Nama chief executive Brendan McDonagh seemed to take an almighty swipe against the developer brethren last week, accusing them of hoarding land. It was a classic diversionary tactic. The central tenet of the argument is that Nama sold sites with planning for 50,000 houses through land and loan sales, and to date the total number of houses built was just 3,000.
He used the example of a site that cost €50,000. If the value of the houses in this area rises from €300,000 to €430,000, then, as building costs are relatively flat, the value of the site will have risen to €180,000 — it is not in the interests of the speculator to build or sell.
It was a curious comment. McDonagh had just defended Nama’s own less-than-stellar track record on housebuilding. He said that, up to 2014, Nama did not really build houses because the housing market was in a slump. Prices would not cover the cost of building. Indeed, McDonagh stressed, by law the agency must get the best price for assets. This is also a fundamental law of commerce. If it was uneconomic for Nama to build houses up to 2014, then surely it was similarly uneconomic for the buyers of Nama’s development land. Nama sold the development land at a profit. So the purchasers’ sites will have cost considerably more than those with the state agency.
Nama purchased loans in 2010 when the underlying collateral, development land, was practically worthless. Unlike all other players in the market, its cost of capital is minimal. So nobody had a better incentive to build more than Nama. Perhaps the agency is too busy monitoring other people not building houses to build houses. How very civil service.
There is a slice of truth to the land hoarding. Yet by far the biggest culprits are investment funds, not developers. And government has nobody else to blame but itself.
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Finance minister Michael Noonan said the government was considering a vacant site tax to penalise hoarders. This is a joke. The same minister introduced capital gains exemption, which actually incentivised these funds to buy land and hold it for a period of seven years. No fund in its right mind would sell land before seven years and hand over one-third of its windfall to the state.
The exemptions were introduced solely to assist Nama. The agency is by far the biggest hoarder of land, not because it is speculating. It simply has too much. It is overwhelmed. It is paying receivers vast sums to sit on these tracts of land and effectively do nothing.
If the Comptroller & Auditor General really wanted to do the state some service, it would investigate whether Nama is getting value for money on its professional services.
The financing of housebuilding is still extremely costly. The planning system is completely broken. Even a plan to fast-track developments of more than 100 homes directly to An Bord Pleanala seems to be stuck in the legislative slow lane.
While a land levy is a perfectly sound idea, it would represent brazen cheek to start levying land that is locked in a Kafkaesque planning system. It might encourage the funds to sell, but given the failings of the system, who would buy?
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Still, it would be popular, and in the end that is all that seems to matter.
Bank float is a balancing act
For the last five years, the price has been completely wrong. In the next week, the price will have to be right. Due to the technical madness of a 0.1% free float, AIB shares traded last week close to €7. The company brokers are guiding that the upcoming share sale will be priced at €4.40 to €4.90, before any discount.
As the horse trading begins in earnest, it will be all about the discount. Raising up to €3.5bn, even in this market flush with cash, is a big task. This is a very large order book.
It is hard to believe that the bank will get away with simply running with the Ireland recovery story, or a revival of the mortgage market. It is believed to be guiding a return on equity of 9%, which is hardly eye-catching. Its digital capability is like leather upholstery — a nice optional extra but hardly a reason to buy. What market makers really crave is a good income story, and here AIB does not seem willing to go the extra mile.
Having just resumed paying a dividend, this is entirely understandable. Regulators are also likely to seek a balance between chipping away at its non-performing loan book and hiking the payout. Investors will want a clear indication as to whether the bank is in any way hamstrung in this regard.
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The bank is a still long way off the European average of a payout of 50% of profits. Even if the bank says it will trend towards the average, who wants to buy average?
Demand will be strong, yet only at the right price. Over the coming four weeks expectations will have to be managed. The state will be mindful that it still has another 70% to sell. It’s not likely to be too aggressive, yet it cannot be too generous either.