Investor versus Developer Risk – The Implications for NAMA

This is a guest contribution from John McCartney (former Head of Research at Lisney): you can read it here.

12 replies on “Investor versus Developer Risk – The Implications for NAMA”

The article deals with investors in commercial property, but it begs an obvious question about the buy-to-let residential property investors. I’m guessing there are a lot more of those about, and many of them have used their own homes as collateral. Given that the buy-to-let market was already wobbling before the house-price collapse – even with massive immigration since 2004 – that, surely, is yet another elephant in the room

Yep and mortgage defaults.
Looks like we have more elephants than Dublin Zoo.

Getting back to the Article…
Is john McCartney saying that none of the 90 billion includes any investor risk?
I agree with him on one thing.
The old assumption that investment in commercial property is a ‘sure thing’ is not at all the reality any more.

On the positive side, falling commercial rents are just what the doctor ordered for cost competitiveness and preserving jobs. It can’t, and shouldn’t, all be about cutting pay.

Eamonn, as I read it, investor loans taken out by property developers should be already included in the €90bn as they would seem to qualify as ‘Associated Loans’ (see, for example NAMA’s FAQ, point 11). This could be quite sizeable as lots of developers retained stakes in buildings they had completed. However, it is likely that many private equity and syndicated investors have no interest in development and so I think its unlikely that their investment loans are included

Totally right. But falling commercial rents lowers the value of the investments so runs counter to what the government wants for Nama.

We also need to see rates come down too which were connected to the hip with rents. So if rents come down, rates should come down. But this will leave Co Councils with less income.

Somebody has got to grab this country where it hurts and make some serious decisions for the future benefit of this country. Or it will be just about cutting pay and we will have lower pay than our competitors but much higher property costs. Worst of both worlds.

@Stuart, I like to hope that there is a rational discussion going on behind closed doors about how best to balance the demands of cost competitiveness with the bank guarantee / NAMA strategy. Even people whose sole interest is in financial outcomes must be aware that NAMA’s success depends on a strong recovery in the productive economy that will be tough if we can’t sort out our cost competitiveness quickly.

It seems obvious to me that high property prices are a significant part of the cost competitiveness problem, pushing up the level of pay required for a decent standard of living, pushing up direct business costs, and pushing up the cost of business services.

There are a lot of pessimists here. Does nobody think that the economy of the country is going to pick up? We are mesmerised by Property still in this country which over time if we forget about it for a while will increase in value when economic activity including consumer spending starts to move upward. The house I reside in is not an Investment but where I choose to live but so often I have heard and read commentators talk about residential houses as investments. As regards commercial property surely if economic activity increases the demand for premises will increase and as a consequence its value whether in the form of it’s price or rental value. If we concentrated more on being entrepreneurial and growing our economy and less on worrying about NAMA blah blah we might get ourselves out of this mess quicker.

This is a sobering analysis from a property expert. In particular the reference to commercial property risks should enlighten the thinking on overpayment for the NAMA loans.

“However, while the threat posed by defaulting developers is now widely
understood, the risks associated with investor loans – which heavily
outweigh commercial development loans on the balance sheets of our
main banks – do not appear to have registered in the same way.”

“In particular, rents, which represent the stream of cash flows accruing to
commercial property investment, are falling precipitously. Overall, rents
on new commercial lettings are down 22% in the last year – a decline that
is almost double the highest deflation rate ever previously recorded”.

This article clearly raises further major issues on valuation.

It’s simple supply and demand. There is currently an oversupply in commercial property. Prices should fall but those holding the empty units are not being pressurised to offload them (NAMA is delaying this).

I run a business down in Newtownmountkennedy in a business park (couldn’t afford a unit closer to Dublin). There are a large number of empty units and a bunch of half finished ones. Some of the empty units have not been rented since they were built 3 years ago, others have already seen their tenants leave. This is just a microcosm of business parks all over Ireland.

CB Richard Ellis found vacancy rates in offices in Dublin to be 21% at the end of the second quarter from 12% a year earlier. There is another 1.8m sq ft coming on line for 2010. These are the highest rates since they started compiling stats in 1991. Not surprisingly they are against removing upward only rent reviews as it will apparently damage the sector – presumably only for landlords selling on their investments to others.

Yes there will be recovery but what is meant to happen is the excess of the last few years is taken out – that means lower rents and prices. In come the entrepreneurs and set up new businesses and away we go.

What about all the crazy tax breaks and reliefs for having your commercial units empty? You simply claim the losses against profits? A loss on an empty unit(s) is very often as good as a profit.

These units should be “made” to become available at modest rents and there should be no tax relief on empty industrial buildings! Then you would have plenty of cheap industrial units for startup’s. Of course, the new thinking is to get the tax payer to pay a different way and to take out a NAMA mortgage on the empty units.


Uh, what Stuart said. Yes, it will recover, but the timeframe is in doubt, and boy, is it important. Many economists right now speak of the L-shaped recovery as opposed to a V-shaped recovery. In Ireland it seems particularly likely that an L shape is in our future. Businesses and individuals are emigrating, some businesses are simply going the way of the dodo (how much of that was contributed to by upward-only review and refusal to re-negotiate?), the government has refused stimulus, going instead for NAMA as its big-ticket recession-buster. Right now, there seems to be no sector that a large-enough percentage of GDP that can fuel the recovery. Property? There’s a glut that will only get worse, especially if you consider that many who might want to sell right now are holding back for a better climate (shadow inventory). Consumption? Traditionally about 70% of GDP, who feels confident enough to spend the way we were? Who is debt-free enough?

If you are watching the biting and scratching around Liam Carroll’s bankruptcies, along with the blitz to sell NAMA, you are watching the main actors doing everything they can to keep Real Estate prices propped up at levels that could not be sustained were they to let the free market make the decisions. These prices do need to come in line with reality, and the sooner the better — in some ways. In others, the pain of that reality will cause untold damage.

So pessimistic? Yeah, you betcha. It’s like the choice between death by drowning or death by freezing. From my “pint of view.”

Following up on the above, over the weekend, I took a look at the relationship between property affordability and per capita GDP growth, using state level data from the US. The US data shows that states with affordable property seem to perform much better than those with unaffordable property. If we, through NAMA, are getting into the business of actively managing residential property prices, then it looks like we may need to be careful to set prices much lower than they were at the height of the boom.

I’ve charted the data here:

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