LOAN VALUES:NAMA WILL use guides that indicate long-term trends in property values as well as supply-and-demand forecasts for property in specific locations when valuing the loans it acquires. Indices will also be used to assess factors such as demographics, interest-rate projections and expected rates of economic growth when valuing the loans, according to sources close to the new agency.
However, the assigned long-term economic value of a parcel of land may not exceed its current market value by more than one-fifth. Likewise, the aggregate value of all land from a particular institution cannot exceed its market value by more than one-fifth.
The Minister for Finance Brian Lenihan said yesterday when he introduced the Nama Bill in the Dáil that overall the agency would pay around €54 billion for loans with a market value of €47 billion and book value of €77 billion.
But he emphasised that the figure he gave for the price expected to be paid by Nama to the financial institutions for their property loans was provisional.
Each of the approximately 21,500 loans expected to be taken on by the agency will be subject to valuation using a methodology laid out in the Bill.
Because the agency will have an overview of almost 2,000 developers’ loans and business plans, it will be able to assess the value of particular properties in the context of other proposed developments and business plans.
It may also take into account such factors as plans for transport infrastructure and expected increases in fuel costs. If, for instance, it was assessing an office development in Mullingar it would take into account the existing supply of offices there, existing and projected demand, and whether any other office developments are being constructed, said sources.
It would also look at economic and population factors, and available data on long-term value movements over periods that exclude the years from 2005, when the Irish property market entered its bubble phase.
Huge variation exists in the deterioration in property values depending on the properties’ nature and location. Mr Lenihan said the loans to be taken on by Nama would involve development land, development property and commercial property associated with the loans (collateral). The expected proportions of each, he said, were: 36 per cent; 28 per cent; and 36 per cent.
A field outside a medium-sized town far from Dublin, rezoned for residential development and bought for an inflated price during the property bubble, may now be back at its original agricultural value.
Some development sites, or partially completed developments, could have a negative value, in that they may need to be knocked and cleared so the land can be returned to agricultural use.
At the other end of the scale a quality commercial building with a good tenant and in a prime location, used by a developer as collateral against a loan, could well see its value increase over the coming decade by a figure of 10 per cent or more, depending on the overall performance of the economy.
Given the oversupply of apartments, offices, hotels and retail units on the market, development land must be the weakest element of Nama’s likely portfolio.
A key issue for the agency over the coming period will be deciding what to do with half-built developments. This could include, for instance, a half-built hotel or a half-built apartment block, in a location where there may be no demand for such an asset.
The temptation will be to put more money into such projects, to bring them to completion and achieve some value. However, this will involve the risk of wasting even more money on something that might never achieve the required return.