At the beginning of December, the Financial Times reported that Lloyds Banking Group had opened discussions with US private equity group Lone Star about selling off GBP 900 million of distressed real estate loans. According to the news provider, the deal would signal the largest such loan disposal by a financial institution in the UK since the difficulties experienced in the property market in 2008. The newspaper suggested this could herald a deluge of similar sales and chairman of Chainbow Roger Southam agrees.
He stated that in 2012 "a lot more problems will come out of the woodwork" for UK banks. As a result, Mr Southam believes other deals like that between Lloyds and Lone Star will definitely be on the cards. "They are going to have to bite the bullet and do the bulk deals that we have seen in this distressed way [as Lloyds have done]," Mr Southam asserted. However, he stressed the biggest difficulty will come in finding buyers for such bundles of assets. "Over the last six months and a little bit before that, yields and the purchase prices would seem very good value, [however], people are not in the marketplace for taking [them] on board," he explained.
Mr Southam stressed the number of potential buyers for portfolios of distressed real estate and loans is "very, very limited", so even if the banks are keen to offload these assets and shore up their books, it may be a difficult task to accomplish. He added that if the market becomes inundated by financial establishments hoping to complete deals of this kind, it could be "very detrimental" for the real estate sector as a whole. Bloomberg recently cited data from Standard & Poors, showing that as much as GBP 4.8 billion of loans tied to mortgage-backed securities are due to mature in 2012. The assets behind the loans will therefore have to be sold, or the loans themselves refinanced over the next 12 months, the news provider revealed.
Ed Stansfield, chief property economist at Capital Economics, told the news agency there is a discrepancy between the type of assets being put up for sale and the sort that investors with cash are seeking to acquire. He said the real estate behind the bank loans tends to be "pretty poor quality" and this is not what investors are looking for in the current economic climate. Meanwhile, Sue Munden, analyst at investment bank Seymour Pierce, noted it will be the UK real estate investment trusts that hold higher calibre property that will be able to take advantage of this sentiment. "The good are going to continue getting better and the bad are going to carry on getting worse," she stated in an interview with Bloomberg.
A further stumbling block for the financial establishments hoping to offload some of their assets could therefore be their quality, with the Financial Times citing data from Savills which revealed that only one-quarter of the estimated GBP 350 billion of the banks' exposure to the UK's commercial property sector is comprised of prime real estate, indicating the remainder will not be as attractive to potential investors. In its European Investment Bulletin for summer 2011, Savills stressed that buyers are still averse to anything other than prime property.
The report highlighted the popularity of assets in desirable locations or that fall into the prime bracket, but indicated investors "remain wary of secondary markets due to the lack of transactional evidence, and questions about the timing and strength of the economic and leasing market recovery in some UK markets". However, the research showed the UK still attracts the greatest level of global investment within Europe, accounting for 34 per cent of the transactions that occurred during the first quarter of 2011.
- Tuesday 03 January 2012