Trouble in Ireland

Trouble in Ireland

Recent headlines have been splashed with stories about the impending insolvency of Ireland and the immediate need to shore up its failing banking system. Although not entirely a big shock given the burst of the real estate bubble that has crippled the banking sector, it appears that Ireland is heading down the same path as Greece, but on an even larger scale.

A little over a year and a half after the National Assets Management Agency (NAMA) was created to take troubled property loans off the balance sheet of Ireland’s biggest banks in an attempt to recapitalize and restore some stability to the lending market, Ireland finds itself in even deeper financial crisis. After the transfer of the second NAMA tranche of loans in late August of this year, approximately 48 hotel loans are now under the control of NAMA, although some of these hotel loans are currently performing and not in jeopardy of default.

For months, many in the hotel investment industry have been watching closely to see whether NAMA would be disposing of any attractive hotel assets. Thus far, NAMA has not shown any interest in conducting a “fire-sale” of hotel properties under its control.

However, now that Ireland has recently requested a massive European bailout, will NAMA’s strategy change? With a European bailout, the EU and IMF will almost certainly impose strict austerity measures on Ireland.

Future transfers of property loans to NAMA may be cut down or eliminated entirely in an effort to halt the continued run up of government promissory notes, which are issued to “pay” for the properties transferred to NAMA.

This could alter NAMA’s holding strategy and could prompt it to move more quickly and take more drastic action to unload, recoup and/or recover as much as possible as quickly as possible on the loans and assets under its broad control. This could have significant ramifications for the hotel investment market in Ireland and the United Kingdom.

Even if this did result in increased investment opportunities, investors would be wise to proceed with extreme caution. The European bailout, resulting political instability and the almost certain imposition of corresponding austerity measures will have long lasting effects on the Irish economy and investor sentiment in the broader Eurozone. This could very well take the opportunity out of the investment.