Distressed bank disposal plans unlikely to impact institutional property market

The way banks deal with their distressed UK property loan books will have little impact on the UK commercial property market according to Sarah Cockburn, property fund manager at AEGON Asset Management.

Cockburn believes any potential impact will be diluted by the drawn out timeframe and the highly confidential nature of the process as the banks in the UK look to get rid of their distressed loans.

Cockburn pointed out that many banks are seeking to reduce the size of their property loan books, with RBS, Lloyds Banking Group and Ireland's National Asset Management Agency likely to be major contributors to this process. But Cockburn thinks banks will look carefully at loan serviceability before making decisions to sell and have been working with landlords directly in cases where there isn't a default.

‘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,’ she explained.

Cockburn believes that it will be well constructed and balanced portfolios that are most 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, as the banks are conscious that if they flood the market this could have a detrimental impact on their portfolios by driving down prices. As such they are likely to take a more conservative approach to the release of stock,’ she said.

She predicts that there will be a steady trickle of this distressed stock entering the market rather than a flood of this type of stock. For this reason it is likely that the banks could take two to three years to fully unwind their distressed loan books.

However Cockburn believes there is a huge weight of money and demand for this type of stock from investors, predominantly from property companies and opportunity funds who have been waiting for this chance to acquire the high returning properties.

She also predicts that 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 investors prepared to invest selectively in good quality secondary property,’ she said.
‘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 by utilising good asset management skills,’ she added.