Warning over commercial property crash

FEARS have been raised of a plunge in commercial property values as banks embark on a fire sale of distressed loans.

They are expected to dispose of £16 billion worth of poor-quality debt in the coming months in a bid to clean up their balance sheets.

These property loans are being snapped up at rock-bottom prices, mainly by US “vulture funds” who are expected to force owners to sell the assets.

Property experts predict 
values will fall by up to 20 per cent in what has been dubbed a “Darwinian” boost for the sector, according to property agent Chris Dougray at 
Lambert Smith Hampton.

Lloyds Banking Group has been closing in on a deal to sell a £780 million loan portfolio, dubbed “Project Forth”, which is understood to be a package of 41 defaulted or breached loans backing around 100 properties in Scotland and the north of England.

According to real estate research firm CoStar, the package is just one of five UK 
non-performing loan (NPL) deals that Lloyds is expected to complete by the end of the year. The bank has confirmed it shed £4.1bn in UK commercial real estate loans over the nine months to the end of 
September.

CoStar said a number of hedge funds – sometimes disparagingly referred to as “vulture funds” – are eyeing the Project Forth portfolio, including Beverly Hills-based property investor Kennedy Wilson and Deutsche Bank in a joint bid, as well as Cerberus Capital Management and Lone Star.

Lloyds is selling another ¤2.2bn (£1.8bn) book of loans, known as Project Pittlane, which includes up to 700 loans made by Bank of Scotland to Irish property companies and entrepreneurs. The researchers added that the debt package is expected to sell at “the most significant yet” discount, at about 10 to 15 cents in the euro, due to the poor quality and performance of the property assets which the loans have backed.

The sale of property loan books, which only includes 
the debt and not the asset, gives the new owners the chance to call in the debt. As a result, property owners will be increasingly forced to sell the assets at low prices.

While values may fall, the transactions will boost sales 
in what has been a sluggish market. The Scottish Property Federation said sales were down in the most recent quarter from a pre-recession high of £1.6bn to an average of £400m. Transactions now stand at an average of 650 sales per quarter, half the pre-recession high, it added.

Dougray, who expects to see low prices drive transactions, said: “This is Darwinian stuff, and the dinosaurs are dying. This is good news and it will readjust the market to where it should be.

“Loan sales allow lenders 
to recapitalise much more quickly than by undertaking an asset-by-asset approach to debt recovery. If this strategy were undertaken, it might take 20 years to achieve what is likely to take 24-36 months through loan sales.”

Recently, two buildings in Scotland were sold by Lone Star, which is understood to have amassed a £20bn fund to target European distressed 
assets. These included Charlotte House on Edinburgh’s South Charlotte Street and 
Telephone House in Dundee.

Chris Macfarlane, a director at Jones Lang LaSalle, said the Edinburgh property was a “prime asset” which sold to 
an institutional investor, but Telephone House, which is currently leased to BT, sold for £5.5m with a yield in the “high teens”, which denotes a low price in relation to the rent.