Lloyds Banking Group has received ?1.9bn from non-core property sales over the first half of the year, taking its cash tally to ?10bn on ?18bn of outstanding commercial real estate debt over the last two and a half years, reflecting an average 44.4% discount.
The cash proceeds reflect a net rundown of ?1.75bn in Lloyds? Corporate Real Estate Business Support Unit (CRE BSU), which has now fallen to ?19.6bn.
Lloyds? CRE BSU is an open division which often results in a larger number of loans moving in and out of the loan book than is visible at the end of each reporting period.
In its six month results published this morning, Lloyds reported that its total global property loan book fell by ?5.0bn to ?59.8bn over the six months to the end of June, driven by a combination of loan repayments at maturity, scheduled amortisation, consensual property sales and with alternative lenders.
Over the last two-and-a-half years, Lloyds has now shed ?10bn in global non-core real estate from an underlying gross loan exposure of ?18bn, implying as much as ?8bn in write-offs among the defaulted loans.
At the end of 2009 ? after the first full calendar year of the CRE BSU set up to work out distressed non-core real estate loan exposure ? Lloyds? outstanding loan exposure to property companies was ?87.15bn.
Based on the current equivalent figure of ?59.8bn two-and-a-half years later to the end of June this year, Lloyds? gross global property company loan exposure has fallen by ?27.35bn.
Lloyds? combined UK-only commercial and residential loan book ? across core and non-core but excluding ?10bn in social housing and ?2.4bn in housebuilder lending ? has fallen by ?13.8bn, or 28%, to ?34.7bn over the two-and-a-half years to the end of June. In the last six months this figure was ?1.9bn.
Lloyds stated it remains on track to complete the rundown of all non-core exposures within two and a half years, by the end of 2014, adding: ?The Corporate Real Estate Business Support Unit has continued to execute on its active asset management programme of the complex portfolio of over 1,800 cases it manages.?
Loan impairment charges fell to ?530m over the six month period, compared to ?629m over the same period last year, with ?asset disposals ahead of plan, despite a worsening real estate market?.
Lloyds? ?19.6bn CRE BSU loans ? comprised of loans secured by the major property sectors as well as more niche segments including hotels, care homes and housebuilders ? include ?13.4bn of impaired loans, reflecting 68.5% of the outstanding balance.
UK market context
Both capital values and investment transactions have trended downwards over the six months to the end of June, with capital deprecation of 2.0%, according to IPD, and transaction activity down 10% on the same period last year.
London values continue to buck the national trend. Commercial property values in the capital have rallied by 37% over the three years to the end of June this year, in contrast to an average 8% recovery for non-London commercial property.
Lloyds? core corporate property client base is weighted towards the larger end of the UK property market, with a bias to the quoted companies and the funds sector.
?Despite the challenging market conditions, credit quality remains acceptable, being underpinned by seasoned management teams with proven asset management skills generating predictable cashflows from their income-producing portfolios,? wrote Lloyds in this morning?s six-month results.
?Loan demand remains subdued but, with a continuing high level of loan maturities over the next few years, refinancing risks remain a wider market issue. Insurers are looking to increase their participation in the real estate market creating increased diversity of funding options.?
Among the mid-sized market, Lloyds said the challenging backdrop of the UK economy is adding further pressures to the domestic real estate market with both capital and rental values coming under pressure particularly outside the London and South East region.
?Tenant default is an area of ongoing concern especially when the lending is supported by secondary or tertiary assets. Restraints on consumer expenditure have made retail assets a particular area of ongoing focus.
?Market demand is muted with many customers preferring to de-gear and conserve liquidity. Credit quality remains stable and the number of non-performing customers continues to moderate. New propositions are structured attractively and in line with our through the cycle credit risk appetite.?
Ireland
In Lloyds? troubled Irish commercial real estate loan portfolio ? which is now 92% impaired, up by two percentage points on six months ago ? ?915m of commercial property loans have rundown, taking the outstanding book to ?9.96bn.
Across the entire commercial, residential and development book, Lloyds? Irish exposure has shrunk by ?1.9bn. Ireland?s commercial property values have fallen by 66% peak-to-trough since the fourth quarter of 2007, according to IPD ? a further fall in capital values over the third quarter would take the falls in Ireland to a continuous five years.
Outlook
Lloyds, as with all banks, needs to balance its ability to continue to supply credit while meeting tighter capital and liquidity criteria as decreed under new regulations from the European Union, namely the EBA?s Tier One 9%Capital Ratio charge, Basel III and the FSA?s slotting regime.
This, in the context of deepening fears over Spain?s need for a bank bailout and the contagious implications therein, as well as wider Eurozone turmoil, leaves bank appetite for new property lending somewhat uncertain.
Ant?nio Horta-Os?rio, group chief executive at Lloyds, wrote in this morning?s results: ?Financial markets are expected to remain dislocated and volatile, with the risk of contagion unlikely to dissipate in the near term, and this continues to place strains on funding markets at a time when many financial institutions have material ongoing funding needs.
?In particular, given the subdued environment, our Wholesale leveraged finance portfolios, and our commercial real estate and real estate related property lending portfolios remain vulnerable in terms of refinancing risk and higher impairments on loans and advances and associated derivatives. Greater resilience in yield levels is evident at the prime end of the commercial real estate market, whereas secondary yields are under pressure.?
jwallace@costar.co.uk
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