The Business Plan in relation to the operation of NAMA has recently been published by the Government.
It is anticipated that €77bn of loans will be transferred from the banks to NAMA. This includes €9bn of rolled-up interest on non-performing loans. The underlying assets were valued at €88bn when the loans were granted. NAMA is paying €54bn for loans on these properties. The properties are currently estimated to be worth €47bn, which represents a €7bn premium being paid by NAMA compared with the present market value. It signifies a €23bn loss for the banks on transfer of the loans to NAMA.
The net present value projections prepared for NAMA indicate that NAMA will make a €4.8bn surplus by 2020, provided certain key assumptions are met.
Many uncertainties surround the likelihood of success for NAMA, not least of which is the NAMA assumption that property values will increase by 10% over the next 10 years. It’s worth noting that the average house price in 1996 was approximately €75,000 and peaked at around €325,000 (new) or €390,000 (second-hand) by end-2007. While prices have dropped greatly in the last year, there is clearly potential for further substantial reduction, so that the long-term economic value of Irish property may be much lower than people think. It is likely that people will continue to de-leverage in the coming years, with a resultant drop in demand for finance to support property prices.
It is by no means certain that the banks will use the NAMA finance to reinvigorate the SME sector, most of which is currently experiencing dramatic reductions in sales, combined with an unprecedented credit squeeze. Consumer spending is declining, due to job insecurity and lack of credit. SMEs are down-sizing and reorganising in an effort to be the “last man standing”. Banks are not in the business of taking unnecessary risks and won’t lend to unprofitable businesses, which many are these days. So it’s not clear that the necessary confidence, both by consumers and by businesses, will be restored in the near future.
Asset values are dropping like stones, but private sector borrowings remain high. Many borrowers, both residential and commercial, are experiencing negative equity. This only becomes a problem when one or more of the borrowers suffers unemployment or a drop in income, whether household income or rental income due to tenants going out of business or negotiating substantially lower rents. Unfortunately there is no NAMA equivalent for such individuals, although there is talk of introduction of an IVA-type scheme, such as is in the UK, to facilitate the wiping clean of slates for people who are unable to repay debt, without the necessity of going through formal bankruptcy proceedings.
If you are owner or director of a small or medium-size business, and would like help with preparing a business plan to help cope with the downturn, please give our office a call and we would be happy to set up a free introductory meeting.