UPDATE 2-Spain targets London investors for 'bad bank'

* New entity will house billions in soured property assets

* Economy Minister to meet potential investors in London

* Signals "conservative" pricing of assets to be transferred

* Private investors to own 55 pct of 'bad bank'

* Healthy banks can participate in equity

(Adds details from parliament)

By Jesús Aguado and Sonya Dowsett

MADRID, Oct 3 (Reuters) - Spain's Economy Minister will meet investors in London on Thursday in the hope of tempting them to buy into a 'bad bank' that will house billions of euros of the country's soured real estate assets.

Madrid hopes the newly formed asset management company will help unblock the credit flows to businesses and families that have been progressively choked off as the country's economic crisis has worsened.

Its creation is also a condition of Spain receiving up to 100 billion euros ($129 billion) in European aid to patch up its creaking banking system, overexposed to a housing boom that crashed in 2008.

Spain expects private investment to finance more than half the heavily written-down assets - including foreclosed property and bad loans - that lenders will transfer into the entity, which is expected to be in operation by early December.

The state wants to limit its ownership to under 50 percent, to avoid an impact on public debt. The government expects private investors to own at least 55 percent of the 'bad bank', Economy Minister Luis de Guindos said in a speech to parliament.

The assets to be transferred would be priced "very conservatively", and details would be given in coming days, he added.

Spain's banks will need almost 60 billion euros in extra capital to ride out an extreme economic downturn, an independent report concluded on Friday.

They will transfer foreclosed property and bad loans to housing developers to the bad bank and receive state-backed bonds in return which can be used as collateral with the European Central Bank to get cash.

Sound loans to real estate developers might also be parked there, de Guindos said.

The entity would be financed mostly through debt, with a 10 percent equity component subscribed by private investors and the state.

The transfers would take place in the first quarter of next year, and the pricing of the assets should be seen in the context of the entity's 15-year lifespan, the minister added.


Pricing is key as it must tread a delicate balance between being low enough to attract investors and high enough not to force further losses on fragile lenders.

"The bad bank will buy assets at very conservative prices and it will stimulate the Spanish housing market," de Guindos said. "It will bring housing on the market at reduced prices."

Spain has already forced banks to write off 137 billion euros in bad real estate investments through two laws this year, giving lenders an average of 45 percent coverage against their book value.

But banking sources expect a further 5 to 10 percent to be shaved off the value of assets before they are transferred to the entity in order to attract investors.

The bad bank will be split up according to asset type in order to attract different investors, de Guindos said.

"A finished home is not the same as a building plot, a house in an urban area is not the same as one on the Spanish coast," de Guindos said.

Spain's healthy listed banks can participate in the equity component of the bad bank, de Guindos said. Santander has not said whether it wants to participate or not. BBVA

said it was considering transferring assets as well as taking a stake but had not made a decision on either issue.

($1 = 0.7731 euros)

(Additional reporting by Nigel Davies; Editing by Fiona Ortiz and John Stonestreet)

((sonya.dowsett@thomsonreuters.com)(+ 34 91 585 8328)(Reuters Messaging: sonya.dowsett.thomsonreuters.com@reuters.net))