Lloyds Banking Group Plc (LLOY) will step up lending to real estate buyers in mainland Europe as competition among credit providers increases in the U.K.
The overseas markets must have “a reliable enforcement regime and a decent amount of liquidity, so we are looking at opportunities in France, Germany, the Netherlands, potentially Scandinavia,” John Feeney, head of corporate real estate, said in an interview. The lending will be to existing U.K. clients, he said.
Lloyds, which made about 7 billion pounds ($11.5 billion) of new real estate loans last year, is growing its property loan book ahead of repayments by customers, Feeney said. The London-based bank, forced to seek a bailout in 2008 after its takeover of HBOS Plc, is nearing an end to selling non-essential mainland European assets. Last week, it agreed to sell 494 million pounds of European real estate loans for 235 million pounds.
“We are now very much focused on new lending, so that’s really where our energies are now consumed,” Feeney said in the March 12 interview at the MIPIM real estate conference in Cannes, France.
Pan-European real estate funds had a total return, comprised of changes in real estate values and rental income, of 5.2 percent for the year through December, according to Investment Property Databank Ltd. That was the most since September 2011, the research firm said.
Investors have set aside $129 billion to buy European real estate, a 7 percent increase from six months earlier, broker DTZ said in a report published on March 12. U.K. projects that were shunned by buyers at the start of last year are now being sold and the investors are receiving multiple offers from lenders to finance the purchases, he said.
“There’s very little discrimination happening in terms of leverage between core London assets and in some cases regional assets of quite questionable quality,” he said. “There is very little premium associated with the additional risk you take on in the regions.”
An increase in lending by overseas banks is one reason for the surge in competition. German lenders aren’t subject to the same regulatory rules as U.K. banks, so they can offer more attractive credit terms to buyers of the best properties, Feeney said. At the same time, Asian buyers of U.K. properties are borrowing from lenders based in their own country.
“The pricing is consistent with the Asian market as opposed to the local market, and I find that a fairly strange phenomenon,” Feeney said. “It would be a fairly odd thing for Lloyds to follow a core U.K. client to Singapore and undercut the local market.”
The bank’s real estate lending unit wants to make more loans to small businesses because there’s less competition from other lenders, Feeney said.
The biggest real estate loan that Lloyds advanced last year was 500 million pounds. In cases like that, “we’re generally placing a very significant component of risk to make the returns work,” he said. “If we were simply lending on balance sheet, the returns would be uncompetitive.”
Feeney said he’ll “focus entirely on return of capital,” and he declined to say how much the bank plans to grow its real estate loan book this year. “We’ll have an opportunity to do more volume than we did last year,” he said.
Lloyds, the U.K.’s second-biggest publicly owned bank, will sell more portions of loans it makes to customers to reduce its risk, according to Feeney.
“If you’re doing silly lending, the market tends to find you out,” he said. “If you have access to the market and you’re distributing risk, you can bring your balance sheet up and down in line with your broader corporate requirements.”
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