Part Government-owned financial firms, The Royal Bank of Scotland (RBS) and Lloyds Banking Group, are selling off repossessed properties to their own subsidiaries rather than the open market to avoid heavy financial losses of billions of pounds, according to Times Online.
RBS has set up West Register to sell off the properties after the owners had fallen into default with their creditors. Lloyds Banking Group has a similar subsidiary in place for the same purpose as it had already inherited massive commercial property loans when it took over from HBOS.
This practice of keeping the properties in the same group was popular in the early 1990s towards the end of the recession. It enables banks to avoid selling properties which have significantly fallen in value and reached negative equity to an outside buyer, which would incur heavy losses.
The subsidiary is able to buy the property asset, for example a shop or office block, at a much reduced price with possible promise of a future interest in value.
However, property agents said that selling on the open market was likely to result in a faster return. The proportion of banks that opt to keep the property rather than sell on the open market is unclear in many cases. Agents said that banks had chosen to take this route after values of properties fell in the 2007 peak of the recession.
Head of valuation at Savills, the property group said: ?Banks sell the property but, rather than selling into the market, they go into a workout vehicle. It is a model that we saw in the last downturn. The subsidiary pays what the property would fetch on the open market. It has to be a fair value.?
