2010 will be the year of Nama

Reality will start to emerge next year as Nama sets the standard for a market which has been largely in denial up to now.

SO THE POLITICAL and economic wrangling is over. Nama exists.

Next year, 2010, will be the year of Nama and the Nama man. What will this mean for the various players in the commercial property industry?

Well it can’t be worse for anyone than 2009, when virtually nothing happened. All property businesses and professional practices were in survival mode during 2009.

The developers with borrowings over €5 million now have a new bank manager in Nama. This will be a sea change.

The big developers will be dealing directly with Nama and smaller developers will still be meeting their old bankers who will now be acting as agents for Nama and directed by Nama.

The old approach of relationship banking is over and everything will now be totally objective and clinical with public procurement-type procedures.

These Nama’d developers will end 2010 either with the support of Nama or in bankruptcy – or equivalent.
In 2010 they will be assessed by Nama on the quality and veracity of the business plans they will have to present to Nama. This will be a commercial life or death document.

Turning to the commercial property market, I am reasonably optimistic for a number of reasons.

Firstly, the property valuation currently being prepared for the Nama banks will be quite realistic and will call the market as it is – which is very depressed. The red book valuations will reflect the reality of the market. Up to this denial prevailed!

Secondly, Nama will be buying its loans based on these realistic valuations plus an “economic value” premium of between zero and 25 per cent.

This will give a base to the market. It should halt the fear of buyers of catching a falling knife. This fear prevailed in the second half of 2008 and all of 2009, and undermined the market.

Thirdly, Nama is unlikely to force the sale of properties below its buy-in valuations and probably not below these figures plus the addition of the premium.

Fourthly, Nama will not be in a hurry to sell its portfolio of loans and/or underlying assets and this will probably result in a scarcity of investments.

The issue of the negligible supply of good investments in 2009 has been a puzzle to me and others in the market. In 2009 there were only one or two portfolios for sale but little of any real quality.

The many good new buildings let on 10 or 15-year FRI (full repairing and insuring) leases to good tenants did not come to the market. The explanation is that investors did not want to sell at fire sale prices and the banks were not putting on pressure to repay loans because of their uncertainty about Nama.

Those institutions with liquidity issues within their property portfolios did not want to look silly selling properties which they had acquired at high figures – so they simply bought time and postponed meeting encashment.

For the investment market the effect of a firm valuation base in 2010 should give confidence to investors and vendors alike. With a lot of cash buyers in the market, those investments that do come to the market will be snapped up and we could possibly see the same sudden rise in values here next year as happened in the UK this year.
I expect that there will be a flow of deals. However, I do not see a high number of investment deals coming from the Nama stable in 2010.

Nama will want to hold onto the rental revenue to offset interest costs on non-income producing loans; see a recovery in the market linked to a recovery in the economy before selling or forcing sales; and those Nama clients who have to sell their investment portfolios to offset development borrowings will be given time to do so. After all, Nama has funds at a cost of 1.5 per cent and is thus not in a hurry.

Nama will initially be focusing on selling properties overseas where it does not have the responsibility of a market maker.
The lubricating oil of the property industry is credit. One of the big unknowns for 2010 is the issue of bank credit for property transactions.

There was a total credit famine this year, for bridging finance, for mortgage loans and for development.

The big question is, will the banks lend on property so soon after their near-death experience? Will credit flow again in 2010? Hopefully it will, because that is the only way a normal market can rise from the ashes.

Now to look at the Nama man. For those of us not directly in the business of selling one-off second-hand houses and perhaps commercial lettings, Nama will be the only show in town.

Many of us will be Nama men. Some of us will (hopefully!) have direct contracts, others will be working for developers who are having their puppet strings pulled by Nama and more of us will be trying to manage assets where the market is dominated by the decisions of Nama. None of us will make a fortune but hopefully we will survive.

Obviously, this market dominance by Nama is an unhealthy situation but it has been brought about by the scale of the loans and number of developers going into Nama.

Nama will or should be trying to withdraw from such market dominance and restore a normal market for its own sake and for the sake of our industry.
Nama is a temporary fix for our banks and not the long term nationalisation of the property industry.

Hopefully, it will achieve this disengagement quickly. But it won’t happen in 2010 and probably not in 2011 because Nama will have its own problems to resolve.

So 2010 will be another year of survival but hopefully it will not be as difficult as 2009.

80% windfall tax is a disaster

The land market, decimated by the recession, will not recover while the 80 per cent windfall tax on rezoned land is in place

The Nama legislation provides that all changes in land zoning will result in such land being liable for an 80 per cent windfall tax rate when sold.

The land market, decimated by the recession, will not recover while this provision is in place. No one will buy or sell land other than at rock bottom prices. This is a seismic change for the property, planning and banking industries.

We have known for some time that the Nama legislation would include provisions for a windfall tax of 80 per cent on land that changed from agricultural use to development use. But this change by way of amendment to sections 644 and 649 of the Taxes Consolidation Act 1997 provides that the definition of rezoning includes, not only a change of use from agriculture, but also from one land use to another.

So, if you own land zoned for residential and the planners change it to industrial, then tax at 80 per cent will apply to a proportion of the profits attributable to the rezoning.

How the proportion of the profits subject to the higher tax will be arrived at is far from clear. The legislation is confusing and, at best, will cause a valuation nightmare.

At worst, from a taxpayer’s perspective, the entire profit may be subject to tax at 80 per cent. It appears that, if there is no zoning change, the tax will be at 25 per cent.

Some might say that there will be no problem as sufficient land is already zoned to meet future demand for many years. This may be true but, due to the imprecise way the legislation is drafted, even a minor change in a development plan could bring such land into the 80 per cent tax net. Suddenly the pressure on planners will be persuading them not to rezone one’s land!

The implications for the banking, property and planning industry may be far reaching.

For the banks it means that valuers, currently valuing assets going into Nama, will cut whatever remaining value might have been in development land – further decreasing the value of loans secured on development land. The consequence of this will be that the Government will have to recapitalise the banks to the extent of this extra write-down. It will also have implications for banking and using land as loan security.

For Nama, the uncertainty created will make it impossible to sell the large areas of development land that it will control and thus its ability to repay the ECB bonds.

Our planning system has been fundamentally undermined. Our entire approach to planning is based on the principle that land owners voluntarily bring their land forward for sale and development. This will now stop.

Our legislators seem to have entirely missed the key point that virtually no land is acquired by CPO procedures for urban expansion – except for roads and infrastructure.

This precept of the voluntary disposal of land by farmers and others could be changed but it would require a huge block of legislation and the putting in place of a complex land acquisition and management system. There is such a system in Holland but to put one in place in Ireland would be fraught with problems.

While no one can support the windfall gains by owners of agricultural land being taxed at only 25 per cent when agricultural land is rezoned, the Senate, by these apparently innocuous changes, has thrown the baby out with the bathwater.

The implication will only become clear over time as the valuers, developers and their lawyers try to unravel the consequences of the legislation. The devil will be in the detail as the new law gets analysed.

Indeed, I can immediately see a misfit between the wording in the new legislation and the classification of land use zones in the Dublin development plan and I am sure there will be conflicts in other plans which will keep the lawyers and tax experts very busy.

It is strongly suggested to the Government that this ill-conceived tax should be withdrawn and that a properly structured and comprehensive land (betterment) tax system be introduced. This would ensure a supply of land but not stop the market working; capture part of the betterment in land that is the subject of new rezoning and also land that may already be zoned; ensure that the funds secured by this tax go to provide local services, including schools and other social infrastructure; and create a system that is accepted as being fair by landowners, developers, politicians and the public, and which will stand the test of time.

However, the design of a system will take time, proper research and consultation. A study should be carried out of land taxation systems at an international level and such a study should integrate the effects of Part V of the planning act, development levies, stamp duty and VAT.

Change of the magnitude made by the Senate 10 days ago should not be imposed on a vital industry on an ad-hoc basis in a last-minute change to important legislation.

Now is the time for the Government to commit to a comprehensive land tax system while the speculation in land is at its nadir and minds are open for change.

Bill Nowlan