Good afternoon. Yesterday, we reverted to the committee with our responses on the 37 questions submitted to us and we are happy to elaborate on those responses later. I propose to focus now on some of the major issues that arise for NAMA at this point in its evolution.
I am pleased to note the remarkable transformation which has taken place in the Irish property market since we last appeared before this committee, almost two years ago. In my address to the committee at that time, I noted that we were beginning to see a positive movement in the Dublin commercial market, as evidenced by buyer inquiries and transactions. That reflected a desire among institutional investors to spread their real estate risk over wider geographic areas and also reflected improving sentiment towards Ireland. I also observed that we were seeing some signs at that stage that the residential market in Dublin was bottoming out.
Since then, both of those tentative signs of recovery have gained momentum and 2014 in particular has seen investment in the Irish commercial property market on an unprecedented scale. Current projections indicate that the volume of direct investment activity will exceed €4 billion in 2014. The previous peak was €3.5 billion in 2006. Italy, by comparison, had €4 billion of commercial property transactions in 2013. When all this activity is taken into account, including loan sales, it is estimated that the aggregate of all Irish market transactions in 2014 will be of the order of €12 billion. In addition to NAMA sales, that projection includes the loan sales activity of the special liquidator, IBRC and a number of other banks with activities in Ireland. This is an exceptionally high level of investment activity by historical standards or even by reference to activity elsewhere in Europe.
NAMA has not been slow to respond to the opportunities created by the much improved market conditions. Up to last Friday, 17 October, we had generated €6.6 billion from loan and asset sales to date in 2014, including close to €3 billion from sales linked to assets in the Republic and €800 million from sales linked to assets in Northern Ireland. Since inception, the total amount generated from the NAMA portfolio has been over €22 billion, approximately €17.5 billion in asset sales and almost €5 billion in recurring income.
While we in NAMA see the improved market conditions as a strategic opportunity to de-risk our portfolio and to reduce the contingent liability exposure of Irish taxpayers, there has been some commentary to the effect that NAMA should slow down the pace of deleveraging so as to manage out its loan portfolio over a longer time period. There has also been some commentary to the effect that we should not sell asset and loan portfolios to private equity and similar funds. As regards this commentary, I would like to make a number of points.
Our strategy in each of our main markets has been to release assets for sale in a phased and orderly manner, consistent with the level of demand, the availability of credit and the absorption capacity of the particular market. In Ireland, over the period from 2010 to 2012, this meant limiting asset disposals into a market where demand was practically non-existent, where the trend in prices was still downwards and where other non-Irish banks were selling off large portfolios quickly. Releasing too many assets for sale could have intensified and prolonged the market downturn here. In 2013, the Irish market stabilised and the subsequent recovery has enabled NAMA to increase the flow of assets for sale and to sell loan portfolios and properties at very competitive prices. This in turn has enabled us to accelerate our redemption of NAMA senior debt. Today, we are redeeming another €600 million in senior debt, thereby bringing to the total to €7.6 billion in 2014, which brings us to our 50% target two months ahead of schedule.
This 50% target was one that we originally thought we would only meet at the end of 2016. Our revised target for end-2016 – which has been endorsed by the Minister for Finance - is to redeem 80% of our senior debt by then. Achieving this 80% target will require a substantial volume of NAMA loan and asset disposals in Ireland as well as in Britain and elsewhere; for the most part, sales will involve commercial assets, including offices, retail, hotel and leisure and industrial assets, or loans secured on such commercial assets.
I am also pleased to inform the committee that we are also redeeming today the last tranche of €134 million of the senior bonds that we issued to the Central Bank to acquire the floating charge over IBRC assets at the time of its liquidation. That means that all of the €12.9 billion in senior bonds that we issued in February 2013 as part of the IBRC liquidation process has now been fully redeemed.
While NAMA is commercially autonomous in how it goes about its business, it cannot ignore the wider ramifications of its activities. The Minister, through his recent section 227 review, which was published in July, endorsed the view of the NAMA board that it should take advantage, to the greatest extent possible, of favourable Irish market conditions by increasing the flow of assets to the market. Such deleveraging creates wider collateral benefits. NAMA senior debt represents a contingent liability on taxpayers and its reduction yields benefits in terms of the creditworthiness of Ireland as a sovereign. This was clearly demonstrated some months ago when the credit rating agencies stated that their upgraded ratings for Ireland reflected, were in some part due to NAMA’s planned and actual accelerated disposal programme which would improve the country’s creditworthiness.
The main constraint on asset disposal activity is that it must be managed in line with NAMA’s obligations under section 10 of the National Asset Management Agency Act 2009, namely to obtain the best achievable return for the State. This means that NAMA must be careful to ensure that the volume of assets and loans which it offers for sale does not exceed the market’s absorption capacity and thereby adversely affect the pricing that may be realised. In that regard, the level of investor interest in the Irish market over the past year has had the effect of expanding substantially the market’s capacity to absorb new supply of assets and of the loans which they secure.
NAMA also fulfils its section 10 obligations by ensuring that assets offered for sale are subject to a competitive bidding process, involving the widest possible array of bidders, with the objective of obtaining the best price available in the market at the time of sale. We do not discriminate against certain bidders or give preferential treatment to certain other bidders based on their country of origin or on their future investment strategy. To do so would be to place NAMA and, by extension Irish taxpayers, at a competitive disadvantage relative to other deleveraging entities.
The strategies pursued by purchasers after they acquire NAMA loans or assets are a commercial matter for them. The imposition of conditionality in the sale of portfolios, even if enforceable, would have the effect of reducing the pricing NAMA would achieve and would also reduce the number of bidders willing to participate in sales processes, both of which would run counter to NAMA’s obligation to maximise the return on its assets.
NAMA is not a developer and has no ambitions in that regard. However, in its capacity as a secured lender, it facilitates development through funding of viable commercial and residential projects under the control of its debtors and receivers. With emerging shortages in the Dublin residential and office sectors, it is reasonable that NAMA should seek to contribute, in so far as this is consistent with achieving the best financial return, to meeting those emerging shortages. That position has been endorsed by the Minister for Finance recently in his section 227 review.
In addition to the revised debt redemption objective of 80% by end-2016, there are two other main strands to current NAMA strategy. One is to facilitate the delivery of office accommodation within the Dublin docklands SDZ area and the other is to facilitate the delivery of residential housing units in areas where supply shortages are most acute. The North Lotts and Grand Canal docks area of the Dublin docklands were designated as a strategic development zone, SDZ, and the scheme was adopted by Dublin City Council in May this year. NAMA has prepared a detailed business plan which includes strategies for each of the 13 individual sites in which it has an interest. These comprise 16.74 hectares, just over 41 acres, which is equivalent to 75% of the 22 hectares of development land in the Docklands SDZ area.
From the initial appraisal exercise conducted by NAMA, it is estimated that up to 3.4 million sq. ft. of commercial space and almost 1,900 apartments could be delivered if all the sites in which NAMA has an interest were fully developed over the next five to seven years. NAMA is engaging actively with Dublin City Council, in the council’s capacity as both planning authority and development agency, to ensure the earliest possible delivery of both commercial and residential space in the docklands area.
NAMA is also willing to advance funds for the early provision of necessary infrastructure to service the area. Already, terms have been agreed with Irish Water for a loan facility to fund the cost of delivering the required drainage infrastructure in the docklands SDZ area, which is at capacity at present. NAMA is also willing to provide up-front funding of €10 million to Dublin City Council to fund costs associated with the design and construction of a new pedestrian and cyclist bridge over the River Liffey to link the north and south docks.
When preparing portfolios of assets for sale, NAMA normally excludes from the sales process those sites that may be suitable for residential development within a three- to four-year horizon. Typically, these are sites in the greater Dublin area. This is in line with the commitment we gave to the Minister, as part of the section 227 review, that we would protect our ability to exercise sufficient control to facilitate the delivery, over the medium term, in the areas of most need.
As part of its contribution to address emerging residential supply needs, NAMA established a dedicated residential delivery team in April 2014. The team’s purpose is to co-ordinate and drive the delivery of NAMA’s commitment to facilitate the completion of 4,500 new residential units in the period to the end of 2016 and to assess the scope for delivery of additional units thereafter. With regard to the target for the end of 2016, it is envisaged that 1,000 units will be delivered in 2014 and another 1,500 units in 2015, with the residual in 2016. Very importantly, NAMA is engaged in preparatory work on a second group of sites in the greater Dublin area which are currently in the planning process or where additional planning work is required. If all of these sites were to be developed, they could deliver approximately 27,000 units in the years after 2016.
NAMA has been fortunate that it has been able to assemble very professional, dedicated and expert staff. Its success to date has been attributable to their very considerable efforts in helping the board and helping me as chief executive to deliver strategically. From my perspective, the biggest risk to NAMA's achieving its various objectives is the very real one that it will not be able to retain the specialist staff that it needs. In total, some 108 members of staff have left since NAMA started, including 23 in the first half of this year and 24 in the three months since then. The fact that staff are leaving as market conditions improve is hardly surprising, but the rate of exodus is accelerating. I am concerned not only about that but also about the fact that many of those departing have very specialist skills and experience that, in the current buoyant property and financial market conditions, cannot be replaced. It is vital that NAMA retain key staff if it is to deliver on the various objectives that I outlined. The business we are in depends crucially on market knowledge and specialist skills in property, banking, planning, finance and law. These skills are generally not available in the Civil Service. To recruit those with the necessary skills, we had to go to the private sector, and that meant hiring staff at private sector levels of remuneration to ensure NAMA’s mandate was carried out professionally. There was simply no alternative given the amounts that were at stake. The point remains valid given the amounts that are still at stake. Owing to NAMA’s finite lifespan, we were in a position to offer staff only specified purpose contracts. Against that background, it is understandable that staff in mid-career, many with mortgages and young children, would tend to seek employment providing them with long-term job security and career prospects. The departure of experienced staff causes considerable disruption and loss of momentum in the management of our debtors and assets. Given its expected lifespan, NAMA may face a diminished prospect of recruiting experienced replacements at this stage and must therefore rely on some of its less experienced, albeit fully committed, existing resources.
For a number of reasons that I will outline, it is important at this point in its evolution that NAMA retain a sufficient complement of specialist and duly experienced staff to enable it to complete its work and generate a positive return for taxpayers. It is necessary to take full advantage of current strong market conditions to de-risk the remaining €17 billion debt in the NAMA portfolio expeditiously. Notwithstanding the very positive growth outlook for the Irish economy over the next two to three years, we are not sheltered from the impact of macroeconomic, financial, monetary or political developments in the United States, Europe or elsewhere.
There is an increased risk that investors will shift their attention elsewhere as the increased pace of deleveraging in other European markets creates more competition for investor funds. Cushman and Wakefield estimates that €584 billion of non-performing loans held by European institutions will have to be sold or worked out over the coming years, mainly due to the new single supervisory ECB mechanism which imposes tighter capital requirements on banks. From Ireland’s perspective, we are currently ahead of many of those competitor markets in terms of the progress we are making in deleveraging our risk, and we should aim to retain that advantage for as long as possible.
Increasingly, NAMA’s deleveraging activity will take the form of loan and asset portfolio sales rather than the sale of individual assets. The amount of work required to prepare a portfolio of loans or assets for sale is considerable. Typically, up to nine months’ preparatory work is required, and it can be longer for portfolios of smaller assets. Such lengthy preparatory phases are necessary to ensure that data disclosed to investors are of sufficient quality to enable them to lodge competitive bids. Otherwise, their bids will be priced very conservatively, or bidders will decline to bid and the net impact will be sub-optimal pricing on asset disposals.
The retention of specialist staff is necessary not only to complete NAMA’s asset disposal activity in a professional manner but also to enable it to bring coherence, direction and drive - and, as appropriate, funding - to the two major initiatives of the docklands and residential development.
As a follow-on from the Minister’s recent section 227 review and his comments about the need for NAMA to retain its operational capabilities, we are currently exploring mechanisms designed to ensure that we can retain sufficient corporate knowledge and expertise to enable us to complete our work successfully. In light of a cost-benefit analysis, the return to the taxpayer from NAMA being in a position to repay its remaining €15.1 billion of senior debt and €1.6 billion of subordinated debt, potentially generating a surplus, and to deliver on its docklands and residential initiatives would be a huge multiple of the costs involved.
I thank the members for the opportunity to address them. We are happy to respond further on these or any other issues they may now wish to discuss.
