 Data Lending Institution AIB BOI EBS INBS Anglo Total

Loan Balances € bn 3.29 1.93 0.14 0.67 9.25 15.28

CMV of Property € bn

1.87 1.26 0.10 0.36 3.86 7.45

LEV of Property € bn

2.04 1.41 0.10 0.41 4.31 8.27

LEV uplift as a % of CMV

9.1% 11.9% 8.4% 11.8%

11.7% 11%

Total € bn 1.90 1.26 0.09 0.28 4.16 7.69

Discount 42% 35% 36% 58% 55% 50%

Source: NAMA

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NAMA – Going Forward• Timing and Characteristics of Irish Economic Recovery

– Essential for uplift in asset values given the dominance of Irish assets in its portfolio

• Transparency – Asset Characteristics – quality

• The need to interpret NAMA as a real estate entity and to plot its future course from this perspective– Learn from global best practice in particular with respect to asset

management and disposal strategies – Use it to foster a REIT market? – NAMA as an Opportunity (Vulture) Fund? – Integration of NAMA as a player within the global real estate

investment sector

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Putting NAMA in a Property Context

• NAMA 80.0 (50.0) € Billion

• GE Capital Real Estate -84.0 US$ Billion

• Unibail-Rodamco 22.3 € Billion

• Westfield 28.0 US$ Billion

• GIC Real Estate 24.0 US$ Billion

• Blackstone Real Estate 23.7 US$ Billion

• Hines 22.9 US$ Billion

• Simon Property Group 20.57 US$ Billion

• Land Securities – 10.0 £ Billion