DealZone

The Office: More tragedy than comedy for UK banks

Pedestrians walk in the financial district of Canary Wharf in London March 24 2009. With property markets stabilising and hopes that the worst of the financial crisis is behind us, Europe’s banks are now looking to resolve their next biggest problem: 225 billion pounds of loans backed by UK commercial property.

As Sinead Cruise and I wrote earlier today, banks are now organising to sort through this massive debt pile, picking the good from the bad, foreclosing on properties and selling off what they can.

“Lenders have long turned a blind eye to breaches of covenants as long as they met interest demands by collecting rents. But they are now abandoning this softly-softly approach as the British economy worsens, planning foreclosures on a scale not yet seen in this cycle.”

“Until now, banks have only repossessed as a last resort because they feared they would be unable to sell assets in the debt-starved investment market. But a flurry of fund launches and opportunistic rights issues has ratcheted up competition among buyers in the sector, stoking hopes for less costly exits.”

Real-estate investors are lining up for a rush of deals in the third and fourth quarters of the year, as many banks are waiting for the fine details of the government’s asset insurance scheme, due to be published in July, before they make final decisions on what to do with their loan books.

General Growth’s collapse

mallThe modern shopping mall is the cathedral of consumer prosperity, so news that U.S. shopping mall owner General Growth Properties sought bankruptcy protection, capping a months-long effort to cope with a $27 billion debt load, is something of a seminal event in the global economic crisis.

The story of the second-largest U.S. mall owner reflects the larger trend in today’s credit-stifled economy: companies that loaded up on debt in better times and have been struggling to refinance so they can cover their payments. Many have succumbed to Chapter 11 after frequent negotiations with lenders, and many more are expected to.

It’s even worse for shopping malls. Commercial-property values have sunk, and the U.S. retail market is hurting. Many analysts say General Growth could survive a lengthy bankruptcy without resorting to a liquidation, but would have to sell off some properties. That could consolidate power in the mall industry if major players like Simon Property Group, Westfield Group and Taubman Centers could cherry-pick some of the assets.