UK lenders affected by the credit crunch were under a lot of pressure during 2011 to reduce their exposure to bad debt secured on real estate. Looking back at those deals, what trends have emerged as to how the banks are dealing with the position they are in?
The big players in the UK and Ireland real estate market are RBS, with a £84bn loan book, Lloyds Banking Group, which is sitting on £79bn of debt, and the National Asset Management Agency (NAMA), which has taken control of around €72bn of loans since it was established in 2009.
Although the widely expected fire selling has not yet materialised, the number of distressed assets being put on the market in the last six months has increased. Of course, banks must take care not to release too many distressed portfolios onto the market at the same time which would have an adverse effects on value, especially in the non-prime markets.
Where possible banks have been acting alongside borrowers to salvage bad debts by selling and refinancing assets. However, this has not prevented them from taking more formal steps to appoint receivers or administrators where there is no other option.
RBS has followed a varied approach comprising different disposal strategies. Some have been more traditional such as the use of receivers to dispose of large portfolios (for example the Industrious portfolio). More creatively they have also formed alliances with cash rich investors, such as Delancey and used innovative fund structures to enable third parties to share in any valuation uplift. Since 2009 RBS has reportedly reduced its property exposure by about £26bn.
Lloyds has adopted a different angle highlighted by the sale late last year of the Flagstaff portfolio of secondary and tertiary receivership assets to Telereal Trillium for around £45m. This was the first time, since the downturn, that multiple assets from different borrowers controlled by different receivers had been amalgamated to create a single portfolio. Despite scepticism, the decision appears to have paid off as Lloyds were able to bring the properties to the market ahead of similar properties before the market was saturated.
As a result of political pressure to reduce debt exposure, NAMA has altered its strategy in the UK in the last 12 months. Instead of holding onto UK properties (particularly in London), it has instead planned an orderly sale over the next seven years to maximise returns as markets improve.
NAMA’s strategy could bring up to €9bn worth of property to the UK market, of which 55% is in London. NAMA has already sold out of a number of trophy locations in the capital, including Claridge’s, The Connaught and The Berkeley hotels and Audley Square in Mayfair. The strategy looks sound with values holding up well, particularly in London which is seen as a “safe haven” by many equity buyers, particularly overseas investors.
So what of the future? Banks are always looking for more innovative ways to deleverage their positions. Having tackled some of their most high profile assets, NAMA and the banks are now faced with the much more difficult (and risky) task of managing the less attractive assets on their books. Pricing and how much the banks are prepared to write down the value of their loans will as ever be the key to the speed and success of recovery.
Rob Thompson, Partner, Real Estate