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RBS and Lloyds sell repossessed properties to subsidiaries
Rebecca O’Connor, Property Correspondent
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div#related-article-links p a, div#related-article-links p a:visited { color:#06c; } Britain’s taxpayer-owned banks are selling repossessed property assets to their own subsidiaries to avoid billions of pounds of losses that would be incurred by selling them in the open market.
Royal Bank of Scotland (RBS), which is part-owned by the Government, has set up West Register to buy properties taken over by RBS after borrowers had fallen into default.
Lloyds Banking Group, which inherited billions of pounds of commercial property loans when it took over HBOS, is understood to have a similar subsidiary that buys assets from its owner.
The practice, which was popular towards the end of the recession of the early 1990s, enables banks to avoid selling assets that have fallen significantly in value and are in negative equity to an outside buyer, which would leave it nursing a loss.
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Instead, the bank, through its subsidiary, is able to buy the asset, such as a shop or office block, at a knockdown price in the hope that it will benefit from a future increase in its value.
The details have emerged at a time when RBS and Lloyds are under pressure to demonstrate how they will generate returns for the taxpayer as soon as possible.
While selling repossessed assets to a subsidiary might result in bigger future gains in value, selling in the open market resulted in a quicker return, property agents said.
It is not clear in how many cases banks choose to keep the property rather than sell, although agents said that the option had become more appealing for banks after falls in value of about 45 per cent from the 2007 peak.
William Newsom, head of valuation at Savills, the property group, said: “Banks sell the property but, rather than selling into the market, they go into a workout vehicle. It is a model that we saw in the last downturn. The subsidiary pays what the property would fetch on the open market. It has to be a fair value.”
RBS and HBOS were the biggest lenders to commercial property companies during the boom. All UK banks are thought to be facing £100 billion of paper losses from their exposure, according to Jones Lang LaSalle, the consultancy.
An estimated £42 billion of commercial property loans are due for repayment in 2009, with £31 billion due in 2010.
An industry source familiar with the practice said: “This is a legitimate strategy that was pursued at the end of the previous recession. It means that the bank is able to avoid crystallising the loss, although it is still on the balance sheet.
"They will do this with a small proportion of the total outstanding debts. All the banks must do to meet regulations is maintain capital lending.”
RBS was not available for comment last night.
A spokesman for Lloyds Banking Group said: “Through the Business Support Unit, our priority is to ensure the successful turnaround of our business customers and to manage the assets for which we are responsible in a way that is of most benefit to all parties. We constantly review the options available.”
Rebecca O’Connor, Property Correspondent
Recommend? (3)
div#related-article-links p a, div#related-article-links p a:visited { color:#06c; } Britain’s taxpayer-owned banks are selling repossessed property assets to their own subsidiaries to avoid billions of pounds of losses that would be incurred by selling them in the open market.
Royal Bank of Scotland (RBS), which is part-owned by the Government, has set up West Register to buy properties taken over by RBS after borrowers had fallen into default.
Lloyds Banking Group, which inherited billions of pounds of commercial property loans when it took over HBOS, is understood to have a similar subsidiary that buys assets from its owner.
The practice, which was popular towards the end of the recession of the early 1990s, enables banks to avoid selling assets that have fallen significantly in value and are in negative equity to an outside buyer, which would leave it nursing a loss.
Related Links
Instead, the bank, through its subsidiary, is able to buy the asset, such as a shop or office block, at a knockdown price in the hope that it will benefit from a future increase in its value.
The details have emerged at a time when RBS and Lloyds are under pressure to demonstrate how they will generate returns for the taxpayer as soon as possible.
While selling repossessed assets to a subsidiary might result in bigger future gains in value, selling in the open market resulted in a quicker return, property agents said.
It is not clear in how many cases banks choose to keep the property rather than sell, although agents said that the option had become more appealing for banks after falls in value of about 45 per cent from the 2007 peak.
William Newsom, head of valuation at Savills, the property group, said: “Banks sell the property but, rather than selling into the market, they go into a workout vehicle. It is a model that we saw in the last downturn. The subsidiary pays what the property would fetch on the open market. It has to be a fair value.”
RBS and HBOS were the biggest lenders to commercial property companies during the boom. All UK banks are thought to be facing £100 billion of paper losses from their exposure, according to Jones Lang LaSalle, the consultancy.
An estimated £42 billion of commercial property loans are due for repayment in 2009, with £31 billion due in 2010.
An industry source familiar with the practice said: “This is a legitimate strategy that was pursued at the end of the previous recession. It means that the bank is able to avoid crystallising the loss, although it is still on the balance sheet.
"They will do this with a small proportion of the total outstanding debts. All the banks must do to meet regulations is maintain capital lending.”
RBS was not available for comment last night.
A spokesman for Lloyds Banking Group said: “Through the Business Support Unit, our priority is to ensure the successful turnaround of our business customers and to manage the assets for which we are responsible in a way that is of most benefit to all parties. We constantly review the options available.”
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