Let’s see if I can recap and re-estimate long-term economic value. To keep things simple, we can say there are four types of loan that would go on NAMA’s books (the numbers in brackets are my best estimate of peak value, done by attributing associated loans, so the numbers add up to the €88bn original value reported):
- Irish commercial (€11.8bn)
- Irish residential (€12.4bn)
- Irish land (€31bn)
- All foreign (€31.6bn)
The two questions we need to know for each, to start discussing long-term economic value, are (1) how far have property values fallen so far, and (2) how far out is the yield based on current prices?
Let’s assume that NAMA and Jones Lang LaSalle got it right for the €8bn in commercial developments, i.e. that prices have fallen by 47% on average so far and that they will rise a little as yields level off to historical and European norms. This means that the €11bn in commercial projects in Ireland is now worth €6.2bn but will rise to €7.5bn.
What about the €12.4bn in residential property? There are no figures that suggest that the average fall anywhere, let alone the country as a whole, has been 47% yet. Based on discounts from asking price data, 35% is a more accurate average of the fall from the peak. However, the
average yield in residential property is just over 3%, only about half a typical yield of 6% (this yield is by no means overly generous). This means that while the properties are probably worth €8bn now, their adjustment to
long-term economic value would mean a downward adjustment to €4.2bn.
Regarding land and overseas projects, the value of Irish land has fallen dramatically and in many cases will not increase significantly as planned developments are scrapped. Overseas, property markets may be turning, having proven more flexible (in the case of the US) or less inflated (in the case of much of Europe). Let’s put to one side, then, the majority of NAMA’s loan book, i.e. Irish land and foreign properties of all sorts, on the assumption that they already reached approximately their long-term economic value. This means that based on what’s happening in residential and commercial property, one would expect a further 5% fall in the value of NAMA’s collateral – and not a 15% rise – as the market proceeds to its long-term economic value.
One further complication is rents, however.
Rents in both commercial and residential segments of the market are falling, due to oversupply. If rents were to fall, say, 20% over the coming three years as they find their new level, this would mean a further fall in the value of commercial and residential property on NAMA’s books of €2.5bn.
In short, even if you think values for Irish land and foreign property have levelled off, estimating the true value of the €24bn in commercial and residential developments in Ireland does not translate into a straightforward mark-up of 15%. In fact, if you believe (a) that 6% is a healthy average yield for Irish property (as NAMA itself does), and (b) that it’s likely rents will fall a further 20% as the market handles recent overconstruction, the adjustment from current market value should be downwards by 10% to about €44bn, and not upwards to €54bn.
Does anyone know if there’s a 1% commission on saving the State €10bn?!
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Originally Posted by Scorpio
