Special Report 102 - National Asset Management Agency - Second Progress Report
Published on 26 July 2018
The National Asset Management Agency (NAMA) was established in December 2009 as part of the State’s response to the 2008 banking crisis. The purposes and functions of NAMA are specified in the National Asset Management Agency Act 2009.
The core idea was for NAMA to acquire property-related loans from the commercial banks, to hold and manage the loans and related collateral — mainly property — and ultimately to dispose of all these assets in a manner that protected the State’s interests. NAMA would then cease to exist.
This report assesses the extent to which NAMA has made progress in achieving its overall objectives. It considers progress in the context of the purposes of NAMA as set out in the Act and of strategic objectives set by NAMA’s Board, namely
♦ at a minimum, to redeem senior debt and to meet all costs incurred by NAMA over its life — intermediate debt redemption targets were also set
♦ recover all costs over the projected ten year life of NAMA without recourse to further borrowing, meeting all of its future commitments from its own resources, over the shortest possible timeframe
♦ to optimise the realised value of assets.
The report also examines the disposal by NAMA of the underlying collateral (asset sale) and of loans (loan sale).
Loans and receivables
The loans acquired by NAMA from the participating institutions are classified as loans and receivables. The stock of loans reduced from €29.4 billion at the end of 2010 to €5.5 billion at the end of 2016, a reduction of just over 80%.
Redemption of senior debt
NAMA paid the banks €31.8 billion for the assets it acquired — €30.2 billion in government guaranteed (senior) bonds and €1.6 billion in subordinated debt.
In 2012, NAMA was forecasting full debt redemption by 2020, and adopted a phased disposal strategy to achieve this. In 2014, NAMA accelerated its disposal programme and set a debt redemption target of 80% by the end of 2016.
By the end of 2016, NAMA had exceeded its target, having redeemed 91% of its senior debt. The redemption of all senior debt was completed in October 2017, significantly ahead of the original target.
NAMA reported a cumulative gain of just over €3 billion to the end of 2016. Subsequently, the NAMA Board announced that it expects to return a surplus of €3 billion to €3.5 billion to the exchequer upon completion of the Agency’s work, assuming market conditions remain favourable.
Up to the end of 2016, NAMA had generated €5.3 billion in rental and other nondisposal income relating to its loans. It incurred interest and similar expenses of €2.18 billion and €741 million in operating costs.
The largest expense recognised in the period 2010 to 2016 is the net charge made for impairment on loans and receivables of €3.9 billion
Realised value of assets
By the end of 2016, NAMA had generated sales proceeds of €32.2 billion — €21.8 billion through the sale of underlying collateral and €10.4 billion through loan sales. Over €25 billion (78%) of the proceeds were generated in the four years 2013 to 2016. Up to the end of 2016, NAMA reported a cumulative net profit on disposal of debtor loans and surplus income of €4.2 billion.
The examination reviewed the disposal process for a sample of 80 property disposals with combined gross proceeds of €2.7 billion. The review examined the valuations, open marketing and other aspects of the process. Overall, the examination found evidence that almost all of the sales reviewed were disposed of through an open competitive process, or with regard to market prices.
The examination also reviewed the processes applied by NAMA in eleven loan sales covering the period 2011 to 2016. Two of the loan sales were not standard loan sale projects. In the case of three of the remaining nine loan sales, departures from the standard procedures were noted — the circumstances which gave rise to the non standard process are explained in chapter 6.
Rate of return
The Act requires NAMA to obtain ‘the best achievable financial return’ for the State. In 2014, NAMA set an entity return on investment (EROI) target of 20% to be achieved over its projected lifetime. NAMA’s projected EROI as at the end of 2016 was 33% i.e. 1.6 times the target. However, this measure does not take account of the time value of money.
While internal rate of return is a standard performance metric for property-related investments, NAMA does not use that measure. The payments to the banks were based on projected cash flows for each loan, discounted at an average rate of around 5% — an implied internal rate of return. At the end of 2012, the projected internal rate of return on the NAMA investments was around 3.8%, reflecting the decline in Irish property values that occurred after NAMA acquired the loans. In line with the subsequent strong recovery in the property market, the projected internal rate of return as at the end of 2016 is around 6.2%.
NAMA adopted a secondary objective, expressed in general terms: to make a positive social and economic contribution across the broad range of activities. The Board expressed this in strategies, viz
♦ facilitation of the delivery of residential units, and
♦ facilitation of the delivery of Grade A office accommodation in the Dublin Docklands
Strategic Development Zone (SDZ).
In 2014, NAMA committed to delivering 4,500 new residential units to service the Dublin market over the three years to the end of 2016. In 2015, the target was replaced with a national target of 20,000 up to the end of 2020. NAMA estimated the total funding required for the 20,000 units would be in the region of €5.6 billion. At the end of 2016, it had delivered 4,647 units and was forecasting the delivery of 3,500 in 2017 and a further 14,000 between 2018 and 2020.
In relation to the SDZ, the Board approved in 2014 initial strategies for the NAMA controlled sites and estimated gross development costs of €1.9 billion in the period 2016 to 2020.