Earlier today, I posted some basic facts about NAMA. This post builds on that by trying to work out where NAMA gets its €47bn current market value and more importantly its €54bn ‘plateau’ value, through looking at the numbers in detail. I’ve started this post not knowing how it will end, so I’ve no prior beliefs on this. I’m trying – and no harm reminding everyone that what I write here is as an ordinary punter with a degree in economics and not in any sort of official capacity as daft.ie economist – to put to best use the numbers made public yesterday, so if anyone spots any errors, let me know and I’ll be happy to correct them. OK, let’s go!
Who lent what where?
The pie chart below shows the regional breakdown of the €68bn lent out. As you can see, Irish loans account for two thirds of the total land and developments that NAMA will control. This gives us one important guidance for further analysis, namely that discussions that focus on local market conditions in Ireland are only relevant for two thirds – or €51bn – of the total loan book value. (Arguably, the fate of the Northern property market is very similar to the rest of the island, so one could make the case that we could look at €56bn.) In terms of who lent what, Anglo (now in State ownership) accounts for 30% of total lending, while AIB and Bank of Ireland account for a further 60% between them.
What is the breakdown of Irish loans?
The detailed figures published yesterday give a total of €37.5bn of Irish land and development assets. Whatever about confident assumptions about the US, UK or European property markets, what can we say about the future for these Irish assets? This is singularly important given that the NAMA document rests crucially on just one fact: yields on commercial property in Dublin are above their long-term average. Is that good enough?
First, let’s look at what’s out there in grass and fields, as opposed to bricks and mortar. A breakdown contained in the Department of Finance document published yesterday shows that the split between land and development is 56%-44%. (The full breakdown is: land (36%), development (28%) and associated loans (36%), but presumably the latter is just a derivative form of the first two. I work this back in, in a pro rata way, later, but if anyone knows better, just shout.)
This means that, before we even break the loans down to commercial versus residential, we have €21bn, or more than half accounted for, by land. This is the very same land that we have heard has been devalued by anything up to 95% from the peak, due to the probability of a good deal of land being rezoned to agricultural. It’s reasonable to assume that this land splits down in some way between that which probably will be developed (and which has presumably fallen in value by 50%), and that which probably won’t (likely down 90%).
This leaves a further €16.4bn of loans which have as their collateral construction development projects already underway in Ireland. This is presumably the chunk of NAMA that led to the inclusion of some yield analysis, as mentioned above. However, this figure itself needs to be broken down into residential and commercial. The detailed figures at the back of the draft legislation do not give this breakdown for any bank apart from Anglo Irish Bank. Its loan book is split almost half and half between the two (to be exact, 51% residential, 49% commercial). Should this ratio prove to be typical for other banks also, this means that about €8.4bn of the loan book is in Irish residential construction projects at least partially underway, while €8bn is in commercial projects underway.
Amazingly, it is on this latter commercial segment of the market, worth from what I can see about €8bn – and only this €8bn alone – that is the subject of any form of yield analysis. The NAMA document looks at yields on three sub-segments within commercial again, retail, office and industrial property, in one location (Dublin). It compares these yields with a range of other cities in Europe and with the long-term Irish average, finding that yields in August 2009 were slightly higher than both.
But it must be remembered that NAMA’s entire estimation of long-term value hinges on rents holding constant in this subset (Dublin) of a subset (commercial projects) of a subset (projects underway) of a subset (Ireland) of the total loan book. If Dublin was soaking up half of all commercial projects, this would suggest that NAMA is basing its entire long-term economic value on perhaps 5% of its proposed loan book.
What about long-term economic value?
Let’s see if I can recap and re-estimate long-term economic value. To keep things simple, we can say there are four types of loan that would go on NAMA’s books (the numbers in brackets are my best estimate of peak value, done by attributing associated loans, so the numbers add up to the €88bn original value reported):
- Irish commercial (€11.8bn)
- Irish residential (€12.4bn)
- Irish land (€31bn)
- All foreign (€31.6bn)
The two questions we need to know for each, to start discussing long-term economic value, are (1) how far have property values fallen so far, and (2) how far out is the yield based on current prices?
Let’s assume that NAMA and Jones Lang LaSalle got it right for the €8bn in commercial developments, i.e. that prices have fallen by 47% on average so far and that they will rise a little as yields level off to historical and European norms. This means that the €11bn in commercial projects in Ireland is now worth €6.2bn but will rise to €7.5bn.
What about the €12.4bn in residential property? There are no figures that suggest that the average fall anywhere, let alone the country as a whole, has been 47% yet. Based on discounts from asking price data, 35% is a more accurate average of the fall from the peak. However, the average yield in residential property is just over 3%, only about half a typical yield of 6% (this yield is by no means overly generous). This means that while the properties are probably worth €8bn now, their adjustment to long-term economic value would mean a downward adjustment to €4.2bn.
Regarding land and overseas projects, the value of Irish land has fallen dramatically and in many cases will not increase significantly as planned developments are scrapped. Overseas, property markets may be turning, having proven more flexible (in the case of the US) or less inflated (in the case of much of Europe). Let’s put to one side, then, the majority of NAMA’s loan book, i.e. Irish land and foreign properties of all sorts, on the assumption that they already reached approximately their long-term economic value. This means that based on what’s happening in residential and commercial property, one would expect a further 5% fall in the value of NAMA’s collateral – and not a 15% rise – as the market proceeds to its long-term economic value.
One further complication is rents, however. Rents in both commercial and residential segments of the market are falling, due to oversupply. If rents were to fall, say, 20% over the coming three years as they find their new level, this would mean a further fall in the value of commercial and residential property on NAMA’s books of €2.5bn.
In short, even if you think values for Irish land and foreign property have levelled off, estimating the true value of the €24bn in commercial and residential developments in Ireland does not translate into a straightforward mark-up of 15%. In fact, if you believe (a) that 6% is a healthy average yield for Irish property (as NAMA itself does), and (b) that it’s likely rents will fall a further 20% as the market handles recent overconstruction, the adjustment from current market value should be downwards by 10% to about €44bn, and not upwards to €54bn.
Does anyone know if there’s a 1% commission on saving the State €10bn?!