NAMA to stimulate commercial property market

NAMA to stimulate commercial property market

It would appear from two recent keynote briefings given separately by Frank Daly, the chairman of NAMA and Brendan McDonagh, the CEO of NAMA that NAMA is now turning its attention to disposing of some of the assets that it has acquired with a view to decreasing its loan book.

On 19th May last both speakers outlined to their respective audiences a proposal which is aimed at stimulating activity in the commercial property market through the use of "vendor/staple financing" which is designed to enable the acquisition of assets by third parties who are unable to secure more conventional bank funding.  These types of transactions, the agency advises, are typically used to finance the sale/acquisition of commercial investment type assets that are income producing such as shopping centres and offices. 

Vendor financing is a form of lending in which a vendor lends money to a purchaser which is then used by the purchaser to acquire an asset from that vendor.  In the case of property transactions it usually takes the form of deferred loans from the vendor to the purchaser.  The interest rate offered by the vendor is normally higher than that offered elsewhere making it attractive for vendors in a position to fund the transaction. Conventionally the success depends on vendors who are either cash rich or have access to finance and are willing to take on risk when disposing of assets and whether this model of financing will prove popular in the Irish commercial property market remains to be seen.  NAMA envisages using vendor financing with purchasers injecting equity capital of 25 to 30 per cent of the purchase price with NAMA providing the balance by way of vendor finance with the loan being repaid over a period of 5 to 7 years.  The mechanics should not differ that greatly from the traditional financing model where a third party lending institution is involved however in the vendor financing model the vendor will be sharing the risk of the purchase with the purchaser over the lifetime of the loan. 

NAMA believes that making vendor financing available on the market will encourage purchasers to buy in a distressed market and should have the effect of setting a floor for the commercial property market.  Of course, in such transactions NAMA will only be providing the vendor financing where it has enforced its security and is selling the assets as either mortgagee in possession or through a statutory receiver. 

In the briefings NAMA advised that it is seeing "tentative evidence to suggest that we may be close to the bottom of the cycle in Ireland" in relation to commercial property transactions.  The agency also advised that it is seeing "a lot of interest from international professional investors who have a more long term performance horizon in mind and who are interested in acquiring strong income-producing assets which will provide a steady return over time". While this is encouraging there is little evidence of an increase in transactions in the first half of 2011. There has yet to be any published reports of assets having been disposed of by NAMA through vendor financing and it is therefore a case of wait and see.

By Louise O'Donovan, Partner and Michelle O'Donnell, Associate.