© Henley Business School 2008www.henley.reading.ac.uk Real Estate & Planning NAMA – An Irish Solution to Property Debt? Éamonn D’Arcy 05 May 2015

Insert footer on Slide Master Ireland – A Classic Real Estate Bubble Positive economic conditions promoted real estate investment by firms and household Public policy measures also promoted real estate investment by households Cyclical acceleration in price promotes speculation and over-evaluation - volume of outstanding loans increases and mortgage credit accelerates Lenders contribute to the bubble by supporting demand through arranging finance for potential buyers even for international purchases – Liquidity Most investors and developers had little supporting corporate infrastructure or access to capital other than through bank lending and majority had little or no obvious professional capacity related to real estate

Insert footer on Slide Master3 Real Estate Bubbles are not new! US 1920s – Residential US 1980s – Office Markets Japan – Commercial France (Paris) – Commercial UK late 1980s – Residential Asian Financial Crisis 1997 – Real Estate Bubbles a key feature – Thailand, Malaysia US Residential Spain Residential China Residential Ireland – Residential and Commercial

Insert footer on Slide Master Bubble Impacts –Re-pricing falling capital values –Non-performing real estate loans –Distressed assets –Overbuilding – market consequences –But time-frame of impacts far from uniform Key influences on market recovery –Growth Context –Institutional Structure of Real Estate Markets Professional Capacity, Innovation, New Players

Insert footer on Slide Master The Irish Bubble Many similarities with the Japanese Bubble –Bubble at the end of a prolonged period of growth –A very speculative bubble –Significant debt burden –Wider problems of economic competitiveness But Japanese Bubble more focused on Commercial Property In Japan post-bubble real estate problems lasted for over 15 years. –Poor growth rate a key issue In Ireland exposure to property debt created the need for urgent recapitalisation of the Irish Banking Sector

Insert footer on Slide Master The National Asset Management Agency (NAMA) A key element of the Irish Government’s approach to bank recapitalisation Remit acquisition of performing and non-performing real estate related loans from participating financial institutions Removes toxic real estate loans from balance sheets Institution receives a price based on NAMA’s assessment of the assets potential ‘long-term economic value’ Funds received recapatalise the institution

Insert footer on Slide Master NAMA Business Model Bank NAMA Borrower NAMA Perspective ► NAMA controls the relationship with the borrower and makes all decisions ► NAMA receives income on the acquired loan portfolios (usually floating rate plus a profit margin) – to the extent that such is recoverable ► NAMA pays an interest coupon on government bonds (floating interest rate) 3. Borrower continues to owe €100m to NAMA, despite NAMA only having paid €60m to Bank for the loan 1. Bank sells €100m loan to NAMA 2. NAMA gives Bank (say) €60m Government bonds in return Bank Perspective ► Reduces risk weighted assets (RWA) which have a high weighting for capital ratio purposes (which will somewhat mitigate the impact of any valuation impairment upon transfer) ► Removes the loans from the banks balance sheet that generally cannot be used for collateral purposes to access liquidity with Central Bank or other market counterparties ► Receives government bonds which can be used as collateral with Central Bank or other market counterparties for liquidity (zero weighting RWA) ► Banks will administer the loans on behalf of NAMA but control passes to NAMA

NAMA- An Outsourced Operating Model NAMA Legal: Arthur Cox Tax: PwC Loan Valuation: HSBC Property Valuation: JLL Audit Coordinator (KPMG) Master Servicer: Capita External valuers Property valuation: Panel selected Loan valuation: Panel of firms assigned to individual institutions Valuation workstream Data workstream Legal workstream Pre-loan transfer to NAMA Post transfer External solicitors Certification by CEO and CFO regarding material accuracy of submission Loan administration Data flow to NAMA NAMA project Bank project assurance process Legal DD: Panel selected

Insert footer on Slide Master Asset Transfer Complex Process –Assessments of asset quality central to the transfer process because of the need to establish long-term economic values –Essential to get this right for the long-run ability of NAMA to achieve its goals –Discounts higher than initially expected Estimated book value of loans transferred will be in the region of €80 bn. –Approximately two thirds of the assets are located in Ireland with the rest overseas (mainly UK)

Insert footer on Slide Master Key Tranche 1 Data Lending InstitutionAIBBOIEBSINBSAngloTotal Loan Balances € bn CMV of Property € bn LEV of Property € bn LEV uplift as a % of CMV 9.1%11.9%8.4%11.8 % 11.7%11% Total € bn Discount42%35%36%58%55%50% Source: NAMA

Insert footer on Slide Master NAMA – Going Forward Timing and Characteristics of Irish Economic Recovery –Essential for uplift in asset values given the dominance of Irish assets in its portfolio Transparency –Asset Characteristics – quality The need to interpret NAMA as a real estate entity and to plot its future course from this perspective –Learn from global best practice in particular with respect to asset management and disposal strategies –Use it to foster a REIT market? –NAMA as an Opportunity (Vulture) Fund? –Integration of NAMA as a player within the global real estate investment sector

Insert footer on Slide Master Putting NAMA in a Property Context NAMA 80.0 (50.0) € Billion GE Capital Real Estate US$ Billion Unibail-Rodamco 22.3 € Billion Westfield 28.0 US$ Billion GIC Real Estate 24.0 US$ Billion Blackstone Real Estate 23.7 US$ Billion Hines 22.9 US$ Billion Simon Property Group US$ Billion Land Securities – 10.0 £ Billion