The committee invited us today to discuss the operations and functioning of NAMA, including the recently-published 2016 annual report and financial statements. I am pleased to report we generated a profit of €1.5 billion in the 2016 financial year. Taking into account the profit of €1.8 billion reported for 2015, this brings to €3.3 billion the cumulative profit reported since we last appeared before this committee in late 2015. This strong performance reflects the impact of market recovery but also the detailed, professional asset management and corporate finance work that had been put in place by NAMA in earlier years towards enhancing asset values through focused planning work, remediation and capital expenditure.
Since we last appeared before the committee, we have redeemed €7.6 billion in senior debt. That leaves only €500 million to be redeemed later this year from the original €30.2 billion that we issued in senior debt. The €30.2 billion has been redeemed from cash generated by debtor asset sales and by NAMA loan sales. The reason we no longer have a contingent liability of €30 billion potentially falling on Irish taxpayers is that international and domestic investors have invested heavily in Irish property assets since Ireland exited the troika programme at the end of 2013. That has enabled NAMA to generate almost €40 billion in cash from inception to date, including €5.4 billion generated in 2016. The carrying value of our loans at the end of 2016 was €3.9 billion and over 80% of our residual exposure is to assets located in Ireland. Our exposure to UK assets is now relatively low. When we acquired loans from banks, the associated UK asset portfolio was valued at over €12 billion; that portfolio has now fallen to less than €600 million.
With regard to our residential delivery programme, part of NAMA’s residual loan portfolio is secured by sites that have capacity to deliver houses and apartments in the years ahead. There has been much talk of the shortage of housing in urban areas and the reasons supply has been slow in responding. In my view, the principal explanation for the supply shortage was that residential prices fell by over 50% between 2007 and 2013 and only in recent years has it become commercially viable to build houses again. No funder, be it NAMA, banks or otherwise, could have funded the building of housing unless it was profitable to do so. Apartment schemes are still very challenging to fund given the planning requirements and restrictions. Our role in residential delivery must be understood in that context. To the extent that we fund any residential development by our debtors, it is to ensure that we maximise the return from the sites and thereby maximise the debtors' debt repayment. We will only fund residential development that is commercially viable; which is under the control of co-operative debtors and receivers; and, importantly, which is under the control of debtors who have a proven capability to deliver quality houses and apartments. Sites which do not meet these criteria and the loans secured by them are subject to sale. We can only fund residential development projects that generate a better commercial return through funding than they would generate from alternative options such as the sale of the sites concerned. A debtor or receiver will want to maximise the debt repayment and therefore it is important that the management and disposal of the asset yields the highest return.
There has been some commentary to the effect that NAMA should not sell its interest in residential sites to international funds and that instead any sales should have been restricted to domestic developers. The reality is that under our legislation, we could not have limited the field of potential buyers if the effect of doing so was to reduce the sales proceeds generated by sales. In any event, these funds bought less than 40% of interests in sites sold and they did so mainly through loan sales. Crucially, under our section 10 objective, we cannot refuse to sell to funds or any other financial institutions that submit the best bid for the asset concerned. We are obliged to get the best price. This is normally achieved through open marketing of loans and assets. We depart from the open marketing policy only if a better price can be achieved through a more restricted sales process.
It has also been suggested that as part of its asset and loan sales, NAMA should have imposed covenants requiring purchasers to develop sites within certain predetermined periods. There are two difficulties with such an approach. The first is that it would have led to discounts on the prices achieved on the assets and sales concerned. The second relates to the doubts as to the enforceability of such covenants; I am not convinced one can force a purchaser to develop a site if he or she considers it unprofitable to do so. We have a number of licensing arrangements in place and are actively reviewing the feasibility of other potential licences. Generally speaking, licensing arrangements are suitable for sites controlled by receivers. They usually involve smaller builders who acquire the development rights by paying a small amount upfront and who then build out the sites and pay us as houses are sold.
For reasons I outlined, we fund sites that are commercially viable to develop and which are under the control of co-operative and capable debtors. We have and will continue to dispose of our interest in other sites. Since inception, we have disposed, either through loan sales or through asset sales by our debtors and receivers, of sites with a capacity to deliver 50,000 units. Approximately 38% of these interests have been sold to financial institutions or funds; the remaining 62% have been sold to developers and other private purchasers. The committee may have noted from recent media coverage that some of the funds and financial institutions have established, or are preparing to establish, residential development operations with a view to actively funding the delivery of new supply.
We estimate that, at this stage, more than 50% of the 50,000 unit delivery capacity disposed of by NAMA is commercially viable to develop, although it is difficult to be certain about this in the absence of detailed project-by-project information. Approximately 10,000 of these units had planning permission or were in the planning system prior to sale. To our knowledge, only approximately 3,700 have been built or are under construction to date. Why are so few being delivered? In the short time available here, I will outline some of the many factors that are at play. There is no doubt that land hoarding is an issue, although it is not the full story. For any given site, there is little disincentive to hoarding as long as the owner expects house prices to rise. Costs remain relatively fixed, as illustrated by the table in my submission, and any rise in house prices translates into profit on land.
The fact that planning permission has been obtained does not make development viable in itself. Construction costs remained relatively stable during the financial and property crisis as prices collapsed. Therefore, the key factor in determining viability now is the sales prices that can be achieved on newly-built houses and apartments. In some cases, prices have risen sufficiently to make development viable but this is not necessarily the case throughout the country. For many residential sites it is not possible to proceed until such time as critical infrastructure is in place, including roads, sewerage and water services, schools and recreational amenities. The introduction of the local infrastructure housing activation fund programme is a welcome move in this respect. There are particular difficulties with the viability of developing apartment blocks which are, at best, commercially marginal at present. We need to build many more apartment blocks if we are to make a serious impact on new supply. Height restrictions that apply under current planning policy have an impact on the viability of commercial apartment development. In some cases, statutory development plans set a height restriction that is less than the most cost-effective scale. A city centre apartment development project that is not commercially viable at six to seven storeys is more likely to be commercially viable at 12 to 15 storeys, for example. The height restrictions currently applied, particularly in city centre locations, are no longer appropriate given current and prospective housing needs. Amending height restrictions to 15 storeys in city centre locations and perhaps to ten storeys in suburban areas merits serious consideration.
The provision of basement car parks can add considerably to the development cost of an apartment project. Most urban apartment schemes require basement parking as a condition of planning, usually on the basis of a car space for every two apartments. Basement parking costs are estimated, on average, to add about €30,000 per car space to development costs, and that must be added to the recovered price. Greater flexibility in the exclusion of expensive car parking requirements would improve the commercial viability of certain apartment schemes, particularly in city centre locations or locations already well served in terms of access to good quality public transport.
Finally, it is worth mentioning there are practical reasons the market can be slow to respond to supply shortages. In practice, the development process from initial site assessment to the start of construction takes at least two years. It involves assessing a site, resolving issues relating to services or legal title, employing a design team, completing pre-planning consultations, lodging a planning application, dealing with additional information requests from a local authority, awaiting planning permission, raising construction finance, tendering to construction firms, appointing a construction team and then starting to build. That two-year timeframe assumes all goes well but in many cases there are delays that may be caused by planning refusals, objections, legal problems or funding shortages.
After the preparatory period of two years or more, building commenced with the start-up phase and initial site works for roads and other infrastructure, and thereafter the completion of even a 100-unit housing scheme can take 18 to 24 months. For these very practical reasons, the house-building deficit is unfortunately not going to be resolved quickly.
