I thank the committee for the invitation to attend and give evidence before it today on NAMA's functioning. Mr. Daly has covered a number of important points on the principles that guide NAMA's strategy and day-to-day activities and has articulated the agency's commitment to supporting the national imperative of economic and employment recovery. As chief executive, I reiterate this commitment.
I want to outline the milestones that have been reached by the agency in the two years since its establishment and to signpost the agency's evolving strategic direction. I will do so with reference to the facts about our work. I will also highlight a number of what I believe to be misconceptions about the agency with regard to the scale, composition and geography of our loan portfolios and underlying securities and in respect of how the agency goes about its daily work.
Today's engagement is timely for a number of reasons, not least because the agency has reached the next logical and very important juncture in its evolution. We have concluded the first critical phase of our work. This has included purchasing and transferring loans with a face value of €74 billion while simultaneously constructing an organisational infrastructure capable of meeting the enormous challenges set for the agency by the magnitude of Ireland's financial and property market crises.
The agency is in a new phase, focused on our core commercial objective of recovering for the taxpayer at a minimum what we paid for the acquired assets in addition to whatever we have invested to enhance property assets underpinning these loans. NAMA is pursuing a number of strategies to achieve this overriding objective. The main strategies are the agreement of detailed asset sales schedules with debtors; the optimisation of NAMA cashflow from loans and debtors; the adoption of an active loan sales strategy; innovations to attract international investor capital to Ireland; and measures to increase market activity in commercial and residential property markets in line with the potential for recovery in both. We are also developing strategies to achieve our objectives in the broader context of the 2009 legislation, taking account of the need to contribute to the social and economic development of the State.
NAMA applies best practice in dealing with the decisions of banks and the borrowings of debtors that were at the root of the property market problems in this country, and which continue to frustrate economic recovery. An important aspect of NAMA's work, therefore, is the application of rigour in our dealing with debtors. This is not what many were used to in the banking and property development practices that have led us all here but it is the only way the mistakes of the past can be put right. However, NAMA's rigour does not mean, as some critics claim, that we are either slow or lumbering. The fact is we are neither; we are careful and the average decision time is within six days. This is one of the key misconceptions about the agency I wish to address. I ask committee members to consider the facts as I work through a number of key headings relating to the agency's work.
A total of 189 NAMA-managed business plans have now been assessed representing approximately €59 billion, with three debtors to complete whose debts amount to €2 billion. These were late acquisitions in October 2011 and we expect to complete the review of these business plans by April. A total of 541 participating institution-managed business plans of the 599 smaller debtors have been assessed, with 58 to complete. According to these figures, we have completed the assessment of business plans covering 97% of the loans on our balance sheet with reference to a loan acquisition value of €31.8 billion.
I wish to take this opportunity to advise the committee of the decision of the NAMA board to establish dedicated teams comprising 15 existing NAMA staff which will monitor and supervise intensively the management of the 599 NAMA debtors being managed by approximately 500 staff in Bank of Ireland, AIB and the Irish Bank Resolution Corporation, IBRC, which operate on NAMA's behalf. The teams concerned will be situated in the institutions and will ensure the highest standards are applied by the institutions to the management of the €5 billion of NAMA debt involved. This decision is part of the evolving NAMA strategy referred to at the outset.
In cases where it makes demonstrable commercial sense from the perspective of the taxpayer, we work with debtors with a view to maximising the potential return from their loans and associated assets. This, in practice, means the sale of properties to support phased debt repayments; the assignment of rental income; the granting of charges over unencumbered assets; and the reversal of transfers to relatives and others. We have approved asset sales valued in excess of €7 billion and in the 22 months since March 2010 when we acquired our first loans, we have generated more than €6.6 billion in cash flow.
We also have been granted charges over assets with a value of €221 million. This means we have secured almost €250 million in new securities from our debtors since we began operations. It further protects the position of taxpayers. A total of 50 of our largest debtors transferred assets to family members or connected parties. Of these, 31 involving assets worth €160 million have been reversed. The highest single transfer reversed was worth approximately €30 million. We are pursuing 22 others, some through the courts, and we are actively carrying out asset searches in other cases outside this top 50. When completed, the aggregate value of these unpledged assets may prove to be approximately €500 million.
Circumstances exist in which the agency has to take enforcement action - which is not a preferred option - where debtors have been unwilling to work with NAMA because they consider our terms to be too onerous and because of NAMA's objective commercial assessment of the best likely return for the taxpayer. In such cases the agency explores the various enforcement options legally available to it, including the obtaining of judgment and seeking to attach this judgment to assets owned by the debtor concerned to the extent it is legally permissible to do so.
NAMA has taken enforcement action in 214 cases connected to 116 individual debtors and declined 44 others. At the start of this month, NAMA updated its website list of properties subject to enforcement action. The total number of properties now listed is 1,119. A total of 72% of these properties are located in Ireland, with 13% in Northern Ireland and 15% in Britain. The geographical breakdown can be somewhat misleading in that enforcement can relate to individual properties or multiple properties such as apartment blocks. In Northern Ireland, for instance, the bulk of enforced properties are single units.
In the vast number of cases, the properties subject to enforcement are for sale or are under management and generating income. In some instances, receivers are working through outstanding title defect and ownership issues and planning and compliance issues, and these will be offered for sale as soon as is practicable and in line with NAMA's strategy for dealing with the property. Since the end of March 2010, NAMA has made more than 7,000 individual credit decisions ranging from the relatively straightforward to substantial and complex applications. This amounts to more than 160 credit decisions per week. As I noted, the average turnaround for decisions is six days and we work to a target turnaround of seven days.
Another misconception is that the National Asset Management Agency is simply a debt collection agency. The 7,000 credit decisions to which I referred have underpinned more than €1 billion approved in advances of working and development capital to debtors. New advances of more than €1.1 billion have been approved and are split between Ireland, at 45%, Northern Ireland, at 1%, Great Britain, at 45% and other locations, at 9%. We will allocate capital wherever there is a commercial rationale for doing so. A number of important points are worth making in respect of this split given some recent commentary. The approval of advances in Britain must be seen in the context of asset sales of more than €3 billion of loan and property assets in that country, which represents a significant net income flow for the National Asset Management Agency and Irish taxpayers. More than 80% of NAMA's cashflow is currently generated from UK assets, reflecting current liquidity in the British market and the location and quality of the assets underlying the agency's loan portfolio. It makes sound commercial sense for NAMA to focus on liquid overseas markets at this point in the economic cycle.
In terms of Northern Ireland, the figures presented may not provide the full picture. The agency has advanced significant additional working and development capital to Northern Ireland debtors who have projects both in Northern Ireland and the United Kingdom. Much of this capital is therefore accounted for with reference to data for Great Britain. It is also important to note the mix of assets in NAMA's Northern Ireland loan portfolio, which is characterised by a high proportion of land not under development or so-called dry land. This limits the opportunity to advance new working and development capital at this stage as it does not make economic sense to do so.
In Ireland, we have approved working and development capital advances of more than €500 million. This represents a significant injection of capital into the construction sector and more widely at a time when the economy is experiencing a protracted credit drought. We anticipate there will be significant opportunities in the coming years to advance working and development capital in respect of the Irish market as the economy improves. In making this point, I am conscious of the misconceptions relating to NAMA's Irish loan portfolio. While due diligence on acquired loans is nearing completion, a preliminary analysis suggests that 56% of such assets are located in Ireland, 34% in Britain, 4% in Northern Ireland and the residual 6% largely elsewhere in Europe and the United States. The property assets underlying our Irish loans are worth €18 billion by reference to November 2009, approximately €11 billion of which is located in the greater Dublin area.
Our ongoing engagement with potential investors suggests there is growing overseas interest in acquiring Irish commercial assets, particularly in prime office and retail properties in Dublin with good covenants and attractive yields. The scale of the fall in Irish commercial property prices from peak of close to 65% according to the Investment Property Databank, IPD, has meant that yields on investment assets have reached very attractive levels of more than 8%. Measures announced in the recent budget, including the substantial cut in stamp duty and new capital gains tax incentive relief, are also likely to help the market.
NAMA's residential portfolio is predominately located in the metropolitan growth centres of Dublin, Cork, Limerick and Galway, which are characterised by strong rental markets and emerging indicators of pent-up demand for residential purchases. The agency will only provide additional capital to projects that are commercially viable and only where the additional capital will deliver a better return to the taxpayer than otherwise would have been the case.
In terms of NAMA innovations, we are constantly examining ways to encourage transactions in the property market through the use of innovations such as vendor finance, qualified investment funds or initiatives for the mortgage market. Vendor finance is an example of such an initiative and is an increasingly attractive option from NAMA's perspective. While there is significant interest in our portfolio, lack of finance is a major difficulty in Ireland and internationally. Most buyers are unable to borrow at an interest margin of less than 4.5%, even on good assets. As NAMA's cost of capital is lower, we are able to offer vendor finance at a minimum margin of 2.5% and up to 70% loan to value.
Vendor finance offers a number of advantages for NAMA, the most obvious being the opportunity to de-risk our loan portfolio significantly. It also brings more buyers into the market and adds price tension. This is true even where the option of vendor finance is not taken up by the eventual buyer. The need for vendor finance becomes clear when one considers that most traditional lenders to the sector are pulling back from making new loans, and other major financial institutions have announced moratoriums on lending to property, both here and internationally. NAMA is not a bank and considers vendor finance as an aid to market participation only when applied to the right product and, critically, the right client. Applied correctly, it can play a positive role in attracting international investment into Ireland's commercial property market and supporting employment.
NAMA will consider vendor finance on a case-by-case basis. By the end of this year, we also intend to have launched at least one sub-investment fund, known as a qualified investment fund. These sub-funds, based on regional or sectoral portfolios, are a way to attract institutional investors such as pension funds and sovereign wealth funds to buy properties on a phased basis. We are also about to begin an active loan sales process, having recently established panels for Europe and the United States. This will enable us to monetise the loan portfolio and thereby reduce the size of our balance sheet. We will also pursue an active marketing strategy for loans and, with the consent of our debtors, for the property assets securing them.
We are also close to launching a pilot residential mortgage initiative with partner banks which, in simple terms, will provide potential purchasers with a level of protection against housing values falling from current levels over the next five years. We have received approval from both the Minister for Finance and Central Bank and are awaiting final approval from the European Commission, which we expect to receive shortly. In all cases, the sale of loans or the assets underlying them will be conducted in a structured way. We will not sell off the portfolio cheaply. There have been attempts, driven by misconceptions about Ireland, to low-ball us but we have not been a fire seller as that would not be in the interest of the taxpayer.
In terms of NAMA's wider socioeconomic contribution, we are at all times open to proposals, and the agency actively contributes to public policy processes aimed at supporting the achievement of wider social and economic objectives. While there are wide-ranging examples of this, I will focus on the agency's engagement with the Department of the Environment, Community and Local Government and local authorities regarding unfinished estates and the broader issue of social housing provision. Following release of the report of the advisory committee on unfinished housing developments last June, the Minister of State with responsibility for housing established a national co-ordination committee to oversee action on unfinished estates and monitor and drive progress. NAMA has assigned two representatives to the committee which meets regularly. The committee focused its initial attention on the 243 estates categorised by local authorities as the most problematic, known as Category 4 estates. It is often incorrectly assumed that the vast majority of unfinished estates are under the NAMA's control. Only 29 or 12% of Category 4 estates are controlled by agency debtors or receivers. We are funding, through our receivers, the cost of urgent remedial work on these estates, which is estimated at €3 million. Good progress has been made in this regard.
NAMA is moving towards dealing with the next worse group of problematic estates, namely, Category 3 estates. The agency has exposure to 150 of the 1,500 estates in this category. Work on these estates is ongoing and we are at an advanced stage in clarifying the status of each site, agreement of plans and timetables for site resolution.
In December 2011, NAMA identified more than 2,000 properties as being available for social housing. As the Minister for the Environment, Community and Local Government stated at the time, this represents potentially "one of the largest housing allocations made in the history of the State". NAMA is working systematically with local authorities and the Housing Agency to determine the demand for and suitability of the identified properties. This work is well advanced and we expect units to come on stream in the coming months.
NAMA has exposure to 121 hotels of more than 900 hotels operating in the country, which is a relatively small share. While the agency has exposure to 20 golf courses, most of which are attached to the hotels to which I referred, there are more than 400 golf courses in the country. These figures show that, contrary to urban myth, our debtors have relatively small exposures to the hospitality sector.
While I am conscious of time, I wish to briefly address a number of additional issues. The first issue is NAMA's ongoing interaction with State agencies, including the IDA, to identify the potential for synergy between NAMA related properties and the requirements of inward and indigenous investment. The agency's chairman referred to a recent example involving 230 new jobs for Dublin and noted that NAMA's actions facilitated the sale of a second site. NAMA has worked closely with South Dublin County Council and IDA Ireland in addressing legacy issues. Further, we are developing communications systems to ensure the timely relay of information to NAMA from State agencies which interact with us directly or through clients.
In his budget 2012 speech, the Minister for Finance referred to the NAMA policy guidance for dealing with upward only rent reviews. Our guidance provides an opportunity for NAMA to approve rent reductions where it can be shown that rents are in excess of current market levels and viability is threatened. The policy also provides for the appointment of an independent valuation of market rent where necessary. Where a qualifying tenant is unhappy with the negotiations with his or her NAMA landlord, he or she can contact us directly and many landlords have done so. It is important to add that the guidance is not designed to accrue benefits to a tenant who may be in a position to bear the burden of rent under existing contractual arrangements where the tenant is part of a group with profitable trading outlets inside or outside Ireland.
In the past month we have advised of a number of changes in structure and responsibility at a senior level in NAMA, including the proposed appointment of a chief financial officer, a process which is well under way. These will ensure that NAMA is correctly positioned for the challenges ahead and will enable it to focus its full attention on the management of its portfolio of assets and maximising recovery of funds for the taxpayer.
Our projected costs for 2012, at €194 million, are 0.6% of the consideration we paid for the loans. Some €74 million of these costs will be paid to the institutions who employ 500 staff to administer the loan portfolio on our behalf.
We are generating strong cashflows through a combination of debtor repayments and the asset sales. This will be used to finance working and development capital and also towards paying down NAMA bonds as part of meeting the €7.5 billion repayment target by the end of 2013.
In accordance with the IFRS accounting standards, there has been some commentary lately about the accounting policy used by NAMA. Effectively, we have had to apply a methodology known as effective interest rate methodology. We acquired a distressed loan portfolio at a significant discount to original par value and we are using a collateral base valuation model in accordance with accounting standards to project the expected recovery on the related cashflows and expected receipts on the disposal of these assets over time.
A significant portion of the loans acquired are not expected to perform in accordance with their original contractual terms. As a result, the most significant portion of the cash generated by NAMA will be on the future disposal of underlying property over time and not from the receipt of the expected contracted interest. Interest income is therefore recognised on loans in accordance with this methodology by reference to the related cashflows on a proportionate basis over the life of the loans rather than on a cash received basis in order to accurately reflect the effective rate of return over the expected life of the loans. This is in accordance with international accounting standards and approved by their auditors.
In addition to the public accountability provisions contained in the National Asset Management Agency Act 2009, we have implemented a number of strategies to support communications with the Oireachtas and with the public. No person is more conscious than me of the huge responsibility we have at NAMA, but I am fortunate in that I have been able to assemble a strong committed group of people and I have a very supportive board. Our objective every single day is to do the right thing. We recognise that others may have contrary views but many of the commentators propose no realistic or credible alternatives. We are always open to receiving ideas and solutions on how best to optimise the portfolio.
I hope I have comprehensively addressed an update of the work of agency and I thank the members for their time.