Lloyds Banking Group has kickstarted the sale of a £1bn portfolio of commercial property loans, as it continues to reduce its exposure to the sector.

The bank has appointed JP Morgan Cazenove to undertake the sale, which will consist of distressed loans that are managed by the bank’s business support unit.

The loans have a face value of £1bn, but will be sold at a discount. They are secured against office, retail and industrial assets, but not hotels or residential assets, and they are all outside of London.

The process is at an early stage, but it is understood that Lloyds is looking to complete a deal by the end of the first quarter of next year. A small number of buyers are likely to be approached although, given the amount of opportunistic and private equity capital which has been raised targeting sales by banks, the sale is likely to attract widespread interest.

Earlier this year, Royal Bank of Scotland agreed a deal with Blackstone to sell a 25% stake in a £1.6bn portfolio of property loans. The loans will be put into a fund managed by Blackstone, and RBS will retain a 75% stake in the fund’s equity which it will sell down over time.

In contrast to this, Lloyds is looking to undertake a straight sale of the portfolio retaining no residual interest, in order to speed up its deleveraging process.

Despite the need for banks to reduce their exposure to the property market there have been few large loan portfolio sales in the UK and Europe since the beginning of the downturn, and Lloyds is understood to be looking to sell this portfolio ahead of a perceived increase in loan sales.

Earlier this year (news, 18.3.11) Lloyds put out feelers on a potential sale of a £1bn of performing property loans from its real estate lending unit, but did not pursue this sale, and the sale of loans from its support unit is the first time it has packaged up loans for sale.

The bank is still in the process of completing the sale of the Flagstaff portfolio of 35 assets to Telereal Trillium for around £47m, the first time it had packaged up distressed assets – all in receivership - from different borrowers for sale.

It sold £1.8bn of property in the first half of 2011, having sold £4bn last year.