Ireland should introduce mortgage real estate investment trusts to help banks and the National Asset Management Agency offload bad debt stemming from loans made during the property boom, NAMA Chief Executive Officer Brendan McDonagh said.
The CEO said he asked Finance Minister Michael Noonan to consider allowing the REIT structure in Ireland to give NAMA and the banks an alternative to selling debt portfolios directly.
“It’s a way of helping not just NAMA, but other banks deleverage,” McDonagh said in an interview in Dublin. Mortgage REITS have helped replace mortgage-backed securities in the U.S. and the U.K. is considering their introduction, he said.
NAMA, set up by the government in 2009 to purge Irish banks of risky real-estate assets, plans to sell off loans with a face value of 71.2 billion euros ($99 billion) by 2019. Mortgage REITs allow debt owners to pool commercial or residential mortgages and sell shares to investors. They don’t pay corporation or capital gains tax on profits from property investment, with shareholders taxed on dividends they receive.
Competition for Buyers
NAMA faces competition for buyers from Lloyds Banking Group, which is seeking to wind down and sell off property backed loans in Ireland. Lloyds said in August that 64 percent of its Irish loans are impaired, compared with 53 percent at the end of 2010. It took a loan loss charge of 1.78 billion pounds ($2.9 billion) on assets in the country.
Lloyds is “in the same space as ourselves,” McDonagh said. “We have to watch to see what they’re doing and I know they’re watching us.” Royal Bank of Scotland Group Plc, which owns Ulster Bank, is also trying to deleverage, he said.
Two-thirds of the portfolio in the British capital is linked to investment property and the rest is development land, he said.
NAMA is drawing up policies for each part of the property market to help it recognize which areas will rebound first, which developments are worth completing or starting and where a change of plan would increase value. McDonagh said demand for development land is strong in London and a shortage of prime office space in Dublin may prompt NAMA to invest there.
Overseas banks have retreated from U.K. investment in the last six months as they focus on their domestic markets, making it more difficult for potential debt buyers to get finance, McDonagh said. The banks are “trying to deal with issues that are in other parts of the bank and they have to preserve capital and preserve liquidity.”
In Ireland, NAMA’s biggest market, the value of the company’s assets has been hurt by a four-year property slump. During the first nine months, home values dropped 11.5 percent, according to a Jones Lang LaSalle Inc. report last month.
McDonagh said he’s trying to convince investors that “the fundamentals are strong, that the government is doing the right things and that effectively the economy’s in recovery, so they will make money,” he said.
NAMA’s loans in Ireland and the U.K. are secured by about 30 billion euros of real estate, McDonagh told the Public Accounts Committee today. Properties in the rest of Europe and the U.S. account for 1.5 billion euros.