One of the UK’s largest commercial property lenders is launching the sale of a big portfolio of nonperforming loans secured against struggling shopping centres.

NatWest, formerly Royal Bank of Scotland, has appointed PwC to explore the possibility of selling a collection of retail and leisure property loans with a face value of £550M, React News reported. 

It is the first significant sale of a portfolio of nonperforming property loans for several years, and it has been hastened by the impact the coronavirus has had on the retail sector.

The loans are secured against about 25 assets owned by about 15 borrowers, React said. No price guidance has yet been put on the portfolio, which would likely have to offer a deep discount to potential investors in order to entice them to buy.

The buyers of nonperforming loans make money from them in two main ways: encouraging the existing borrowers to refinance the loans elsewhere and paying their debts back in full, or close to in full; or forcing the sale of the underlying properties for more than the price paid for the loan.

The problem with this strategy in retail property today is that no one wants to buy shopping centres or lend against them, even at prices vastly below their peak. If the buyer of a loan ends up taking control of the asset, they may have to put significant money in to find new tenants, which erodes the potential return.

KPMG, the administrator to collapsed shopping centre giant Intu, said in a recent report that the majority of the centres the company owned are worth less than the debt secured against them — it was just trying to work out how much less.

Another interesting factor in the sale being mulled by NatWest can be summed up by the phrase “once bitten, twice shy.”

Private equity firms made hay in the UK between 2010 and 2014 by buying huge portfolios of distressed loans from banks and then selling or refinancing the properties at a profit.

But many of those buyers, like Lone Star, Oaktree and Cerberus, got their fingers burned in the shopping centre sector and lost the equity they put into shopping centre deals when values dropped and they handed keys back to lenders. Oaktree gave a portfolio of shopping centres that it acquired through an NPL sale back to a new lender with whom it refinanced the assets.

British banks have been encouraged by government and the Bank of England to show forbearance to borrowers experiencing loan defaults to avoid creating distress in the financial system, but the potential sale indicates that NatWest would rather take a loss now and hand the problems in its shopping centre lending on to someone else.

NatWest said in third-quarter results last year it has a £22B commercial real estate loan book. It said loans to property companies were among the top three sectors where it had to provide forbearance to borrowers, and real estate was also in the top three sectors where its loans were impaired, along with retailers and leisure operators.

Unlike in the wake of the credit crisis, NatWest can afford to sell the loans at a loss — tighter banking regulation means it has a much larger capital buffer to mitigate the impact of loans going bad.