Bad Debt? Sell It on the Stock Market

To purge their balance sheets of debt and avoid future writedowns, more and more U.K. banks are considering plans to transfer commercial property loans into REITs. Such strategies entail using REITs as publicly traded “exit vehicles” to limit the losses they and their borrowers face.

The British Property Federation is currently pushing the idea to the government as a solution for state-owned banks saddled with real estate loans.  Ian Marcus, head of real estate at Credit Suisse Group AG, remarks, “It’s obviously being considered by all relevant parties because the sector needs to recapitalize and that is one methodology of doing so.”

U.K. banks are currently weighed down with 227 billion pounds (US$371 billion) of loans against retail properties, office buildings and warehouses after funding the real estate boom that ended in 2007, reports a De Montfort University study.  According to BNP Paribas, approximately 100 billion pounds of the loans are due to mature in the next three years.

The values of the commercial properties they are secured against have declined by an average 44 percent from their peak two years ago, calculates London-based Investment Property Databank, Ltd.  Peter Cosmetatos, the British Property Federation’s finance director, concludes, “Allowing mortgage REITs would seem a natural and sensible way for REITs to help banks reduce their exposure to real estate and recapitalize the sector.”

It’s an interesting proposition and creates a new play – allowing opportunity players to get undervalued, under-performing loans at the share level.