U.K. Banks May Transfer Commercial Property Loans Into REITs

Im not sure I follow what is being done here. From my understanding the UK banks have a lot of loans from the real estate sector. They may take losses from these loans (from defaults or the value of property declining?). So in order to prevent further losses (from write downs?) they wish to convert the loans into REITs that investors can buy into so the banks can take a step towards being "recapitialized."



If these loans are taking losses, isn't this just transfering bad credit on to investors? Im not sure exactly what is going on. Also, isn't the housing sector in the UK doing way worse than the US markets?



I would apprecaite it someone could clarify this for me.


-snapman















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U.K. Banks May Transfer Commercial Property Loans Into REITs


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By Chris Bourke




July 16 -- (Bloomberg) -- U.K.
banks may transfer commercial property loans into real estate investment trusts
to purge their balance sheets of debt and avoid future writedowns.

Banks are considering using REITs as publicly traded “exit vehicles” that
could limit the losses they and their borrowers face, said Ian
Marcus, head of real estate at Credit Suisse Group
AG. The British Property
Federation has recommended the idea to the government as a solution for
state-owned banks weighed down by real estate loans, said Peter
Cosmetatos, the London-based industry body’s finance director.

“It’s obviously being considered by all relevant parties because the sector
needs to recapitalize and that is one methodology of doing so,” Marcus said in
a telephone interview. The concept is in its early stages, he said.

Banks are saddled with 227 billion pounds ($371 billion) of loans against U.K. shops, offices and warehouses after funding
the real estate boom that ended in 2007, according to research by De Montfort
University in Leicester, England. About 100 billion pounds
of the loans expire in the next three years, according to BNP Paribas. The
values of the buildings they are secured against have declined by an average 44
percent from their mid-2007 peak, according to London-based Investment Property
Databank Ltd.

Options being considered include the creation of new REITs that both the
bank and borrower could agree to sell properties to. Banks could waive some of
their debt in return for a share of any gains a borrower makes through a listed
company, said David Ryland, a partner at law firm SJ Berwin LLP who helped
develop the U.K. REIT legislation that took effect in 2007. Banks could
potentially own stakes in the REITs.

‘Exit’ Needed

Financial firms using REITs as exit vehicles “is something that people are
looking at,” said Ryland. “There will need to be an exit for distressed
portfolios, although some of the properties may need to be improved before they
are suitable for such vehicles.”

Another possibility is the transfer of loan books into mortgage REITs, which
the U.K.
doesn’t yet allow. The BPF said it was preparing to push for a change in that
legislation in the coming months.

“Allowing mortgage REITs would seem a natural and sensible way for REITs to
help banks reduce their exposure to real estate and recapitalize the sector,”
said Cosmetatos in a telephone interview.

Bank Holdings

U.K.
banks with the most real estate loans are Royal Bank of
Scotland Group Plc and Lloyds Banking
Group Plc, according to a June 26 report from BNP Paribas.
They both have about 97 billion pounds of outstanding loans against commercial
buildings, the report said.

Leigh
Calder, a spokesman for Lloyds, and Michael Strachan, a spokesman for RBS,
declined to comment.

Banks with the largest state ownership have been taking part in the
conversations about REITs, said Cosmetatos, without naming them. The U.K. government
owns 70 percent of RBS and 43 percent of Lloyds.

RBS is keeping real-estate loans on its balance sheet rather than
foreclosing on borrowers, as it hasn’t provided for the significant losses that
would incur, Chief Executive Officer Stephen
Hester said at a June 16 conference in London. Hester was CEO of British Land Co.,
the U.K.’s
second largest REIT, until last year.

“We’ve been getting some tentative signs that there is interest, both at the
Bank of England and the treasury, but the more detailed conversations haven’t
happened yet,” said Cosmetatos.

Investor Opportunity

REITs have failed to match the market enthusiasm that preceded their U.K. debut in
2007. There are 21 U.K. REITs with a total market value of about 15 billion
pounds, according to the BPF’s property
information Web Site. Most have lost more than a third of their value since
2007. U.S. REITs flourished after the savings and loan crisis of the 1980s, as
the tax- efficient vehicles were used to fund the purchase of institutions’
real-estate holdings, often at low prices.

“It makes perfect sense,” said Nan
Rogers, a London-based real estate investment trust analyst at Arbuthnot
Securities Ltd. “There isn’t much stock available because banks have been
hanging on to it all, and this is an opportunity for investors to take stakes
in properties that have the potential to be worked.”

To contact the reporter on this story: Chris
Bourke in London
at cbourke4@bloomberg.net


Last Updated: July 15, 2009 19:01 EDT