Jim Stewart: One of the contentious issues in the NAMA proposal is the value of the loans being purchased. Loans with an estimated market value of €47 billion will be taken over by NAMA at an estimated value of €54 billion. Many have argued that market values should be used. One problem with this argument is that it assumes that there is a market for property assets underlying these loans in the accepted sense of a market.
In fact, there has always been massive state intervention in the property market and there probably always will be. For example planning procedures, tax incentives (hotels, section 23 houses, multistory car parks) and absence of tax in other cases. The State can also influence values via provision of infrastructure, for example provision of a school, bus service, a Luas extension, or reopening a railway line. Planning regulations can have a considerable effect on property values. If the Minister for the Environment were to restrict apartment building so as to effectively prevent new building, existing apartment blocks are more likely to gain in value. The current crisis has revealed serious flaws in our planning process. Reform is bound to affect property values
The problem with valuing the assets that NAMA may own is that the State is both negotiating with the banks, and eventually the property owner, as to value, and at the same time can influence value. Any valuation is subjective, including the estimates that have been widely discussed of the loans to be acquired by NAMA. The draft bill recognises this.
One of the advantages of earlier intervention was the certainty of the state commitment, plus the existence of options which under certain circumstances increased returns to the State and reduced risk. For example, the preference shares issued to banks earlier this year had associated warrants for a 25% shareholding in both banks, which have become much more valuable because of the rise in bank shares. If either bank raises further capital and repays the preference shares issued, the potential State shareholding is reduced to 15%.
The current NAMA proposal envisages a small element of risk sharing – 5% of the total amount paid to the banks will be linked to the performance of NAMA, although precise details have not been published. There are other ways that the Bill could be changed to further reduce, but not eliminate, risk and uncertainty to the State.
That will be the subject of my next post.
Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.
He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).