14/11/2009

By Mike Phillips

Royal Bank of Scotland will put £39bn of its £91bn commercial property loans into the government's asset protection scheme, the bank revealed last Friday.

It also plansto reduce its UK property loan book from £43bn to £30bn over the next five years -a 27% drop.

The UK's largest property lender revealed the extent of the property that will be covered by the government's insurance scheme in the same week that the second-largest lender, Lloyds Banking Group, said that it will undertake a £25bn capital raising to avoid entry to the programme.

The property industry will be anxious to see whether the contrasting actions of the two banks will lead to different attitudes in terms of bringing distressed assets they have leant against to a stock-starved market.

Property will be the second-largest asset class - after loans made to other financial institutions - to go into the protectionscheme,which will insure RBS against excessive losses on loans and assets that have lost value over the past two years.

The £39bn of assets covered by the scheme compriseloans with a par value of £34.4bn, which have been written down by 3.5% to £33.2bn, as well as£4.7bn of undrawn commitments linked to these loans.

RBSsaid it had put all the property loans that are being managed by its workout teams, as well as those on its high-risk watch list, into the scheme.

Overall, RBS has reduced the amount of assets it will put into the scheme from £281bn to £242bn, and the total of property loans from £51bn to £39bn, due to improvements in the global financial system.

Speaking at EG's annual investment summit in September, Stephen Eighteen, head of property in RBS's "non-core"division, said that neither borrowers nor loan officers would know if their loan was being included in the asset protection scheme, and that inclusionwould make no difference to the way the loanwas managed.

Separately,RBSsaid that £13bn of property loans inits UK commercial property loan book had been deemed "non-core",which means thatthey will be run down over the next three to five years.

Source: EG Finance (www.egi.co.uk)