By Daniel Thomas and Ed Hammond
Published: February 26 2010 23:13 | Last updated: February 26 2010 23:13
Barclays is to move into housebuilding to minimise losses on a site where the developer defaulted on a loan.
The bank is to invest in the building of a new development of expensive homes in Chiswick, west London, on a site that had gone into administration, in a trial that is expected to be repeated with other loans.
The decision was made to avoid the forced sale of the site and a huge writedown on the value of its loan, and illustrates the more pro-active approach that bankers are having to take following a crash in the real estate market.
Barclays has appointed Jones Lang LaSalle to manage the development of the scheme, which will comprise 11 homes backing on to the Thames.
Graham Keable, of the business support property team at Barclays Corporate, said: “We had the choice between crystallising a substantial loss or building the scheme and mitigating the problem.
“If we had sold the site, it would have lost us up to half of the value of the loan.”
Although declining to give exact values, he said the bank’s exposure to the site would be increased by 130 per cent in order to complete the development work. The original borrower is still involved in the process, and could even achieve a profit if the sales reach a certain hurdle.
“This is not to generate profit – this is to mitigate losses. We would continue to roll this out as long as the underlying risk position was secure,” Mr Keable said.
John Slaughter, of the Homebuilders Federation, said: “It is the first time we have heard of a bank doing this as a way of bringing projects through in the current climate.”
All banks are having to deal with extensive problems in their property loan books.
Lloyds and Royal Bank of Scotland, which have the highest exposure to the sector, have created special solution teams to restructure loans.
It is more common for banks to manage assets in the commercial sector, where there are single large properties. Lloyds revealed on Friday that bad debts of £24bn were linked to poor investments made by HBOS, many in real estate
.
Banks are sitting on more than £200bn of UK real estate loans, including commercial and residential development, many of which will be either in breach or default of banking agreements after a sharp fall in the market since the peak of 2007
.
Barclays’ decision has been helped by evidence of continuing demand for prime London homes. Although the Nationwide index showed a slight decline for house prices in February, Knight Frank data showed prices for central London homes recording their strongest growth in a single month since the market peak in August 2007
.
The market rose 3.3 per cent in February, according to Knight Frank, taking prices up 19 per cent in total in the past 10 months.
