How will NAMA manage its loan and property portfolio?

[Brendan Burgess]

As it looks increasingly likely that NAMA will come into being, it’s time to discuss how NAMA will manage its portfolio of loans and underlying properties. I can't find anything written on the topic online apart from this article back in May by Bill Nowlan.

The big problem for NAMA is that they can’t just wait for the market to recover as NAMA is the biggest player in the market. Its strategy and actions will determine how the market performs, in Ireland at least.

They will be able to get rid of their overseas properties without disrupting local markets and presumably they should do that to reduce the overall level of borrowings.

If they wait for ten or fifteen years for prices to increase by 10%, the property market will be subdued for ten or fifteen years waiting for the properties to be released onto the market.

The big problem is the oversupply of property especially housing. There are two types of oversupply. There are housing estates in parts of Ireland which will never be occupied, no matter how low the prices of these houses are. But oversupply of apartments in Dublin 4 can be fixed by lowering the selling prices.


Some development land will never be developed and it should be sold back into the market for agricultural use – possibly with a clause preventing any development on the land for 20 years.

People are reluctant to invest in property now as the future is uncertain. Banks are unwilling to lend although this may change after they get rid of their bad loans.

Could the government help with some form of tax relief for long term purchasers of NAMA development land? Say a fund is set up like a forestry fund. It would not be allowed develop the land for at least 10 years, but any development profits then would be tax-free. The fund might buy other assets which it would commit to holding for 15 years to take them off the market. These other assets would provide the fund with an income. In principle, I am against interfering in the property market, but these are unprecedented problems.



Does anyone know how other asset management agencies dealt with the problem?

 

[z109]

Does anyone know how other asset management agencies dealt with the problem?

They sold at a loss! (Sweden, Finland, Indonesia) or took advantage of a rising market (RTC in the US) to almost break even or make only a small loss. But constant selling is a requirement as you say, the overall level of borrowings must reduce.

The sad fact is that the most saleable loans are those which are currently performing. Selling these will reduce debt levels, but will increase the running costs of NAMA...

Here's a good summary of seven asset management agencies:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=282518

One of the alarming things is that they all deal with already failed banks - either bust or nationalised. This makes the transfer price largely irrelevant and significantly skews the perception of the outcome. Mostly they also only deal with non-performing assets. They are workout mechanisms, not government hedge funds...

Note, large central AMCs have a key disadvantage, according to the author of the study above, that they are susceptible to political interference, cronyism and fraud...

All examples demand rapid disposition of assets as part of the good solution, the more successful ones appear to have achieved this, but since this is a measure of success (rather than necessarily a successful outcome), I'm not sure how valuable it is.

Another conclusion seems to be that experience of credit loosening seems to be varied, with a large number of countries experiencing further credit tightening after the AMC was initiated.

And here's another summary, this time from the BIS, on the AMCs that resulted from the East Asian financial crises (probably the ones that are most directly comparable to the Irish one):
http://www.bis.org/fsi/fsipapers03.pdf

The conclusion is, in places, chilling:

Pricing of the assets transferred
appears to be a key issue since an AMC has to balance
between enticing banks to sell their NPLs and the potential
cost to the AMC and ultimately to taxpayers. Transferring
assets at market value implies that the banks will have to
realise the loss, which may force some of them into
insolvency, given the large NPL volumes carried in some
cases at unrealistic valuation. Those AMCs that acquired
assets at prices above their fair value are likely to be subject
to significant losses. The successful experience of some
economies that use option-like profit- or loss-sharing
agreements in acquiring NPLs from banks suggests that such
an arrangement tends to facilitate NPL transfers and to
contain potential AMC losses.

Total
recovery from resolution for the AMCs studied, including both
cash and non-cash, varies from 20 to 50 cents on the dollar,
which is in line with international experiences. The
experiences of these AMCs suggest that they should promptly
dispose of their assets, rather than sitting on the impaired
assets and hoping that an economic turnaround will reduce
their losses.

It does end on a positive note, but with a strong caveat:

In sum, the East Asian experience suggests that public AMCs
have played an important and positive role in helping the
banking system return to health by removing NPLs from banks
so that they can resume lending more quickly. The
performance of these AMCs varies widely across the East
Asian economies. The extent of genuine improvements in
bank balance sheets, the ultimate AMC losses in cleaning up
the bank balance sheets and the possible impact on central
banks involved in financing these public AMCs can be better
assessed in a few years’ time when more AMCs are winding
down their operations. In order for public AMCs to be a useful
policy tool, governments need to have the commitment to
recognising the eventual costs of dealing with NPLs in the
banking system in one way or another.

So, in short, credit can be loosened, but the taxpayer takes that cost. Recovery levels are low with the emphasis being on resolving the problem not maximising the return. Governments need to be up front about the losses that will be made.

Pretty much what Mr. Lundgren said...

 

[Bronte]

Could the government help with some form of tax relief for long term purchasers of NAMA development land? Say a fund is set up like a forestry fund. It would not be allowed develop the land for at least 10 years, but any development profits then would be tax-free. The fund might buy other assets which it would commit to holding for 15 years to take them off the market. These other assets would provide the fund with an income.

That's a great idea, give even more tax incentives to developers to buy back their land at a massive discount, build on them and pay no tax. Something along the lines of the hotel building fiasco or Section 23 and 50. Another distortion of the property market.

 

[Brendan Burgess]

That's a great idea, give even more tax incentives to developers to buy back their land at a massive discount, build on them and pay no tax. Something along the lines of the hotel building fiasco or Section 23 and 50. Another distortion of the property market.

Hi Bronte

A key part of what I said is that they would not be allowed to develop them for 10 years, so there would be no building on them.

It would not be of interest to developers but more to funds of retail investors.

And as I say, I am wary of government intervention as it is disruptive.

I think that Section 23 was a success in that it got a lot of apartments built when there was a huge shortage of rental property available. Of course, it should have been closed down a lot earlier.

The tax relief for building hotels was disastrous for the investors and also for the existing hoteliers who find it difficult to compete.

But the general point of this idea is that it is to discourage development. All the incentives you list encouraged development.

Brendan