There was a fairly lengthy piece in the Saturday Weekend Review of the Irish Times about the philanthropic developer and businessman Niall Mellon.  I have a lot of time and admiration for Mellon’s energy, entrepreneurship and housing development works in South Africa.  However, his views about the causes of the crash and the role of developers in Ireland’s woes seems way off-beam and, at times, contradictory.  On the one hand, developers apparently played little or no role in the collapse and have been the victims of a witchhunt and, on the other, they have a duty of shared responsibility to pay back debts.  Here’s a selection of what he had to say:

“What happened” was the collapse of the Irish banks in 2008. One day he was a developer worth more than €150 million; the next he had nothing. “The night the banks collapsed I went to bed a hero and woke up a villain. That’s what the Irish State did.”

Two years after what he passionately describes as a “witch-hunt” against developers, he surrendered his Mount Merrion home on five acres to Nama. “And – what people couldn’t understand – I also handed over another dozen properties I owned, unencumbered, with no bank debt whatsoever, any of which would have paid my mortgage for several years.” …

“Irish people need to remember there was no property crash in Ireland; there was a bank collapse that caused a property crash. Two different things. Fianna Fáil were desperate to blame anyone except themselves and heaped pain on developers. It was an absolutely disgraceful effort by the then government, and it hasn’t been much better under this one. But this year Frank Daly, the current chairman of Nama, came out and said it was the banks, not the developers. So developers need to be fairly judged now. Everyone is forgetting developers only built to satisfy demand.”

The last paragraph is the one that many people will have problems with.  The conventional reading would be that the banks collapsed because they had over-extended themselves by lending finance to developers in a bubble and oversupplied market (unlike elsewhere where banks were caught in the maelstrom caused by the complex deriatives of the US subprime market).  Given that developers sought this finance, to intimate that they are an entirely innocent part of the banking collapse or that the fault lies simply with banking practice and government policy appears disingenuous.

It was developers who drove property development and borrowed the money for ambitious and risky property schemes; it was developers that contributed donations to political parties and strongly lobbied government about laissez-faire planning and finance; it was developers who drove up land prices and helped egg-on property prices; it was developers that flooded the market with excess housing and commercial property; it was developers who build estates compromised with poor building materials and weak safety standards. Developers did not only build to satisfy demand – they created huge oversupply with respect to residential and commeercial property which still exists and will do for quite some time in many parts of the country. And commercial property has been as much the problem as houses and apartments.  The legacy of unfinished estates, zombie hotels, ghostly retail parks and office developments, pyrite-infected homes, and a reading of Breakfast with Anglo or Anglo Republic or Ireland’s House Party or Namawinelake attests to all of this.

Admittedly, not all developers were the same and they ran their businesses in different ways and with varying ethos.  Nevertheless, as a collective group developers do share responsibility in the collapse in the country’s fortunes along with banks and government.  The idea that developers are simply innocent victims of the crash is delusional and smacks of an attempt to re-write the narrative of history so that they are more favourably judged.  It simply doesn’t wash.

Mellon himself does seem to accept this notion of shamed blame and responsibility.  He continues:

“I wanted to accept my share of the responsibility. Part of that was moving out of a big house. Part of it was keeping unencumbered assets and giving them to Nama.

“There has to be a shared responsibility and a shared approach to solving this. So if you borrowed money you sell your assets to pay back as much of that loan as you can, and when you’ve done that you should be set free, in recognition of the fact that there was a systemic collapse of the financial governance system with the Irish banks.”

He could have opted for “the easy choice” of bankruptcy in the UK but decided against it. Pride was one factor; another was a sense that he could do a better job disposing of assets than a receiver. He has also managed to pay “95 per cent of debts due to a few hundred small creditors. So that’s nearly finished,” he says.

And fair dues to him.  Unlike other developers who have run for the hills or have sought to shift assets or fight Nama, Mellon has seemingly got on with addressing his various obligations.  Having read the piece, I’m inclined to try and judge him fairly, but at the same time I’m not prepared to accept many of his assertions with respect to the innocence of developers in creating the conditions for the crash or to rewrite history.

Rob Kitchin

As reported in The Irish Times on Wednesday and on NAMAWineLake it seems there might have been a fundamental change in the extent to which NAMA will pursue developers for repayment of loans.  As Vincent Browne noted, in the NAMA debate in the Dail the then Minister for Finance, Brian Lenihan, stated:

Let me be clear – Nama is not designed to be and will not be permitted to operate in practice as a bailout mechanism for developers who have operated irresponsibly.  The amount a borrower owes will not change because of the transfer of a loan from his bank to Nama. The agency will have a statutory duty to maximise the taxpayers’ return and will therefore be expected to use its entire means to this end. The Bill also provides the agency with the wide range of powers it needs to pursue borrowers and enforce security.

However, on Saturday Night Show on RTE1 (clip below), the developer Harry Crosbie stated:

HC: “The money we’re going to pay back is what they [Nama] paid.  That’s the only money.”

[…]

BOC: So the amount that was taken off on the haircut that we [the taxpayers] paid through recapitalising the banks effectively …

[HC] That’s correct, I will pay that back

[BOC]… that money’s gone?’

[HC] ‘Over above the haircut is gone.’

[…]

[BOC] ‘I paid crazy money for a house, but I have to pay back every penny of that. And I have to face those consequences.  Do you get that people might be looking and thinking, so he’s going to pay back, whatever, half the money, what NAMA paid for it, and we pay back the rest of it and Harry is laughing like.’

[HC] ‘I’m not saying it’s going to happen [but]  there’s no other way it can be fixed.

[…]

[BOC] ‘So we all just have to accept there is a lot of money gone?’

[HC] ‘Correct, correct.’

 

In other words, if a developer borrowed €100 million from Anglo for a failing development, and the loan was transferred to NAMA with the average haircut of 58%, then he expects to only pay back €42 million.   Now, not only has the developer been saved from going bust, which he would have done without NAMA stepping in to take on the loan, but he’s also had his debt radically reduced, and the €58m loss to the banks is being picked up in part or full by the state.  This distinctly sounds like a bailout for developers at the citizens expense.  As Vincent Browne notes, however we look at this it is not maximizing the return to the taxpayer.

.

NAMA’s response so far: “The priority of Nama is to recover the amount Nama paid for the loans Nama would pursue the full amount in many cases, depending on the level of co-operation they had received from the borrower but often there was no point.”   That’s it.  It seems to me that there is a point in pursuing Harry Crosbie given his confidence as to how his developments will turn out.  At least he should fail a whole series of stress tests before the pursuit is abandoned, or the debt repayments restructured over a much longer period, or the asset be transferred either in part or full back to the loan holder as happens when a home owner fails to pay back a mortgage on a house.

NAMA has been critiqued by both the Right and the Left.  For those on the Right, NAMA represents state interference in the logic of the free market, disrupting its ‘natural’ recovery by artificially controlling large elements of the property market and protecting failed developers and speculators in the short term who otherwise would have gone bust, thus blocking the growth of more resilient players or new start-ups.  For those on the Left it protects those who created the crisis but it does nothing to protect home owners and tenants struggling to pay mortgages and rent and who are also underwriting NAMA’s costs (and do not have access to debt forgiveness).  It seems that both of them are correct.

What NAMA is up to on behalf of the nation clearly needs to be more fully explained.  These kinds of relevations should not come out through a chat show.  Are decisions about debt forgiveness being decided by NAMA alone on behalf of the nation or have the government made this decision?  In either case, where is the public debate on the issue?  It is after all a state investment on behalf of citizens.  A key priority it seems is for NAMA to be opened up to freedom of information and the rationale for their strategy and decision making made much more transparent.  There is a lot to learn here from the Resolution Trust Corporation in the US who were much more open and clear about what they were doing and why.  They understood that good communications builds understanding and trust.  We deserve the same.

Rob Kitchin

Willie Penrose T.D., Minister for Planning and Housing, published two documents through the Department of Environment, Community and Local Government today relating to unfinished estates.

The first is ‘Resolving Ireland’s Unfinished Housing Developments: Report of the Advisory Group on Unfinished Housing Developments‘, which sets out the various issues relating to unfinished estates and makes various recommendations with respect to addressing these issues.  It extends the Advisory Board’s draft report published back in February.

The second is the Department’s response: ‘Resolving Unfinished Housing Developments: Response to the Advisory Group on Unfinished Housing Developments‘.  This sets out four strategic aims for the next twelve months (developing a coordinated partnership approach to unfinished estates; tackling issues of public safety; putting in place stronger legislation/policy frameworks to tackle issues; building confidence in the housing market) and a number of action points for the Department and related agencies.

There are two other associated documents that have yet to be published – the manual on how to tackle in practical terms the issues related to unfinished estates (which will be an updated version of the draft manual published in Dec 2010) and the code of practice.  These are due shortly and will give more specific information for developers, local authorities and other stakeholders.

The Department’s response piece is, in my view, the more important document because it commits the DECLG to 20 actions set out in relation to five themes.  The most important of these are the development of Site Resolution Plans (SRPs) that will involve a partnership approach to estate completion, whereby all stakeholders (developers, banks, local authorities, residents, estate management companies, Health and Safety Authority, etc) will meet to negotiate a plan of action on an estate by estate basis.  The action points in summary are:

Coordination and Partnership

1.    A National Co-ordination Team on Unfinished Housing Developments, under the chair of the Minister, will drive the implementation process, with a particular focus on resolving sites.

2.    City and County Councils will each establish Unfinished Housing Development Teams to co-ordinate actions at a local level and to provide regular reports to the National Co-ordination Team.

3.    A Code of Practice on issues such as public safety, the site resolution plan process, information exchange and identification of development solutions will be finalised by the National Co-ordination Team to ensure buy-in by developers, site owners, funders, local authorities and residents.

4.    In cases where the relevant loans / securities fall within their remit, NAMA will work with local authorities, developers and/or receivers and the Department in facilitating early resolution of public safety issues and in co-operating with the other stakeholders in agreeing and implementing Site Resolution Plans, where feasible and appropriate.

5.    The Minister will engage with other financial institutions (both domestic and non-domestic banks) to ensure a full understanding of their statutory responsibilities and to secure their co-operation and engagement with local authorities and developers in addressing public safety issues and in agreeing and implementing Site Resolution Plans.

6.    An Information Pack for local residents in unfinished housing developments will be prepared and published by the Housing and Sustainable Communities Agency.

7.    Guidance will be issued to City and County Development Boards on encouraging and facilitating community involvement in resolving unfinished housing developments.

8.    A best practice Guidance Manual on Managing and Resolving Unfinished Housing Developments on unfinished housing developments will provide practical guidance for local authorities and other stakeholders on how to manage unfinished housing developments

Public Safety

9.    Local authorities will complete their own initial categorisation of unfinished housing sites in line with the four categories identified in the Advisory Group’s Report and will monitor the developments in their areas, updating regularly the National Co-ordination Team on the status of housing developments in their area.

10.    The Department will expedite the approval of applications for funding support from the €5 million public safety initiative funding with the first allocations to be made in June 2011.

11.    Local authorities and the Health and Safety Authority will continue to liaise and engage in monitoring incomplete sites and any resolution activities being undertaken either by the developer or local authority.

12.    The Department will provide ongoing technical assistance to local authorities on the categorisation of developments, on the formulation of an initial site response using the funding at 10) above, on the preparation of Site Resolution Plans, as well as planning and building control queries.

Site Resolution Plans

13.    City and County Unfinished Housing Development Teams will identify priority sites that should be the subject of Site Resolution Plans and will work with site owners, developers, funders and residents in their efforts to develop such plans, reporting to the National Co-ordination Team, with a view to ensuring that 300 Site Resolution Plans are in place by end 2011.

14.    City and County Unfinished Housing Development Teams will develop best practice approaches to the re-use of vacant housing in each of their areas by the end of 2011.

Legislative and Policy Framework

15.    The Department will immediately review existing legislation as identified by the Advisory Group and develop any necessary amendments to the legislation to ensure that there are adequate powers available to address the efficient resolution of unfinished housing developments

16.    The Department will review taking-in-charge standards for public infrastructure within housing developments such as roads, public lighting and piped services with a view to making recommendations on how best to develop national standards.

17.    The Report of the Advisory Group will be referred to the Building Standards Compliance Group for its analysis and response.

Housing Market and Planning Supports

18.    The Department will re-state previous planning guidance to planning authorities on specific policy aspects regarding better phasing of development, the provision of bonds / securities and other DECLG policies as regards sequential and phased development to inform the resolution of unfinished housing.

19.    The Department, working alongside local authorities and voluntary housing bodies, will engage actively with developers and site owners, including NAMA, in seeking to ensure positive uses for vacant complete and near complete housing and in line with the achievement of sustainable communities and balanced tenure of housing developments.

20.    The Housing and Sustainable Communities Agency will undertake an examination of the potential role for self-build and equity partnership type models to enable residents and new investors to assist in resolving unfinished components of housing developments.

What is good is that the DECLG have now appraised the situation and set out a set of action points.  It is particularly good to see a National Coordination Team being put in place and that legislation is going to be reviewed with a view to putting SRPs on a statuary basis and make amendments to existing legislation to aid their implementation.  I do, however, still have a number of concerns.

First, the speed of response.  We are four years into the housing crash and the development of the unfinished estates phenomenon.  It has taken 15 odd months to get from the announcement of a survey to a report and yet a lot of these action points are still at the reviewing and assessment/formulating solutions stage.  In the meantime, lots of people are living with a whole series of issues, many of them concerning health and safety.  The latter has been an supposedly urgent action point for quite some time.  It is true that some local authorities and developers/receivers have already moved to address some of these issues, but it is only now that the first €1.5m of funding is being released to LAs to tackle issues on the worst 230 identified estates.  The aim is to have 300 SRPs in place by the end of the year.  That is 10.5% of all estates (2,846) or on average 9 per local authority.  It’s not clear also whether that is 300 SRPs drawn up or actually in the process of being implemented.  We need to get to the implementation phase across all estates sooner rather than later.

Second, finance.  Finishing off estates and addressing their various issues is going to cost money.  There are 1,655 estates with works outstanding.  At present, there seems to be four possible sources of funding: developer bonds; the DECLG through its €5m public safety fund; NAMA and its development fund; developers/banks who own the estate or possible new investors.  There seem to be massive issues in drawing bonds down and if they can be accessed they are often insufficient to complete outstanding works.  The DECLG €5m split across 1,655 estates is €3200 per estate, which will hardly scratch the surface; NAMA will only invest in estates that are commercially viable and for which they hold the loan book; developers are bust and banks illiquid.  It really isn’t clear to me where the finance is going to come from for either developers or local authorities (where developers are absent) to finish off estates without central government funds being made available (and no such fund was announced today beyond the €5m).  One suggested solution is to recoup the costs from future sales, but again this would only work if an estate is commercial viable, investors come in, and market conditions improve in the short to medium term.  I would like to know a lot more about plans with respect to financing and I’m sure stakeholders would as well.

Third, I am still concerned that the model for SRPs is one of partnership and has the feel of voluntarism about it.  SRPs seek to encourage and not compel developers and stakeholders.  The two documents today are full of phrases like ‘encouraged to work’ and ‘should undertake’ rather than be ‘compelled to work’ and ‘will undertake.’  Without the new full manual it is difficult to fully comment on this, but it also still seems as if there is no conflict resolution mechanisms or clearly delineated objectives, milestones and timeframes for SRPs.  The danger is that negotiations become divisive and fractious and implementation effectively gets kicked down the road.  The role of the National Coordination Team is also not clear.  It seems to have some monitoring function, but its not clear if it’ll be hands on in terms of overseeing, assessing and directing progress and what it’ll do if SRPs are failing.

The next stage is clearly the publication of manual and the code of practice.  Hopefully they will turn up soon.  Today’s report and the DECLG’s response is a step in the right direction, but whether the action points and strategy being pursued will deliver, or deliver significant improvements for residents any time soon, is still an open question.

Rob  Kitchin

I was told a story at the weekend of a group of developers getting together to toast the creation of NAMA with champagne when it was announced by Brian Lenihan.  How true it was, I’m not sure, but I can easily imagine it happening.  Here was an institution that was going to keep them from bankruptcy and losing everything in very short order.  Sure, they would still have to pay back the state, but the state had been very good to them over the past few years and would continue to help them out on favourable and flexible terms whilst they dealt with the crisis facing them.  They’d be able to carry-on living their champange lifestyle whilst the state helped get them back on their feet in time for the next property bubble. And a lot of the public felt the same thing – NAMA was a bail for developers and failed banks, not simply a mechanism to save the Irish economy.

Frank Daly, the Chairman of NAMA, made a speech yesterday to the Leinster Society of Chartered Accountants (reported in the Indo, IT, RTE), that noted that many developers are clinging to their old ways and lifestyles stating, “Certainly not all of them have yet abandoned the extravagant mindset of the 2003-2007 era”.  A few weeks ago Brendan McDonagh, NAMA Chief Executive, told a Dail committee that indebted developers were “displaying obvious wealth almost in defiance of us”.  Both Daly and McDonagh have made it clear that those developers who think that NAMA is a vehicle for them to continue to live champagne lifestyles are in for a rude awakening.  Yesterday, Daly detailed that NAMA is going to undertake the due diligence on loans and business plans that were quite clearly absent during the Celtic Tiger years, arguing that, “Our approach has been fully vindicated by what has emerged to date in terms of sub-standard loan documentation and of assets not properly secured,” and that developers are “fully aware” of what is expected in terms of the “thoroughness and stringency of their business plans”.  He went on to state that no borrower is too big to fail, which suggests that there might well be some significant casualities in the coming weeks and months.  Daly also went on to criticise the planning process, questioning how many shopping centres or apartment developments a medium-sized town could accommodate?  Clearly a question that some towns have answered the hard way, with hundreds of empty units that may remain as such for quite some time.  A similar question could be asked of hotels and office blocks.  It’ll be interesting to see what happens to the sales of champagne in Ireland over the next couple of years.

Rob Kitchin