Royal Bank of Scotland's 'bad bank' to offload 1,300 homes

Around 80% of the properties are worth less than the UK average home price of £242,415. Photograph: Johnny Green/PA

Royal Bank of Scotland's £3.2bn distressed-property arm is trying to sell off a portfolio of more than 1,300 UK residential properties, and is considering floating them on the stock exchange, in a move that would be seen by the City as the creation of a mini "bad bank".

The investments are worth around £200m and are held within a little-known RBS subsidiary called West Register, which holds assets valued at more than £3bn, mostly in the UK and Germany.

The offshoot buys troubled properties from RBS and would almost certainly form part of the potential "bad bank" that chancellor George Osborne is considering hiving off from the rest of the 81% taxpayer-owned lender.

Aubrey Adams, head of property in RBS's Global Restructuring Group (GRG), which includes West Register, said: "GRG is in effect the bad bank … we are looking very hard at selling [the residential portfolio] as a whole. I would love to do this as a REIT [real estate investment trust, an investment that trades on major stock exchanges]."

A separate Guardian analysis of the West Register portfolio demonstrates what a challenge it would be to sell, as the quality of assets vary hugely. The portfolio contains more than 1,300 homes in Great Britain, ranging in value from about £4m down to £40,000. Around 80% of the properties are worth less than the UK average home price of £242,415, according to a detailed analysis of the portfolio conducted for the Guardian by property website Zoopla.

While the analysis suggests that the value of West Register's residential investments have remained flat over the past three years, it also shows they have dropped by about 7% since RBS was bailed out in 2008. The residential portfolio includes ownership or rights to loans on properties such as:

• The luxury apartment block Charters, a Sunningdale home famous for once entertaining the Duke and Duchess of Windsor.

• A garish £2m house called Water Music located in the millionaires' enclave of Sandbanks, Poole, and once the home of former Bournemouth football club owner Eddie Mitchell.

• A St Andrews student house next door to the digs occupied by Prince William and the then Kate Middleton during their university days.

• Large numbers of new-build housing estates and apartment blocks built during the last boom and located across the country.

• Streets of old properties dotted around the UK's provincial cities, often repossessed from failed buy-to-let landlords.

The investment bank Rothschild is compiling a report for the Treasury on whether it is feasible to split RBS into good and bad banks. It is expected to report within weeks, with analysts broadly expecting a recommendation against a break-up. They argue it is not needed as RBS has already wound down or sold off the vast majority of its bad loans and European state aid rules and the need for approval from RBS's minority investors would make the plan unworkable. In any case, Adams predicts that West Register will sell all of its assets within three years.

Apart from residential property, the Guardian's analysis also shows that West Register controls vast quantities of land as well as a diverse range of commercial property assets. They include:

• Top London office blocks.

• More than 100 pubs and hotels, including four containing restaurants run by the celebrity chef Marco Pierre White, plus the rump of the Ramada Jarvis hotel chain.

• A Norfolk pig farm with capacity for about "720 sows with 750 maiden gilts".

• Care homes.

West Register started coming to the City's attention after RBS was saved from collapse by a £45bn taxpayer bailout in 2008. However, the subsidiary was originally set up in the 1990s to take on properties from highly distressed lending situations to avoid selling them in the open market at knockdown prices. It competes against outside investors to take control of troubled RBS assets and only acquires a property if it makes the winning bid.

RBS says West Register holds £3.2bn of assets, 38.8% are located in Great Britain, 33.3% in Germany, 8.3% in the US, 2.7% in Ireland and 17% in the rest of the world.

The vast German portfolio is partly a result of RBS's ill-fated takeover of the Dutch bank ABN-Amro – the deal that brought the Edinburgh-based bank to its knees in 2008.

However, West Register has attracted an army of critics. Some say that the process allows RBS to book smaller writedowns on distressed assets as, if West Register wins the bidding process, it will have valued the troubled properties at a higher rate than the market. RBS counters that the process means the bank gets a better return for its main shareholder, the taxpayer.

The property arm has attracted further controversy, as borrowers have accused it of being a mechanism used to aggressively take their assets away – although RBS says West Register only ever bids after investors have no chance of recouping any return on the initial investment.

But despite those brief public debates, West Register remains an obscure arm of which little is really known externally. Even within the bank there are contradictions, as RBS has consistently maintained that West Register's sole function is to own properties, and not the loans behind them.

However, the Guardian's analysis of Land Registry records shows that West Register in fact controls rights to a string of the bad loans, including ones attributable to: 10 Fleet Place, a City office block that is in the process of being sold for £115m; Drayton Manor theme park in Staffordshire; Harleyford Golf Club, part of the luxury Harleyford Estate and marina complex in Buckinghamshire; and Sloane Square House, a large office and apartment block in one of the most prestigious and expensive areas of London.

RBS added that West Register has rights to restructured loans on properties, which allow the bank to share in any profits made on properties that are eventually sold. It is not clear whether the rights, known as charges, allow West Register to more easily take ownership of properties.

RBS's distressed-property arm has already spent years shrinking its balance sheet since the crisis. The process has included high-profile deals such as selling Heineken a portfolio of pubs for £412m in 2011, including the Punch Bowl in Mayfair where the lease is part-owned by the film director Guy Ritchie.