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With an estimated £90bn of commercial property lending exposure between them, Lloyds and RBS are technically the two largest quoted property companies right now - not that they want to be.
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Following this week's seismic restructuring announcements, it is hoped the banks can finally think about tackling the problem of distressed property loans. Since the market's 2007 peak, commercial property values have practically halved, wiping out equity and leaving the banks in loco parentis on a giant portfolio of shopping malls, offices and commercial buildings. As if that wasn't enough, Lloyds, through its takeover of HBOS, also controls enough land to build 150,000 houses.
Reducing exposure by selling assets is the obvious answer. And Lloyds, which looks set to sidestep the government's asset protection scheme, is likely to lead the way.
This week, its adviser Jones Lang LaSalle has reputedly received 40 bids for Glasgow's Silverburn shopping centre, which Lloyds foreclosed on earlier this year. The £250m asking price is substantially less than the £300m debt secured on the centre. Competition from vulture funds, property companies and institutions means the bank could come closer to breaking even than it ever dared hope.
"The banks can place their property assets into three buckets - the good, the average, and the crud," theorises Nomura real estate analyst Mike Prew. "The cruddy stuff will have to sit there for a decade until the market comes back. The banks won't want to foreclose on the average stuff, as it's management intensive. But the good stuff at the top is saleable - and there's now a competitive market for it."
An important test of the market, the Silverburn experience could encourage the banks to sell more. But market watchers fear the current pricing bubble could burst if large numbers of assets are dumped on the market.
"There will be no great outpouring of distressed property at the current time," predicts Jemma McAndrew, director of real estate workout at Jones Lang LaSalle. "The uncertainty in respect of the Government stake in the banking sector cannot be understated. The forthcoming general election will give clarity in the decision making process."
Lloyds has been brave enough to test the market, but the dismantling of RBS's £30bn commercial property loan book will be highly political, given the extent of taxpayer support. The banks' vast holdings, combined with growing investor appetite for property, means spinning off prime assets into separately-listed vehicles cannot be ruled out. We watch the sector with growing interest.
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-IC-2.1.3g-prod - 17/03/2010 18:13:09 - ben.wheeler
