ANALYSIS-UK property upswing -- the real bank bonus

By Sinead Cruise

LONDON, Feb 1 (Reuters) - Large chunks of troubled real estate loan books could turn a profit for embattled banks in 2010, far sooner than hoped, as UK commercial property regains investor favour, freeing up cash for new bank lending.

'It's hard to pinpoint the exact time but I would have thought that we should start to see property mark-ups emerge as a feature on bank balance sheets before too long,' said Richard Batty, global investment strategist at Standard Life.

The UK commercial property sector is in a nascent recovery and some experts reckon banks may soon post mark-ups to reflect the 7.3 percent rise in capital values seen in the last quarter of 2009, including a 3 percent rise in December.

The rebounding asset class may add a surprise lustre to 2010 earnings from the likes of Lloyds Banking Group and Royal Bank of Scotland, whose books are laden with troubled loans worth more than the property they are secured on.

'We've seen revaluations in other assets in the last quarter, in asset-backed securities (ABS), for example, where new market prices have been established. These mark-ups would of course be very helpful for the banking system,' Batty said.

After plunging 45 percent in the two years to August 2009, property values are now rising, giving banks more options to sell or strike joint ventures on property assets and unlock fresh capital for activities, such as investment banking or mortgage lending, with more lucrative margins.

Michiel Rang, of ING Real Estate Finance, said many non-specialist investors held distorted views of UK property market fundamentals, where low interest rates, a supply shortage and recovering rental market have created opportunities to capture yields higher than most other mainstream asset classes.

The UK is further ahead in its recovery than Continental Europe but the same fundamentals apply, Rang said.

Three-month total returns for UK commercial property hit 9.4 percent at end-December 2009, against 5.5 percent for equities and -1.9 percent for bonds, data from benchmark provider Investment Property Databank showed.

'We are seeing the effect of classical over-enthusiasm transferring into classical over-bearishness. The uptick over the last quarter does not surprise me,' said Rang, head of ING's Europe & Asia Pacific operations.

The sterling rate, down about a quarter since 2007, has made UK commercial property more attractive to foreign investors such as South Korea's National Pension Service, which bought HSBC's London HQ for $1.3 billion in 2009.



PIPE DREAMS?

Long-suffering UK bank investors should abandon hopes for significant mark-ups in the value of their hefty commercial property portfolios until at least 2011, even though average prices are rising at a record pace, said Justin Bates, a financials analyst at Daniel Stewart.

'History tells us that the number of insolvencies and company administrations don't stop rising until about two years after technical recession has ended, so lots more pain is on the way I would suggest,' he said.

RBS has put UK commercial property loans totalling 32 billion pounds ($52 billion) into an asset protection plan backed by the government. Those loans are held by about 18,000 mostly mid-sized developers and property investor clients and some fear these will take years, not months, to unpick.

The International Monetary Fund said four months ago that British and Eurozone banks were only about 40 percent through their writedowns, which is consistent with wider doubts lingering over the value of poorer quality properties on their balance sheets.

That said, Lloyds' Chief Executive, Eric Daniels, has said the worst of that bank's commercial real estate impairments are over, while some continental banks are also starting to make positive noises on this front.

Even banks that have yet to fully write-down their property assets may now not have to do so, said Singer Capital Markets analyst Ian Wild.

'Administrative issues slowed down the ability of banks to address their property problems at the height of the crisis but these delays may have done them an unexpected service,' he said.

(Editing by Andrew Macdonald)

($1=.6147 Pound)

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