It is clear many banks are seeking to reduce the size of their property loan books for the next five years at least. RBS, Lloyds Banking Group and NAMA will be major contributors to this. Banks are looking carefully at loan serviceability before making decisions to sell and have been working with landlords directly in cases where there isn’t a default.
Bank sales
Sales have been steadily coming to the market as a combination of portfolios and individual asset sales. Much of the prime stock on their loan books was dealt with early on, and the majority of what is left is secondary and tertiary. We expect to see banks increasingly packaging up saleable assets into portfolios towards the end of this year and early 2012.
Well constructed and balanced portfolios are likely to achieve better pricing. The impact on the market is likely to be diluted by the drawn-out timeframe and the highly confidential nature of the process. The banks are conscious that if they flood the market this could have a detrimental impact, so it is likely that a conservative approach to the release of stock will be taken. We expect to see a steady trickle of stock being released onto the market rather than the market being flooded with a lot of stock. For this reason it is likely it could take two or three years to fully unwind the situation.
There is a huge weight of money and demand for this type of stock from investors, predominantly from property companies and opportunity funds that have been waiting for this chance to acquire the high return properties.
Secondary assets
Lloyds was the first bank to market a portfolio of distressed assets, known as Project Flagstaff. We understand that this is currently under offer to a property company, and that there was more depth of investor demand than anticipated, although pricing for this type of stock reflects the nature of the properties accordingly, and those seeking double digit property returns will be looking carefully.
The supply of bank stock coming to the market is unlikely to have much effect on prime institutional quality property pricing. We see better performance prospects for institutional investors prepared to invest selectively in good quality secondary property. The prime end is a very overcrowded space and such a risk-averse approach is leading to some mispricing of good quality assets.
Providing the fundamentals are there, better returns can be gained from investing in good quality secondary property and using good asset management skills, without taking the high risk/high return strategy of those brave enough to buy the bank stock.
