Lloyds lifts hope UK real estate losses past peak

* Most of 13.4 bln stg impairments on commercial property

* FTSE 350 Real Estate Index sees highest intraday in 7 mths

* Results fuel hopes for 2010 lending comeback

By Sinead Cruise

LONDON, Aug 5 (Reuters) - Lloyds Banking Group (LLOY.L) fanned hopes for an imminent end to Britain's UK real estate debt drought after saying impairments in its multi-billion pound commercial mortgage book had peaked.

Lloyds said first-half bad debts rose to 13.4 billion pounds ($22.75 billion), of which 9.7 billion was in its wholesale division, comprising commercial real estate. The impairments knocked Lloyds to a blistering loss. [ID:nL4423910].

The wholesale impairments were more than eight times those seen a year ago, implying the mammoth task of marking down property loans inherited from HBOS is broadly complete.

Lloyds described its revaluation of HBOS' legacy real estate assets as "prudent" but analysts and brokers said this description failed to reflect just how aggressively Lloyds has moved in efforts to restore confidence in its business.

"They took a very tough view on the HBOS loan book at the start of the year so I'm not surprised they have said the point of maximum risk has passed," Noble Group property analyst Michael Burt said.

"We have seen the pace of correction in prices slow in recent months and it is hard to see how that might accelerate again," he said.

"You can argue that supply of debt is still constricted but you can no longer say there is no investment demand for fundamentally good quality UK commercial property."

The FTSE 350 Real Estate Index hit a seven-month intraday high following Lloyds' results, as investors anticipated a lift in lending volumes now the extent of its liabilities had been uncovered.

The index .FTNMX8730 was up 4.9 percent to 1,863 points at 1043 GMT, chiefly due to gains of more than 6 percent at bluechips Land Securities (LAND.L) and Hammerson (HMSO.L).

TROUGH OF THE MARKET?

Average prices for UK office, retail and industrial real estate have dropped almost 45 percent since June 2007, when billions of dollars of U.S. subprime mortgage losses forced global credit markets into meltdown.

With average income yields almost double the 10-year UK gilt and interest rates languishing at historic lows, many investors see now as a good time to get back into the market.

"With prime yields on average 25-50 basis points lower than they were at the start of 2009, it is clear that capital values in some areas are beginning to improve," said Mat Oakley, head of commercial research at property broker Savills (SVS.L).

"I think it's too early to call the bottom for all types of property, but for well-let income producing investments it's not far off," he said.

After addressing the need for massive real estate markdowns following the takeover of HBOS, Lloyds said it expected the underlying credit risk of its real estate portfolio to rally over the rest of the year.

"Against our base economic assumptions, the remainder of 2009 and into 2010 is expected to be difficult; but a combination of conservative lending policies ... together with a stabilisation of market conditions is expected to lead to an improving portfolio trend," the bank said. (Editing by Andrew Macdonald) ($1=.5890 Pound) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)