Banks buying from their own borrowers

Sunday, June 19, 2011

The subsidiaries of foreign-owned banks are poised to buy back prime properties on the cheap from their own distressed borrowers.

The banks are particularly keen on buying back fine investment properties in well located areas, according to market sources.

The sources said that in some cases it was the banks’ employee pension funds that would buy back the properties; in others it was special units of the banks which had been set up to hold distressed properties until there was a recovery in the market.

The expectation is that the subsidiaries of the foreign-owned banks in the South will soon be following the example set by their British and Northern Irish counterparts, who have been buying up prime assets from their own distressed loan book.

Last week, for instance, Ulster Bank took over a designer outlet retail park near Banbridge, Co. Down.

The stg£70 million Outlet, as it is entitled, was developed by GML Estates, a division of developer John Farmer’s Orana Group.

(The Orana Group is known to investors in the Republic, as some clients of Goodbody stockbrokers lost €31 million in the Northern Ireland Property Fund, which had a joint venture with Orana.)

The Outlet contains 82 stores employing 500 staff. The developer had originally hoped to attract many shoppers from the Republic. But southern consumers are no longer travelling there in such large numbers, as they now have less money in their pockets due to rising unemployment, lower wages and higher taxes. Higher petrol costs have also dulled enthusiasm for long distance shopping trips.

The vehicle used by Ulster Bank to acquire the Outlet last week was West Register (Northern Ireland) Property Ltd. The company is a subsidiary of West Register Property, a division of the Royal Bank of Scotland, the Scottish bank that is the ultimate parent of Ulster Bank. West Register Property acquires assets from RBS’s distressed property portfolio if it considers this the best way to recover the most money for the bank in the medium term.

Last year, Ernst & Young, which had been appointed as administrators to the Richmond Shopping Centre in Derry, sold the centre to West Register. The business had been placed in administration after RBS had called in its loans.

RBS is not the only British bank buying up assets from its own distressed borrowers: Lloyds Banking Group also currently operates a similar subsidiary in Britain.

The model that it has adopted was previously used by British banks following the British property crash in the early 1990s. The idea was to avoid having to account for the losses if the properties were sold on the open market and to benefit from any future recovery in the property market.

However, there have been suggestions in Britain that West Register has sometimes acquired distressed property at below market value, leaving the original borrowers with a sour taste in their mouths.

Last year, Property Week, the British property magazine, reported that RBS had sold one of its most high-profile distressed properties (Charters, the luxury residential development in Sunningdale, southwest London) to West Register.

The magazine said that RBS had, in July 2010, ‘‘sold’’ the scheme to West Register for stg£16.2 million, a year after appointing chartered accountancy firm PriceWaterhouseCoopers as administrators to the development.

John Morris, a director of the development, claimed at the time of the administration in May 2009 that RBS had turned down a £30 million plus offer for the scheme, an offer which was backed up by an independent valuation for Investec, the lending bank.

The July 2010 transaction for just £16.2 million raised eyebrows in Britain, given that luxury residential values in the south-east had risen markedly since May 2009. Property Week said at the time that it had been unable to obtain a comment from either RBS or PWC on the ‘‘cut price £16.2 million sale to West Register’’.

Of course, the banks will want to get the best return on their distressed property portfolios. And they may be of the view that the best way to get a good result is to hold out for a market recovery in the medium term.

But the distressed investors could be forgiven for thinking that they are being penalised for having acquired good assets, which will likely recover in value over the medium term.

They may also fret that the banks have a conflict of interest in that they may want to rush to buy assets at the current distressed prices, so that they can benefit from any future upswing.

The activities of West Register in the North and in Britain are likely to be of interest to property investors in the Republic who own prime assets funded with borrowings from Ulster Bank. That’s because Companies Office filings show that, in 2009, Ulster Bank set up a division called West Register Property (Republic of Ireland) Ltd, to acquire and develop property assets here.

A spokesman for Ulster Bank said that the southern West Register had done ‘‘nothing significant’’ so far. She indicated that West Register only bought back property in cases where Ulster Bank had provided the original loan for the property.

She also said that West Register normally only bought property when it had already been placed on the market for sale and that it would be sold at market value.

She said if there was only a single bid in the market, the deal was done at arms length.

The investors to whom Ulster Bank lent vast sums of money to buy assets at high prices in the past will certainly be hoping that Ulster Bank lives up to those assurances.