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Endgame in sight for Lloyds’ real estate deleveraging: UK and Irish books fall to £8.5bn

Lloyds Banking Group’s non-core legacy UK and Ireland commercial property loans have shrunk to around £8.5bn, after the a further run-off of approximately £4.2bn over the first half of this year.

Over the six months to the end of June, Lloyds’ non-core UK commercial real estate exposure reduced by £3bn to just £4bn, according to the bank’s results presentation and subject to rounding. Ireland commercial property loans fell £1.15bn to £4.35bn, according to Lloyds’ half-year results published this morning.

In addition, the may be modest indirect real estate exposures in the bank’s corporate loan book pools, although these are no longer reported by sector.

Within Lloyds’ £4.35bn Irish commercial property book, £4.1bn of loans are impaired, reflecting 94.6% of the remaining exposures, while the bank has made provisions covering £3.2bn.

Lloyds’ Irish book is comprised of £2.7bn of commercial property investment loans, of which £2.4bn are impaired and £1.7bn in provisions have been set aside, and £1.7bn of commercial property development loans.

Lloyds’ entire £1.7bn Irish commercial property development loan book is impaired, with provisions of up to £1.5bn set aside.

CoStar News reported back in mid-June that Lloyds is expected to bring to market a nationwide direct portfolio of Irish shopping centres and retail parks, dubbed Project Thomond, in September.

Project Thomond, so-named after Thomond Park, which is the location of Limerick Rugby Park. There is understood to be at least two assets in Limerick as well as shopping centres and retail parks in Dublin, Cork, Sligo and Cavan.

Based on the current understanding of Project Thomond’s assets, an asking price of circa €120m is thought probable.

Savills and Bannon are understood to be appointed to sell Project Thomond on Lloyds’ behalf.

Lloyds is also one of the three creditors which have enforced over the 400-acre Cherrywood Business Park and development scheme south of Dublin, with a guide price of €220m.

Stephen Tennant and Paul McCann of Grant Thornton have been appointed as receivers, who in turn have instructed Savills, in a sales process dubbed Project Cherry, as first revealed by CoStar News six weeks ago.

Also coming from Lloyds in the third quarter is “Project Pheonix II”, in reference to the non-performing loan portfolio Lloyds sold to Apollo last December, comprised of granular residential properties throughout secondary locations in Ireland.

Impairment coverage for Lloyds’ UK commercial property exposure is reported only as part of a merged loan pool including corporate loans, some of which will be corporate loans to property companies while many more will not.

This merged segment, which fell by £3.6bn to £7.9bn over the first half of the year, has £5.3bn in impaired loans, reflecting 66.8% of the pool, against which Lloyds has set aside £2.6bn in provisions.

Furthermore, this £7.9bn merged pool of UK commercial property and other corporate loans includes the dwindling Corporate Real Estate Business Support Unit (BSU) portfolio, which is now also no longer separately stated.

However, this morning’s interim results stated that the BSU portfolio “continues to reduce significantly ahead of expectations” – a 35% reduction in net book value for the first six months of 2014, compared to 24 per cent in the same period last year

Consensual asset sales by customers, loan sales and asset disposals totalled £2.5bn net book value, compared with £3.6bn for the same period last year.

The BSU impairment charge in the first half of 2014 reduced to £92m compared to £317m in the same period to 2013, reflecting lower gross charges on a reduced portfolio, some improvement in real estate market conditions in the regions as well as asset management which has enabled a number of write-backs on previously impaired loans.

Lloyds’ two major loan portfolio sales in the first half of this year have been the sale of the €590m Project Aberdonia to Marathon Asset Management for €280m and the sale of the £536m Project Avon to Cerberus Capital Management for £352m.

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