Property Developers and Banks: The Nama Gamble

Imagine that, in early 2007, a property developer purchases a parcel of land that is zoned for residential development. The developer intends to build a mixed development of 3 bedroom semi-detached houses and 1 bedroom apartments. He borrows 90 million euro from the banks and invests 30 million euro of his own, or his shareholders, money for a total land purchase price of 120 million euro.

Then, during the months since early 2007, the housing market starts to slump and the developers finds that he cannot afford to repay the monthly amounts due to the bank on the loan of 90 million euro. The bank obtains a court order for repossession of the land in lieu of the debt and tries to sell it. The continuing slide in property values means that the site is now worth say only 36 million euro, which is a reduction of 70 percent from the amount originally paid.

If the bank is fortunate enough to find a buyer at a price of 36 million euro, they would still suffer a loss of 54 million euro. The developer and any shareholders will lose the 30 million euro put into the development.

Enter the National Asset Development Agency. Nama valuation experts will assess a price for the land, based not on the current low market price but on what they call "the long term economic value" of the site. If Nama personnel decide that the land is worth 60 million euro in the long term, they will provide the lending bank with a bond for this amount, which the bank can then exchange for badly needed cash from the European Central Bank. Only time will tell if Nama gets these valuations right. EU approval will be required before a final valuation figure is used as the basis to issue a bond.

In this scenario, the bank has had to accept a loss of 30 million euro and the developer now owes Nama the original 90 million euro loan his company obtained from the bank.

The cost to Nama, and ultimately the Irish taxpayer is 60 million euro and the land must then be sold to another developer for at least 60 million euro before the taxpayer seems any return on their "investment".

Nama-skeptics would argue that the banks, as commercial entities in an ostensibly capitalist system, should not be treated any differently than any other risk taking private company, and they should not be propped up with tax payers money.

In many cases the money invested by the property development company to buy the land is itself a loan from another bank. This reduces the chances of Nama recovering significant amounts of money from developers. Many developers have given personal guarantees on their borrowings, which may be worthless as more and more developers go into bankruptcy.

This article is based on a recent report on Nama in the Sunday Business Post newspaper.



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