With many of the big developers now part of the NAMA experiment, much of the Irish property and construction market is now a semi-State industry. This is a fact of life that we all have to get used to. NAMA, a State organisation, is one of the biggest property asset managers in the world, and most of us are now, or will be, NAMA men.
Our industry is accustomed to good old fashioned property bubbles- but this is different. We got hit by an international tsunami as well as a local bubble. I look back and wonder how we got from being the most adventurous and independent property market in Europe to being the most controlled one. The answer is that we built too much, borrowed too much, bought too much, and did all this too quickly and without appropriate checks and balances in place. In past property bubbles, the bankers, Regulators and Government eventually rationed the availability and the price of money and called a halt to property excesses before too much damage was done. This did not happen this time; no one shouted stop! The instincts of the speculators, developers and investors turned into a feeding frenzy. In the process property prices at least doubled from what I would regard as a stable position and they have now come crashing back down. They are unlikely to get back to 2007 levels for a very very long time.
In the circumstances the Government had little choice but to set up NAMA. It was the only viable way to save the banks, who are even more critical to the overall economy than the property industry. As a result NAMA is now the main banker to our industry and all key decisions will emanate from NAMA for several years. So we are where we are, but how do we get out of here? Hopefully NAMA will have a relatively short life and our industry will return to normal territory soon. Fortunately its semi-nationalisation is not ideologically driven – only the 80% land-tax element is.
Having resolved the banks’ balance sheet problems in practical terms, NAMA’s job is threefold, as follows:
• To effectively warehouse the oversupply of houses, offices, development sites etc, and feed them out as the economy requires.
• To restore an operational property and construction industry in Ireland.
• To repay- over time- its Bonds with the funds realized from the sale of warehoused property assets.
The key to the capacity of NAMA to do this work is the almost free line of credit given to it via the massive €54bn ECB supported Bonds issued to the Banks and currently costing1.5% p.a.
The modus operandi selected by NAMA is to require all its significant borrowers to prepare Business Plans showing how they intend to work out their portfolios and repay their borrowings over time. As NAMA’s CEO Brendan McDonagh said at a recent conference, NAMA is not a liquidation vehicle: it’s a work-out vehicle. NAMA wants its borrowers to produce plans showing how they will survive (and hopefully prosper), and thereby repay their borrowings. The last thing that the management of NAMA will want is to take direct control over millions of square feet of empty buildings and acres of development sites. It will want developers and borrowers who know every detail of their schemes to stay in control, to add value, and to work in collaboration with NAMA to achieve a satisfactory outcome for both parties. But, while NAMA will not want to take possession of land and buildings, it will have the powers to do – so don’t mess with it!
The key to survival will be the quality of the Business Plan presented to NAMA. The calibre of these Business Plans prepared by borrowers/ developers will impact on their contractors, subcontractors and suppliers, and on their professional advisors such as architects and QSs. So the big issue is how to go about preparing a robust Business Plan that will get the support of NAMA’s Management and Board.
NAMA in its own Business Plan gives some help in this regard. It wants the following to be included by each borrower:
• Current situation
• Level of indebtedness
• Full list of assets and liabilities
• Short, medium and long-term objectives
• A list, in order of priority, of assets to be disposed of and assets which require additional investment etc
• Funding requirements.
The essential part of any Business Plan will be the cash-flow statement. This will show the projected movement of assets and resulting funds over a realistic time span, whether it be 3, 5 or even 10 years (the circumstances, including the size and nature of the portfolio, will dictate the time frame). The content of the cash-flow statement will be based on various assumptions made in respect of each asset, including:
• Interest payments being made or accruing
• Cash from disposals and rents
• Payments to creditors and from debtors
• Further expenditure required before an asset can be sold
• Further equity input or borrowings and sources of these.
The most critical element of the Business Plan will relate to assumptions about sales or lettings of properties and their price levels. Most Business Plans will have to assume some improvement in market conditions from those currently prevailing, or else the plan will not stand up. The first must be a recovery in the economy, which is critical for us all, but we need to know from NAMA the assumption it will consider reasonable – a 3% p.a. recovery in values, say, or 5% perhaps? NAMA itself has projected its own break-even on a basis of 1% growth, but this is very conservative in my view.
Apart from the need for an overall recovery in the economy so as to restore demand for buildings, much will depend on the local market and the level of oversupply, and on other developers’ plans for supplying product into a given market or sub-market. One of the issues causing concern is to what extent NAMA will seek to control supply in each sub-market. Will it leave it to market forces or will it actually try to control supply? For example, if all the developers intent on providing new office blocks in Sandyford were to get funding and support from NAMA, this would exacerbate an already bad situation. But if NAMA were to favour one developer at the expense of another, this would lead to its own problems. We don’t know how NAMA will address issues such as these, and some indication would be helpful in preparing Business Plans.
When NAMA gets a Business Plan, it will assess it to evaluate whether it is sensible, logical and realistic, and will meet with each of the major borrowers to give a response. If agreement can be reached on a work-out plan, NAMA will work constructively with the borrowers to achieve the optimal outcome. However, if no agreement can be reached and/or the borrower does not wish to cooperate he will be asked to repay his debt in full. If this does not happen or is not feasible, NAMA will take enforcement action against the borrower. NAMA will have the choice of taking possession of the assets or appointing liquidators or statutory receivers. The latter will effectively act as Asset Manager in possession, reporting to NAMA. For those unfortunate enough to have their assets taken over by NAMA, the debt will not be wiped out. Indeed one of the tough provisions in the legislation is that if NAMA takes possession then the property will be valued and only that valuation amount will be credited to the debt. If the property is sold later by NAMA and they receive more for it than the valuation then none of the extra is credited to the borrower’s debt.
So the alternative to coming up with a sound Business Plan is not very attractive, and borrowers would be best to set their minds on becoming a ‘NAMA man’ and producing a robust Business Plan.
My definition of a NAMA man is as follows:
• Trust-worthy
• Technically competent
• Good market/industry knowledge
• Good attitude towards NAMA
• Realistic expectations
• Resourced to walk the talk
• In it for the long haul
• Focused on debt repayment.
So what does all this mean to you as architect, surveyor, builder or supplier associated with developers with borrowings from NAMA? You will need:
Firstly, to support your client in preparing a good Business Plan, one that gets the support of NAMA. Don’t accept hairbrained ideas based on unrealistic outcomes. NAMA will not support this.
Second, to look at your own cost inputs. If cost is too high it could jeopardise the whole Business Plan. NAMA will not tolerate excessive costs.
Third, to recognise your and your client’s weaknesses and try to find solutions to any deficiencies in leadership, management or skilled resources. NAMA will want an ‘institutional’ attitude and performance from its ‘client’ and will not tolerate incompetence.
For you personally, if NAMA decides to run with your client’s Business Plan then your prosperity will depend on its being rolled out successfully. NAMA will need you as a professional or contractor if the plan is to meet its objectives. This is your opportunity. NAMA will not want to get involved in selecting new professionals for projects that already have competent suppliers, contractors or professionals.
As to NAMA’s administrative procedures, we have been told that it will directly control the top hundred borrowers who make up 50 % of borrowings. The other 50 % will be administered by one of the participating banks. Thus, if outside the top hundred, your bank may not appear to change – but that bank will be supervised by a NAMA official who will be calling the shots: forget good old-fashioned relationship banking of the golf club variety!
One of the big concerns that I have about the NAMA project is the amount of time required to carry out due diligence and to transfer each of the loans across to NAMA. This was all planned to be completed by mid 2010, but NAMA have already admitted to time slippages in transferring the big loans, and this does not auger well for the smaller ones. As we all know, the commercial property market has been in a sort of limbo for the past twelve months or more, with no decisions forthcoming from banks on how to go forward. All have been waiting for NAMA. If the delay extends past the middle of next year I believe that NAMA must put in place some interim procedures that allow decisions to be taken by the banks administering these loans. How such an interim procedure might work would need to be worked out, but it would be totally unfair to allow interest to accrue and projects to be frozen simply because NAMA can’t get around to processing what are their new clients.
So 2010 will be the year of NAMA for us all. Those who survive will be NAMA men. We are all on a learning curve – including NAMA. Hopefully by this time next year we will all be in harmonious partnership with our new main banker.
Thursday, January 28, 2010
Monday, January 18, 2010
Commercial property has not hit a plateau yet
My nagging fear is that it is too early to buy real estate - it's a tenant's market and will be for some time
Dublin: one in four offices available
With Bloxham Stockbrokers saying that property values will rise in 2010, now is a good time to consider buying property. As commercial property values having fallen by over 60% since 2007, the answer is not as simple as it was two, three or even four years ago. Back then I was very negative about Irish property – but few listened to grey-haired advisers in those exuberant days.
The first thing to realise is that we are now in a completely new property game. New rules, new stadium and a different shaped ball. Over the next decade property investment will be mainly about income and little about capital appreciation so don't expect to make a quick killing.
The second basic change is that it will be a tenants' market for quite some time.
I have spent my life acquiring and managing institutional property and there are a number of principles or mantras that I have successfully used as follows:
• Timing – more money is made (or lost) out of getting the timing right than any other decision.
• Location is critical.
• The quality of the building really matters.
• Tenant(s) strength, fair rent and satisfactory lease terms are important
• Price/ yield – does the yield make sense and fit into long-term parameters?
• The economy – what is happening?
• Competition – what else is happening in the property market?
• Mix – no single property should represent more than 10% of a portfolio.
• Replacement – what would it cost to build?
• Borrowing increases risk and has to be repaid – often out of (taxed) income.
Whenever I looked at any given property in any country or city, these were my personal 10 commandments.
So how do we apply this methodology to the current property situation in Ireland?
On the key issue of timing, whilst I would not have considered buying in Ireland since 2005, the point for reversing that position must be approaching. My nagging fear is that it is still too early.
There will be lots of well-located good buildings in good locations coming available over the next few years from the Nama stable so scarcity has to be discounted. The big issues for consideration now are:
• Rental levels – will they rise or fall further?
• Tenants (or their absence).
• Oversupply of space.
• Yields/prices.
• Interest rates.
• The prospects for the economy.
To buy now you would have to be taking a long-term view on these issues, unless the building was let for a very long term to an undoubted tenant such as the government. Rents, which have been falling for the past two years, will eventually stabilise but I do not know if they will plateau at current levels or fall further. This situation will be driven by the economy and the interplay of supply and demand. The situation is currently unstable, with rental values falling throughout 2009. However, apart from retail, occupiers of offices and industrial are not having serious problems with rental levels but of course they will seek the lowest price going.
Yields have come back to a spectrum that I am now comfortable with and fit into long-term trends. Yields are currently in the spectrum range of 6-6.5% for retail, 7-7.5% for office and approaching 10% for industrial – all in respect of quality, well-let property – but if not prime quality, I would be adding significantly to these returns.
Recovery over the next few years may see yields coming down to around 5-6% for retail, 5.5-6.5% for offices and 7-8% for industrial, but the boomtime yields are gone for ever.
The big unknown is the economy. Traditionally, commercial property has lagged behind recovery in the real economy because business space users do not rush out and take more space as soon as
business improves. They generally have surplus space in existing premises and will await taking more space until they have constraints.
The equivalent of about one in four of Dublin offices is available, so the supply is not constrained when demand does come back. There is the possibility that FDI will create new demand particularly in the office sector and this could give an earlier lift off. So having regard to all these factors, what advice do I give to those clients seeking to invest in property in 2010?
These are risky times for all investment. The safe option is to keep the money in the bank and see how markets evolve over the next six months. But if one wants to be adventurous and jump in now, I would make five points as follows:
• Make sure the rents on a given property are not at historic high levels and if so adjust your price accordingly.
• Be aware of your tenant's financial health.
• Look carefully at the lease terms and take professional advice.
• Look at the bricks and mortar and location. This is your only real long-term security.
• Don't over borrow.
Really brave investors will be those who buy high-quality vacant buildings at knock-down prices in 2010 and wait for an economic recovery to achieve lettings – it's risky and takes nerve but is potentially very rewarding.
Dublin: one in four offices available
With Bloxham Stockbrokers saying that property values will rise in 2010, now is a good time to consider buying property. As commercial property values having fallen by over 60% since 2007, the answer is not as simple as it was two, three or even four years ago. Back then I was very negative about Irish property – but few listened to grey-haired advisers in those exuberant days.
The first thing to realise is that we are now in a completely new property game. New rules, new stadium and a different shaped ball. Over the next decade property investment will be mainly about income and little about capital appreciation so don't expect to make a quick killing.
The second basic change is that it will be a tenants' market for quite some time.
I have spent my life acquiring and managing institutional property and there are a number of principles or mantras that I have successfully used as follows:
• Timing – more money is made (or lost) out of getting the timing right than any other decision.
• Location is critical.
• The quality of the building really matters.
• Tenant(s) strength, fair rent and satisfactory lease terms are important
• Price/ yield – does the yield make sense and fit into long-term parameters?
• The economy – what is happening?
• Competition – what else is happening in the property market?
• Mix – no single property should represent more than 10% of a portfolio.
• Replacement – what would it cost to build?
• Borrowing increases risk and has to be repaid – often out of (taxed) income.
Whenever I looked at any given property in any country or city, these were my personal 10 commandments.
So how do we apply this methodology to the current property situation in Ireland?
On the key issue of timing, whilst I would not have considered buying in Ireland since 2005, the point for reversing that position must be approaching. My nagging fear is that it is still too early.
There will be lots of well-located good buildings in good locations coming available over the next few years from the Nama stable so scarcity has to be discounted. The big issues for consideration now are:
• Rental levels – will they rise or fall further?
• Tenants (or their absence).
• Oversupply of space.
• Yields/prices.
• Interest rates.
• The prospects for the economy.
To buy now you would have to be taking a long-term view on these issues, unless the building was let for a very long term to an undoubted tenant such as the government. Rents, which have been falling for the past two years, will eventually stabilise but I do not know if they will plateau at current levels or fall further. This situation will be driven by the economy and the interplay of supply and demand. The situation is currently unstable, with rental values falling throughout 2009. However, apart from retail, occupiers of offices and industrial are not having serious problems with rental levels but of course they will seek the lowest price going.
Yields have come back to a spectrum that I am now comfortable with and fit into long-term trends. Yields are currently in the spectrum range of 6-6.5% for retail, 7-7.5% for office and approaching 10% for industrial – all in respect of quality, well-let property – but if not prime quality, I would be adding significantly to these returns.
Recovery over the next few years may see yields coming down to around 5-6% for retail, 5.5-6.5% for offices and 7-8% for industrial, but the boomtime yields are gone for ever.
The big unknown is the economy. Traditionally, commercial property has lagged behind recovery in the real economy because business space users do not rush out and take more space as soon as
business improves. They generally have surplus space in existing premises and will await taking more space until they have constraints.
The equivalent of about one in four of Dublin offices is available, so the supply is not constrained when demand does come back. There is the possibility that FDI will create new demand particularly in the office sector and this could give an earlier lift off. So having regard to all these factors, what advice do I give to those clients seeking to invest in property in 2010?
These are risky times for all investment. The safe option is to keep the money in the bank and see how markets evolve over the next six months. But if one wants to be adventurous and jump in now, I would make five points as follows:
• Make sure the rents on a given property are not at historic high levels and if so adjust your price accordingly.
• Be aware of your tenant's financial health.
• Look carefully at the lease terms and take professional advice.
• Look at the bricks and mortar and location. This is your only real long-term security.
• Don't over borrow.
Really brave investors will be those who buy high-quality vacant buildings at knock-down prices in 2010 and wait for an economic recovery to achieve lettings – it's risky and takes nerve but is potentially very rewarding.
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