Sealed at a price of around £720 mln (€927 mln), the sale of the Gherkin indicates that the City of London has hit a new market peak.
Sealed at a price of around £720 mln (€927 mln), the sale of the Gherkin indicates that the City of London has hit a new market peak.
The sale of the 180-metre high office tower at 30 St Mary Axe both exemplifies the unprecedented level of interest in London offices as well as the attainment of a new market high as the City of London defiantly surpasses pre-crisis levels.
Dubbed the Gherkin for its pickle-like shape, the UK capital’s most iconic skyscraper changed hands in early November after having received over 200 expressions of interest from prospective buyers. It was sold for around £720 mln (€927 mln), representing a 20% premium to the asset's sale price in the boom year of 2006.
PREMIUM PRICING
Designed by Sir Norman Foster of Foster & Partners, the 50,000 m2 building was put on the market early this summer by receivers Deloitte Real Estate after its previous owners Evans Randall and German firm IVG failed to strike a restructuring deal over its spiralling debts. It was marketed both through invitation to selected investors as well as through an advertisement in the international press.
‘Our instructions were to achieve the highest price within 2014,’ commented Stephen Down from Savills, the agent appointed by the receivers to manage the sale process.
‘Since it was a receivership sale and involved an iconic building, the decision was made to open up the process and create a website for investors to register their interest. We knew that there were investors specifically interested in the Gherkin and that the asset would appeal not only to people’s heads but also to their hearts.’
The bidding process was driven by wealthy individuals as well as financial institutions from across the globe, he added. ‘The Central London commercial property market has benefitted from improving market conditions over the course of the last few years. Not only have we witnessed a sustained appetite from international investors for assets in London but we have seen a substantial improvement in business growth and take-up of office supply as the capital’s economy continues to improve.’
BRAZIL'S RICHEST BANKER
The Safra Group, controlled by billionaire Joseph Safra, Brazil’s richest banker, had been looking for a suitable asset to make an entry into the UK commercial property market for some time and following the appointment of Deloitte as receivers, registered its interest in the asset. It is understood that Safra offered to pay over £700 mln in cash for the building, only slightly more than a number of other investors which also passed to the second round of bidding. The deal reflects a 12% premium to the asset's guide price of £640 mln.
Commenting on the transaction, Safra said the acquisition is consistent with its real estate strategy of investing in properties that are ‘truly special – at the best locations within great cities.' 'While only 10 years old, this building is already a London icon that is distinguished from others in the market, with excellent value growth potential. We intend to make the building even better and more desirable through active ownership that will lead to a range of enhancements that will benefit tenants,' Safra said. The group, with assets under management of over $200 bn, operates banks and invests in a wide array of businesses across North and South America, Europe, the Middle East and Asia.
TROUBLED HISTORY
IVG’s Euroselect 14 fund and Evans Randall bought the landmark multi-let asset from its original owner, reinsurer Swiss Re, which still occupies the lower half of the building. They paid £600 mln in 2006, using £396 mln of debt from a five-bank consortium led by BayernLB and including Deka, Helaba, ING and LBBW.
IVG and Evans Randall were then hit by the European financial crisis, which meant that by 2009 the Gherkin’s value had dropped to £480 mln. In addition to the loss in value, the Swiss Franc-denominated senior loan on the asset was not fully hedged against currency risks, something which had dire consequences when the Swiss Franc started a long path of appreciation against Sterling which has continued until this very day. The asset was put in receivership in April after years of defaults.
It was marketed for a price of £640 mln, and few people expected it to trade for much more. But at over £700 mln, the closing price surpassed all expectations, which effectively resulted in the repayment not only of the creditor banks but also, to a certain extent, of some of the equity capital put up by its former landlords.
Closed at a yield of less than 4%, the sale compares positively to 2006 when the Gherkin changed hands for 4.3%. Although the price paid today may appear to make little sense to seasoned property investors, it reflects the positive rental growth prospects for London’s office market as well as the staggering level of appetite for true core assets in the UK capital.
‘The UK market offers rental growth prospects – which is something you cannot say for most European cities,’ Down explained. ‘Interest rates are low and the UK is an attractive market from both a micro and a macroeconomic perspective. The world’s capital has been flying to safe havens because of market uncertainty. It was the case two years ago and still is the case today.’
In the specific case of the Gherkin, the investment ‘does make sense from an equivalent yield point of view’, Down added. The building is currently 100% let at an average of £55 a square foot with the potential – through asset management - to reach £75 over the next three to four years thanks to lease expiries and rent reviews.
EXPENSIVE TOWERS
Market experts expect that London’s prime office yields will remain strong in the next few months, largely as a result of the weight of overseas capital targeting commercial real estate in the capital city. ‘Supply remains constrained in the market,’ Down said. ‘Even if interest rates move up a fraction that will have a limited impact on prime yields provided that there is rental growth.’
Landlords are putting assets on the market to benefit from the increase in values. Last month, Norway’s state fund spent £582.5 mln on the Bank of America Merrill Lynch Financial Centre while a consortium including China Life Insurance and Qatar's sovereign wealth fund snapped up Clifford Chance's headquarters in the financial district for £795 mln (€1 bn). Qatar's sovereign wealth fund has also made a preliminary takeover approach with Brookfield Property Partners for Canary Wharf's largest owner Songbird Estates but its £2.18 bn bid was rejected as too low.
The largest trophy asset currently for sale is the HSBC global headquarters, which was put on the market by the South Korean pension fund, National Pension Service of Korea (NPS). Qatar’s sovereign wealth fund has reportedly agreed to buy the asset - London’s largest and most expensive office tower - for a price of £1.1 bn, just topping the previous record.
The Canary Wharf landmark has a chequered history and has been sold a number of times in recent years. NPS bought the building for £772.5 mln in cash in 2009. It was sold just two years previously to listed Spanish property group Metrovacesa for £1.09 bn. Sold at the height of the property boom, the deal marked the single largest commercial property sale London had ever seen. However, just one year later, Metrovacesa was forced to sell the property back to HSBC when it defaulted on loans, in another example of a deal gone sour due to the credit crunch.
By Virna Asara
Southern Europe Correspondent