Taxpayers are facing a massive loss on the government's bank rescue plan, as leading property consultants warn that the value of the loans to be sold to the National Asset Management Agency (Nama) has already fallen below the 47 billion estimate made by the Department of Finance in September.
CB Richard Ellis, one of Ireland's biggest commercial property agents, says the combination of the 80% windfall tax on property, the ban on upward-only rent review contracts for commercial properties and the recent flooding mean that Brian Lenihan's original estimate will have to be revised downwards.
"We're in the process of valuing the first tranche of some of the loans of the 10 big developers for the banks," said Marie Hunt, the director of research for CB Richard Ellis. "The market value of some properties has certainly fallen, mainly in the area of unzoned land. Whatever the Department of Finance believed the land was worth in September, that figure would have to be reduced now."
A drop in the current market value of the loans will have far reaching consequences for the government. Currently Nama is planning to pay 54 billion for the loans, which includes an additional 7 billion estimate for their "long-term economic value". This is based on the assumption that property prices will rise 10% in the next 10 years.
If the loans are valued at less than the original estimate, and Nama pays less than 54 billion, the government could have to further recapitalise the banks. But if Nama pays the agreed 54 billion, the taxpayer faces massive losses.
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"If the value has even fallen 5% lower than expected, property prices would have to increase by much more in the next 10 years for Nama to break even, maybe by up to 30%," said Ronan Lyons, an economist with the property website Daft.ie. "The reality is that the loans can't be worth ¤47 billion now. The abolition of the upward only rent reviews on commercial properties, for example, will have a huge impact on valuations."
Hunt said that last week's ban on such contracts will have a negative impact. "The bottom line is that this clause reduces the value of an investment in commercial property," she said. "So when we're valuing commercial properties that are new to the market, like the ones that are going to Nama, there will be a downward drive on those valuations."
Hunt said the 80% windfall tax on development land was having a "disastrous" effect on land values. Under the original Nama bill, the tax would apply to land rezoned from agricultural to development use. A last-minute amendment in the Seanad provided that any rezoned land will be subject to the tax.
"It basically means there will be no trading of land at all," said Hunt. "In some cases land values had been marked down 80%, but this amendment means they will be marked down even more. It might have seemed like a slight tweak, but it will have a big effect on values."
Hunt said the recent flooding was certain to affect the value of some residential properties that will be transferred to Nama. These valuations will be the last to take place.