The setting up of an Advisory Group is a significant development for NAMA and may just prove the ‘watershed’ moment that was anticipated following the Geoghegan review in October. But we can likely expect some friction with the NAMA board.

People will rightly focus on the tax, spend and cut elements of Michael Noonan’s speech today, but there was also some important information given about the future operation of the National Asset Management Agency (NAMA).

In October it came to light that Minister Noonan had authorised a review of NAMA’s operations and that he had asked Michael Geoghegan, former CEO of HSBC to do this. Following that review, a member of the NAMA board resigned, stating that significant changes to NAMA were on the way. The review was “a watershed in the life of Nama” he said and would result in “changes to the structure of the agency”. With no official information released, speculation in the media was rife.

The Geoghegan review had come as NAMA was completing its first phase: acquisition of its full loan portfolio of €31.7Bn. The second phase would see the Agency shifting its attention to focus fully on managing the assets in the portfolio with a view to realising the public’s ‘investment’. Before the Geoghegan review there had been much criticism, public and private, as to whether NAMA had the people or the expertise to handle this new phase successfully. Comments from the departing board member appeared to confirm that it did not.

At a meeting of the Public Accounts Committee (PAC) on the 26 October, I quizzed officials as to the outcome of the Geoghegan review, with the Chairman of the NAMA board, Frank Daly, not yielding too much. It was “confidential” he said. Mr Geoghegan had given a verbal briefing to the board of his review, with a number of suggested recommendations. He then gave the same to the Minister, but nothing was written down and no final report was prepared. This meant that either Mr Daly or the Minister would have to give it up.

While Mr Daly remained tight-lipped, the Minister indicated separately his intentions to make some of the recommendations from the review known at a later date. Meanwhile a second member of the nine person board resigned. It seemed certain that a significant change was coming.

And it has now come, with the announcement today that an Advisory Group (AG) to the Minister on NAMA’s operations is to be established. Its purpose will be to advise the Minister on “NAMA’s strategy and its capacity to deliver on that strategy through property disposal and the ongoing management of assets.” More specifically, the AG will:

• Help identify candidates for the NAMA board (and these candidates will have entrepreneurial and property skills);
• Make recommendations on strategies for attracting international capital to Ireland; and,
• Provide advice on lessons learned from asset management agencies in other countries.

NAMA will be directed to cooperate with the AG through the establishing Act of 2009. (So, no change to legislation, as was speculated, but a new order from the Minister under the Act.)

This is a significant development for NAMA. Why?

For one, it confirms that the board is lacking the required expertise for the discharge of its duties as it enters this new phase. That’s an important thing to understand, but it’s perhaps more important that action is being taken to change that fact. It is unlikely that this would have happened in the absence of the Geoghegan review. The Minister is to be congratulated on this.

Secondly, attracting international capital to Ireland is absolutely key if NAMA is to be successful – and there is much external interest. Establishing this as a priority of the AG means that now hopefully serious moves will be made in this direction. Use of the word ‘strategies’ for attracting that investment might point to possible portfolio arrangements, whereby less desirable assets would be packaged with more attractive ones. This is probably necessary for NAMA to successfully meet its obligations.

It was also announced by the Minister that there will be a reduction in the stamp duty rate for commercial properties from 6% to a flat rate of 2%. This should also be a big help to the Agency as it begins to move more Irish properties off its portfolio.

It will be interesting to see how the AG interacts with the Agency in practice and how ‘hands-on’ the Minister will choose to be on foot of its advice. Expect some friction. Chairman Frank Daly seemed to infer at the PAC that while there would be some changes following the Geoghegan review, even structural ones, these would not be significant. This doesn’t fit in my opinion with what the AG is being set up to do. And it certainly doesn’t chime with the comments of one of the resigning board members.

The size of the AG and the formality of its structure will be important considerations. A more fluid membership than the rigid structure of the traditional board system might be an advantage here. This new dimension to the Agency’s operation also provides an excellent opportunity for increasing transparency of the Agency’s activities. At the very least, if its advice was made public, we could measure NAMA’s operation against something.

This is an opportunity to bring more expertise and more focussed direction behind the NAMA project, and it is needed. With an estimated 20% drop in property values since the transfer price paid by NAMA, the possibility that the Agency might require some form of recapitalisation at a future date is very real. The very minimum that must be recovered is €31.7Bn over the next eight years. All relevant resources should be brought to bear.

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Separately, the Minister also announced that legislation would not now be introduced to tackle upward only rent review clauses in existing leases. NAMA had previously anticipated that such legislation would reduce the value of its Irish portfolio by as much as 20%.

This will be a blow to many, but NAMA has advised the Minister that it will publish its policy guidance for dealing with tenants experiencing difficulties arising from upward only rent reviews. The guidance does allow for NAMA to approve rent reductions, it allows for the appointment of an independent valuation of market rent, and it allows tenants to approach NAMA directly where landlords are not being cooperative.

Of course it’s not what those experiencing genuine difficulties with their existing leases were looking for, but insofar as NAMA’s operation is concerned, the publishing of the policy guidance is a welcome measure. NAMA is nowhere near as transparent an organisation as it should be and anything that sheds light on how it conducts its business is a positive.