Royal Bank of Scotland and Lloyds Banking Group, Britain’s two taxpayer funded banks, are planning to take equity stakes worth millions of pounds in joint ventures with property companies on repossessed development projects and buildings in need of refurbishment.
The banks are understood to be in talks with landlords of office blocks, shops and warehouses about co-owning sites where the owners are in default on their loans, to avoid crystallising the billions of pounds of losses the banks would face if they were to sell the repossessed properties on the open market.
Helical Bar, the property investment group, in conjunction with an American fund, is understood to be at the forefront of negotiations. Great Portland Estates, which is known to have a close relationship with these lenders, is another likely partner.
Both RBS and Lloyds have billions of pounds outstanding in commercial property loans. RBS has an estimated exposure worth more than £30 billion, while Lloyds has an estimated £60 billion outstanding, the bulk of which it inherited when it took over HBOS.
Many of these debts have turned bad, after a fall in capital values across the commercial property market of 45 per cent from its peak, according to the Investment Property Databank, leaving a large number of landlords in negative equity.
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Banks have so far turned a blind eye in cases where they have technically been allowed to demand repayment from debtors because of breaches of loan-to-value covenants but concern is growing that this lenient policy is unsustainable.
Mike Slade, chief executive of Helical Bar, said: “Banks have been putting an Elastoplast on the mess of bad debts and damaging the economy in the process. They need to start lending again. Why not face up to the losses now, which they will have to face eventually anyway, so that they are freed up to start making good lending decisions again?”
The proposals to become co-owners of properties will be viewed as another obstacle to the banks’ participation in the Government’s asset protection scheme. Lloyds is planning to cut back its involvement in the scheme.
Industry specialists said that as signs emerge that commercial property values are beginning to stabilise, there is less need to participate in the scheme, which was designed to protect banks from further falls in value.
Investors including Helical Bar and Great Portland have raised millions of pounds to invest in distressed opportunities, but the deadlock in the market has meant that few properties have been put up for sale.
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RBS and Lloyds were unavailable for comment yesterday. However, one person familiar with the plans said: “Sometimes banks will bring in new money in the form of another equity investor, particularly in cases where more money is needed to complete a development project, or the building needs upgrading. The sheer volume of restructuring that needs to happen means that there are lots of reasons in favour of teaming up with specialists, although this is just one option.”
The Times revealed two weeks ago that RBS and Lloyds were selling repossessed properties to their own subsidiaries to avoid taking the full hit from selling into the open market at a vastly reduced sum.
? A luxury residential development site bought for £20 million in 2003 will be put up for sale today after going into receivership. Alpha Place in Chelsea, the former site of a disused power station, will be put up for sale via Allsop, the auctioneer, and Beauchamp Estates. It is believed to be the most valuable receivership of a residential development project in London.
? Royal Bank of Scotland has pumped more than €1 billion (£873 million) into Ulster Bank, its stricken Irish subsidiary, after its bad debts soared in the first half of the year (Katherine Griffiths writes).
RBS injected the money in three tranches between February and July, according to filings at Ireland’s Companies Registration Office in Dublin. Ulster Bank is a wholly owned subsidiary of RBS and is the biggest bank in Northern Ireland and the third biggest in the Republic. It employs 7,000 people.
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It was one of the biggest lenders to property developers in Ireland and has been badly burnt in the implosion of its economy.
Ulster’s bad debts spiralled from £18 million in the first half of 2008 to £157 million between January and June this year. The debts led Ulster to an £8 million operating loss.