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DCU Business School - Developments at DCUBS

DCU Business School


Conor McKeating, Lecturer in Finance at DCUBS, asks:

Could the National Asset Management Agency (Nama) overpay and underpay for Assets at the same time?"

29th April 2009

Conor McKeating, Lecturer in Finance at DCUBS

"Financial commentary since the proposed establishment of Nama has focused on the degree to which it will overpay for assets from the banks or, specifically, how it can avoid overpaying without relieving banks of their capital reserves.

The idea that Nama can overpay relies, in the first instance, on knowing what the price of an asset is. this is tacit acceptance of efficient markets, the belief that the market always reflects all available information and that a unique value, set by the interaction of supply and demand, exists for every asset. But what if a unique value does not actually exist?

At present, the market for development loans, and indeed the land provided as security on these loans, is inactive. in markets such as this, where assets are highly illiquid and demand is very low, transactions are only likely to occur at deeply discounted prices. Therefore, if one considers this depressed market price is the true value, Nama will almost certainly overpay (relative to the current market valuation).

However, what if there is another, "hold-to-maturity", valuation of these development loans, which reflects cash flows and other returns over their lives? If one can calculate an inherent valuation that reflects total expected returns and embedded value over the lift of the asset, it is conceivable that Nama will pay fair value for these assets, or possibly even underpay in some cases.

Therefore, while Nama is likely to overpay relative to current market prices, it is also conceivable that it will pay fair value, or perhaps underpay, relative to some fundamental valuation."

The above piece appears in the 26th April 2009 edition of the Sunday Independent