Less than a mile from Buckingham Palace in London, among a row of 19th century luxury homes, Royal Bank of Scotland Group Plc is seeking to recover some of the 30 billion pounds ($47 billion) of commercial property loans it got stuck with when borrowers defaulted.
RBS, Britain’s largest publicly held lender following its 2008 bailout, is midway through selling 15 residences on Grosvenor Crescent, three years after seizing the properties from an insolvent developer and taking on the unfinished project. RBS, which is offering one apartment for 45 million pounds, is confident it can recover 140 million pounds.
“We are certainly looking to get all our money back,” said Aubrey Adams, head of property in the bank’s global restructuring group, which handles RBS’s defaulted loans.
The group is central to RBS Chief Executive Officer Stephen Hester’s plan to scale back lending and bolster the Edinburgh-based bank’s balance sheet before the government sells its 82 percent stake. While RBS is benefiting from rising demand for London’s most expensive properties, success may hinge on no significant further deterioration in the U.K. and Irish commercial real estate markets, which make up the bulk of the distressed debt.
The values of offices, stores and other commercial buildings in the U.K. have stagnated during the past two years, according to a monthly benchmark index compiled by London-based Investment Property Databank Ltd. This has limited investor gains to rental income, with U.K. commercial real estate returning 5.4 percent in the 12 months ended May, according to IPD’s total return index, which investors can bet on with derivatives.
RBS cut its “non-core” loans to 83 billion pounds in the first quarter from 258 billion pounds at the end of 2008. Loans secured by commercial property make up 44 percent of lending identified by the bank as peripheral to its lending plans and form the majority of cases handled by the restructuring group.
Non-core assets represent 9 percent of the balance sheet that RBS has to fund, compared with 21 percent in 2008, according to research firm Liberum Capital Ltd. In comparison, Lloyds Banking Group Plc has cut its peripheral loan book to 22 percent from 43 percent over the same period, said Cormac Leech, a Liberum analyst. The firm has a hold rating on RBS shares.
“RBS has shrunk its balance sheet more quickly than Lloyds,” he said. This has been overshadowed by weak earnings, in part because of non-core loans and the risk of being caught up in Europe’s sovereign-debt crisis through its 39 billion pounds of Irish assets, he said.
RBS shares fell 2.9 percent to 201.3 pence at 4:30 p.m. in London. They’re little changed this year after falling 48 percent in 2011.
Adams, 62, retired as CEO of broker Savills Plc in 2008. He joined RBS in November to oversee the defaulted commercial loans. Adams isn’t involved with RBS’s 143.2 billion-pound residential mortgage-loan book.
Most of the real estate backing debt managed by Adams’s group is in Ireland, the U.K. and Germany. RBS is seeking a buyer for 42 U.K. hotels managed by Marriott International Inc. to recover 700 million pounds after the borrowers defaulted a year ago.
Grosvenor Crescent is an example of the role of West Register, a unit of the global restructuring group that takes over or buys properties in foreclosure, then makes investments to facilitate sales.
West Register manages about 5 billion pounds of assets and seeks to ensure the bank gets a fair price for foreclosed properties in the recovery process, Adams said. The unit wins about 40 percent of the property bids it makes, allowing the bank to convert a liability into an asset, which is a “more capital efficient way” of managing distressed loans, he said.
Investors, particularly private-equity firms, have inundated RBS with bids for assets, Adams said. The bank has been reluctant to sell to them because offers are often so low that it would spark further writedowns and losses, he said.
RBS has booked 48.2 billion pounds of shortfalls and writedowns since the third quarter of 2007 after losses on commercial and residential loans surged, according to data compiled by Bloomberg. It needed the world’s biggest bank bailout after U.K. taxpayers provided 45.5 billion pounds in 2008 and 2009. RBS said on May 4 it was poised to repay loans received in its rescue, removing an obstacle to its return to private ownership.
The lender took over Grosvenor Crescent, a row of white stucco-fronted townhouses built in the early 19th century, when owner Zegna III was placed into administration in July 2009 with work partially completed.
It hired Grosvenor Group Ltd., owner of the freehold to the land, in April 2010 to manage the project to convert the buildings -- formerly used as the London headquarters of the Red Cross -- back to residential use. Neither disclosed their profit-sharing arrangement.
Prices of the apartments and houses start from 9 million pounds. The most expensive, at 45 million pounds, is an 11,000 square-foot home with five bedrooms, an indoor pool and staff accommodation.
The Belgravia location appeals to international investors seeking a haven for their wealth or a base in the British capital, said Stuart Bailey, head of Knight Frank LLP’s office in the area, who is handling the sale. Buyers have been a “cross section of the globally wealthy,” he said.
Savills, the other sale agent, estimates that 49 percent of prime residential purchases in London by value during the past 18 months have been by international buyers, compared with 37 percent in 2007.
Adams said Grosvenor Crescent is one of a few prime residential developments in central London owned by West Register. It’s also assembling a portfolio of 1,400 newly built rental homes across the U.K. valued at more than 200 million pounds.
It’s acquiring more properties in foreclosure sales by RBS’s business recovery unit as residential landlords default, seeking to sell them as a single portfolio to a pension fund or life insurance company, he said.
Adams said his biggest problem is in Ireland, reflecting the “realization that there’s a hard core that almost cannot be sold currently.”
Ulster Bank, RBS’s main Irish lending arm, is saddled with loans secured by real estate valued at a fraction of what it was when the lender advanced money to borrowers. Property values have fallen by about 65 percent since the third quarter of 2007, when the financial crisis burst Ireland’s investment bubble, Investment Property Databank said in January.
By the end of March, Dublin-based Ulster Bank had set aside 6.42 billion pounds to cover 39 percent of the value of its loans secured by development land, shops and offices. The scale of Ireland’s problems leaves RBS’s global restructuring group with a more difficult task of shrinking a balance sheet through peripheral asset and loan sales.
While some land backing Ulster Bank loans may have initial planning consent, it’s unlikely some sites will ever be developed because they’re economically unviable or not suitable for projects, he said.
The slide in Irish real estate has attracted bargain-seeking investors and enabled RBS to start recovering money by selling foreclosed properties or by assembling portfolios of buildings.
Last month, the Alliance Building, a 210-unit apartment complex in Dublin backing a loan from Ulster Bank, was acquired by Kennedy-Wilson Holdings Inc. and Fairfax Financial for 40 million euros.
While RBS aims to eliminate its non-core loan book by the end of 2013, Adams said some of the debt is so underwater the deadline may be missed.
“As we get further and further into the portfolio there will be a rump that’s harder and harder to sell and that’s an issue,” he said.