Ireland’s National Asset Management Agency is turning debtors into landlords as it seeks to recoup the 32 billion euros ($42 billion) it paid for commercial mortgages after the real-estate market collapsed.
The agency, created to purge banks of toxic property loans, has forced debtors to find tenants for 4,000 empty apartments, the legacy of a real-estate crash that led to the country getting a 67.5 billion-euro international bailout in 2010. NAMA, which has a goal of repaying its debts by 2020, is focused on increasing revenue from the properties while it looks for buyers. It bought the assets using November 2009 valuations and prices have fallen further since then.
“Debtors sometimes want to hang on and hang on, waiting for prices to recover and rise so they can sell them,” Chief Executive Officer Brendan McDonagh said in an interview at NAMA’s headquarters in Dublin on April 10. “I tell them, I need cash flow.”
Rents are rising because a lack of mortgage financing is depressing home purchases and pushing more people into the rental market in a country where traditionally three in four have owned their own homes.
McDonagh, who aims to repay 7.5 billion euros by 2013, said he’s talked with potential foreign buyers for blocks of occupied apartments, which are more attractive as income-producing assets than ones without tenants, as the Irish shy away from buying real estate.
“The residential property market is frozen because of the lack of credit,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin who expects home prices nationally to drop 14 percent this year and 5 percent in 2013. “The Dublin market’s price decline may have already overshot.”
Irish home prices fell about 18 percent last year, while rents in some of the country’s biggest cities rose, according to Daft.ie, Ireland’s largest residential property website. The average asking price dropped to 176,000 euros in the first quarter from 366,000 euros in mid-2007, the peak of the boom, Daft.ie figures show. That’s a drop of 52 percent.
About 553,000 houses were built in the 10 years through 2005 in the country of 4 million people, as homebuilding expanded at twice the pace of the rest of Europe, according to the National Institute for Regional and Spatial Analysis.
Many are now empty. About 15 percent of Irish homes were vacant in 2011, some on so-called ghost estates, the country’s statistics office said last month. NAMA has loaned its debtors 500 million euros of working capital, some of which was spent on completing the apartments and adding kitchens and other fixtures to allow them be leased, according to McDonagh.
During the boom, Irish house prices more than quadrupled to an average of 303,247 euros from 1995 to 2005, the fastest growth among 18 countries surveyed by the Paris-based Organization for Economic Cooperation and Development. In terms of price per meter, Dublin was more expensive than London, Zurich and Paris, the OECD said.
Catherine O’Connor, a realtor at Dublin-based Hunters Estate Agent Ltd., said she handled the sale last week of a two-bedroom apartment at the Grange development in affluent south Dublin for 240,000 euros. Seven years ago, she sold the same property for 600,000 euros. The Grange was developed by Ray Grehan, whose loans have been taken over by NAMA.
“There was a shortage of very good product and people were very keen” during the boom, she said. “Prices were increasing and they felt that if they didn’t get on the property ladder, they’d miss out.”
Ireland’s real estate market collapsed in 2008. The economy has since shrunk about 15 percent, the unemployment rate has almost tripled to 14.3 percent and 14 percent of private residential mortgages were either more than 90 days in arrears or restructured at the end of December, according to the Irish central bank.
Mortgage lending dropped to 2.46 billion euros last year from about 40 billion euros at the market’s peak in 2006. The number of new mortgages granted in the fourth quarter declined 31 percent from a year earlier to 3,856, according to the Dublin-based Irish Banking Federation.
“NAMA was created to recapitalize the banks, but once it was set up, it bought the loans for as little as possible,” said business owner Jay Bourke during an interview in his Eden Restaurant in central Dublin’s Temple Bar area. “So the banks still aren’t lending.”
In all, the government has injected about 62 billion euros into the financial system. That amounts to about 40 percent of gross domestic product, making the Irish banking collapse among the most expensive in history, according to Alan Ahearne, who used to advise former Finance Minister Brian Lenihan.
With few loans available, many are turning to the rental market.
The amount of property available to rent in Dublin fell in January to the lowest levels since July 2008, and average rents in the city rose 0.3 percent to 1,057 euros in the fourth quarter from a year earlier, according to Daft.ie, Ireland’s largest residential property site. In Cork, the second-biggest city, rents rose 2.6 percent.
NAMA, set up by Lenihan in 2009, is seeking to tap that market. The agency used so-called NAMA bonds issued to the country’s banks to buy commercial-property loans with a face value of 74 billion euros for 32 billion euros.
NAMA has bought about 11,500 real-estate loans related to 16,000 properties since it was set up. The agency plans to sell off its entire loan book by 2020. The assets include 5.3 billion euros of land and development loans in Ireland. About 2.4 billion euros of the real estate is outside Dublin and some of it probably will revert to farmland.
‘Wall of Money’
International investors remain cautious when looking at many of the Irish properties, said Robert Murphy, co-founder of Dublin-based broker Murphy Mulhall.
“There’s a wall of money, people waiting to jump in, then in the cold light of day looking again at the price and deciding it doesn’t make sense yet,” Murphy said.
NAMA paid 3.7 billion euros for Irish residential property loans, 2.3 billion euros of which is in Dublin, according to its website.
“NAMA can’t do anything to defy the market,” McDonagh said. “We took a significant impairment charge in 2010 of 1.5 billion euros. The Irish market continued to fall in 2011 and we’re in discussions with our auditors about an appropriate impairment charge for 2011.”
McDonagh said the public will be “pleasantly surprised” by the agency’s performance last year when it publishes its accounts and he expects the impairment charge to be lower than for 2010. Up to the end of last month, NAMA had generated about 7 billion euros from sales, loan repayments and revenue from rents, McDonagh said. It’s already repaid 1.25 billion euros of the bonds.
Ireland is “satisfied” the agency’s debts won’t be brought onto the government’s balance sheet, according to a Finance Ministry spokesman.
Renting blocks of apartments will make it easier to sell them, McDonagh said. The agency is in talks to sell apartment blocks to overseas buyers, including private equity firms that have teamed with real estate management professionals, McDonagh said. The firms are looking to buy as many as 3,000 apartments at a time, he said.
Apartments in Dublin have attracted some interest from overseas investors. Kennedy-Wilson Holdings Inc., a U.S. investment firm, is in talks to buy the Alliance Building with 210 apartments, near Google Inc.’s European headquarters, according to a person familiar with the matter who declined to be identified because the information is private. The property is being sold by Ulster Bank, the Irish unit of Royal Bank of Scotland Group Plc, through receivers Grant Thornton.
RBS spokeswoman Sarah Elliott referred questions to the asset’s receiver Grant Thornton Ltd., whose spokeswoman Lorna Jennings declined to comment.
NAMA may be moving too slowly as prices continue to slide, said Rowena Quinn, Hunters’ managing partner.
“There’s such a glut of unsold apartments in the city,” Quinn said. “The concern for NAMA would be that other institutions are being proactive and starting to dispose of properties.”
With little domestic demand, NAMA has targeted buyers from outside Ireland and has been selling overseas assets. The agency is currently generating 80 percent of its cash flow from the U.K. because credit is available there and the assets’ locations are better, it said March 14.
“We’re going to have to attract a significant amount of foreign capital in to buy these assets, be it buying the assets directly or be it buying an exposure to these assets through an investment vehicle,” McDonagh said.