Banks in the UK and Europe are currently preparing to take a major hit on their assets as they prepare to lessen their exposure to commercial property. Financial institutions have offloaded their best assets but are left with the problem of making the choice of either withdrawing from loans or selling off overvalued properties.
Simon Cooke, the director of Alliance Property Asset Management, explains, “There is a real issue in the value being put on these assets in banks’ balance sheets and whether that is the same as their real sale value.”
According to analysts at Morgan Stanley, European banks are preparing to offload approximately 700 billion euros (£562 billion) in real estate holdings by either selling loans or disposing of the properties outright. Three-quarters of the properties affected have yet to be dealt with.
Many of the properties are currently worth less than when the deals were made, which leaves the banks in a difficult position. They will find it challenging to make a deal for the loans or sell the properties without taking losses.
The Royal Bank of Scotland and Lloyds are two major financial institutions that have backed away from commercial properties. Both of them have made good progress, according to Morgan Stanley, but the deleveraging process has taken a toll on the company’s earnings.
Analysts have stated there will not be a swift recovery to rescue the banks in this instance. Since the best assets have now been sold, there is pressure for the banks to make decisions about the commercial properties that are considered less than top-level properties, and to take action quickly.
Sovereign wealth fund managers may be interested in taking on these assets, but other alternatives may be available to banks looking to unload these commercial properties.
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