UK Property News 4th August 2011

Lloyds Banking Group has sold £1.8bn in commercial real estate over the first six months of the year with “further significant sales anticipated in the second half”. In its interim management statement for the first six months of 2011, LBG said its Corporate Real Estate Business Support Unit (CRE BSU) division had broadly maintained the disposal pace it achieved in 2010 when “more than £4bn” of sales were realised, which the bank said earlier this year was ahead of its own expectations. The CRE BSU loan book has in total reduced by £2.5bn, down to £23.7bn, of which £16.2bn or 68.5% of the book is classified as impaired property loans. The statement said: “CRE BSU has continued to make good progress executing on its active asset management programme for the complex portfolio of over 1,800 cases it manages. Despite the market for capital values improving 17.3% from its trough in 2009, we have seen this improving trend in the market begin to weaken for all but prime or central London based real estate. With the exception of prime or central London real estate, the group remains cautious on its outlook for property.” The management of the portfolio has focused on continuing to support its long term customers and at the same time reducing the exposure to real estate via managed sales. Outside London and the South East, activity in the corporate real estate market remains weak, said LBG, due to declining values, the focus on prime properties and prime tenants, while rental growth in the regions is slow. LBG stated: “Customers are adopting a ‘wait and see’ approach, de-gearing where they can, and conserving cash. In addition, with a significant proportion of our assets supporting property investments, tenant default is an area of continuing vulnerability especially where the lending is underpinned by secondary or tertiary assets. With a continuing high level of loan maturities due over the next few years, refinancing risk remains an issue.” In the non-core business, which aggregates commercial real estate lending, corporate lending and treasury assets, the total reduction in the loan book was £31.3bn to £162.4bn, with the reduction in exposure helping to deliver an almost £500m shallower pre-tax loss for the ring-fenced loan book of £1.5bn over the first six months. Loan impairments over the first half in the bank’s non-core book were higher than the second half of 2010, primarily reflecting a reduced benefit from a number of write-backs on asset sales, particularly in the CRE BSU and in wholesale markets division, as well as higher charges in the non-core leveraged finance portfolio. LBG’s wholesale division loan impairment charge was 44% lower than the first half of last year – from £2.8bn in the first half of 2010 to £1.5bn in the first half of 2011 – driven by the HBOS heritage corporate real estate and real estate related asset portfolios, but with increased impairment on leveraged acquisition finance exposures. The statement said: “We expect the UK environment to remain subdued in the second half of the year… which may adversely impact our corporate real estate property lending portfolio which is vulnerable to tenant defaults, although against our base case economic assumptions, we continue to expect a reduction in impairment charges in our corporate real estate and real estate related portfolios in 2011 as a whole. We remain vigilant in monitoring changes in economic conditions and to individual lending positions.” LBG’s financial performance over the period included a loss before tax and fair value unwind in its wholesale corporate markets of £527m over the six months, compared to a profit of £257m over the previous period. In the commercial division, profit before tax was £262m, compared to £157m in the first half of 2010. This includes a £12m six-month profit in commercial’s non-core business. LBG said it expects UK GDP growth of 1.5% in 2011, normalising above 2% in 2012, with UK base rates increasing from the second half of 2011, unemployment improving from the second half of 2011, and property values stabilising. LBG said its exposure to Ireland “is being closely managed” adding: “In the first half, we have taken additional provisions in Ireland due to further falls in the commercial real estate market as previously anticipated. We believe that further vulnerability exists. A dedicated UK-based business support team is in place to manage the winding down of the Irish book.” In Ireland, a staggering 91.3% of its £11.9bn commercial property loans were impaired by the end of June. In the bank’s wealth and international division, the loan impairment charge rose by more than £300m to £2.5bn, in the first six month of this year compared to the same period last year, reflecting “the continued deterioration in real estate values in Ireland and in Australasian property markets to which the group is exposed”. Also, in the statement, LBG revealed that its subsidiary fund manager Invista Real Estate has seen its assets under management more than halved – from £5.3bn to £2.5bn over the last six months.