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On 30 June 2008, Royal Bank of Scotland had £51 billion in outstanding loans sec- ured against UK commercial property, plus another £40 billion lent to owners abroad. That was what now-disgraced chief executive Sir Fred Goodwin told analysts when presenting first-half results for a bank that went on to have a second half from hell.
It will be interesting to see how much of that £91 billion is written off when new chief executive Stephen Hester presents results for the whole of 2008 next week.
Between June and December, property values fell by about 30%. So will the former chief executive of British Land therefore announce a £27 billion writedown on its global commercial property loan book?
Er no. It doesn't quite work like that. If it did, it would be the end of RBS, Hester and quite possibly Gordon Brown.
What might happen is that the worst of the property loans will be retired into the Government home for distressed assets - namely the asset protection scheme, details of which are expected any day now.
But Hester still faces a thorny decision. For the safety margin between the £91 billion of loans and the value of the property used as collateral has almost certainly vanished.
Here's why: the average loan-to-value (LTV) ratio of the £51 billion in commercial property loans in the UK last June was 68%. That means the properties were valued at £75 billion. Apply the 30% fall values, and RBS suddenly has loans of £51 billion against properties worth £52 billion. The same logic applies to the £40 billion of overseas loans.
RBS is trying very hard to ignore its 98% LTV ratios. Here's BankThink: forget the LTV ratio, as long as the rent on the property covers the interest we are charging on the loan, let's relax.
After all, we have no intention of calling in the loan and forcing a sale of the property in this market - that would be madness.
This defence ignores a tricky question: will those rents keep coming in to cover the interest payments? Answer, yes, mostly, thanks to handy lease clauses that guarantee upward-only rent reviews.
But tenants are starting to go bankrupt in alarming numbers, especially in the High Street.
That will force RBS to foreclose. Then what? The £91 billion question awaiting answer is this: will the bank start to sell foreclosed properties at prices far below what they hope to get one day, some day? Or will it grimly hold on, and hope the market will recover?
These stick-or-fold calculations affect the "impairment" charge calculation used to write down the value of the loans. So far, RBS has taken only a tiny 0.2% "impairment". In 1992, the figure was 5%.
If Hester goes for that, it's a £4.5 billion hit. The whole thing is, of course, a guessing game.
But let's guess; Hester is new. None of this is (so far) his fault. The recession feels deeper than 1992. What shall we say - £6 billion, £7 billion - higher, lower?
New bids on the block at auctioneers
Swing hammer, swing. Six weeks ago, it was suggested here that the property auction market was perking up. This week, it was back in rude health.
At the Cumberland Hotel near Marble Arch, there was standing room only at a two-day sale of 400-plus residential properties conducted by Allsop auctioneer Gary Murphy.
More than 90% of the lots were sold on the first day — a success rate only matched at the height of the property boom.
More than 1000 people crowded into the room, said Murphy. “It was almost overwhelming. We had to put spotters at the back to ensure we picked up the bids.
“It was not like this even in the last boom. I hope this is a signal we may have turned the corner.”
Even more interesting is that the lots sold at an average of 10% above the auctioneer's guide price. One house in Kensington went for double the £1.2 million estimate.
Even office blocks are starting to sell. Last week, Allsop held a commercial sale and also sold 90% of what was on offer.
Auctioneer Duncan Moir says the result was “phenomenal”. Crikey.
Lisa's hubby makes beeline for Russia with Invesco's backing
Anton Bilton must love Russia. This week the 40-something developer who is married to model and actress Lisa B announced slightly complicated plans that will result in all his London property eggs being transferred to a basket in Moscow.
Fund manager Invesco is to chip £75 million into a £125 million capital-raising exercise for Bilton's AIM-listed Raven Russia, a 72-strong business that builds big sheds on the steppes. That will allow Bilton and his partners to do three things:
First, take over the UK business Raven Mount, its £20 million cash pile and £35 million of UK properties — which will be sold. Second, boost the Russian balance sheet which is just about to take a $90 million (£62 million) hit from a revaluation of the 13 million square feet of industrial units Bilton has built from scratch since 2005. Third, use anything left over to build even more sheds.
And why would a supposedly sane fund manager like Neil Woodford at Invesco guarantee Bilton £75 million to invest (a) in property and (b) in Russia? Again, three reasons. First, Invesco makes a 12% return on the money. Second, it gets the right to buy shares at 25p in a company whose net asset value is about four times that number. Third, and most important, it trusts Anton. A man who does love Russia.
“If I were an alien developer from outer space, I'd land my ship right by the Kremlin now,” he says. “Russia is less risky than Britain now. Here, the market is catastrophic.
“Russia has little home ownership and a tax rate of 13% — that gives consumers very high disposable incomes. OK, there is a downturn. But there is still a huge demand for the mid-market Western goods like shampoo and stuff — you know, the sort of stuff that we store in our sheds.”
