HSBC’s Canary Wharf departure vindicates NPS’s decision to sell

When South Korea’s National Pension Service sold the bank HSBC’s Canary Wharf headquarters to the sovereign wealth fund Qatar Investment Authority for £1.1 billion ($1.4 billion; €1.3 billion) in 2014, the deal was heralded as “a sign that the capital’s commercial property market is booming again,” by The Financial Times. It was a record fee paid for a single building at the time.

Besides its impact on the big picture, the sale, conducted just five years after NPS paid £772.5 million for the building in a notable early acquisition following the global financial crisis, also made heroes of a fledgling real estate team at the state pension. It was easy to see why. The exit to QIA crystalized for NPS almost $900 million in profit, thanks to the building’s generous in-place rent distributions and the capital gain from the sale, according to the Business Korea news service.

The news this week that HSBC has decided to leave the 1.7-million-square-foot tower at 8 Canada Square to migrate into central London has rocked the eastern Dockland region of London, so long known for collecting the highest-profile financial services tenants. The bank confirmed it will depart after its lease expires in 2027, adding its brand to an ever-growing cohort of blue-chip corporates embracing – rather than rejecting – hybrid working for its workforce and so opting for smaller premises.

More broadly, the update by one of banking’s biggest brands that it intends to dramatically downsize its global headquarters is another indicator of an already embattled office sector. HSBC’s reduction in its headquarters space adds to dismal investment volumes across markets around the world and increasing instances of borrower defaults by landlords that would rather call time than double-down on their positions.

For NPS, HSBC’s exit from the Fosters & Partners building further validates its decision to sell – even when there was still 13 years left on the lease at the time of the exit.

Let us bring you into a conversation between PERE and a senior executive at NPS held in 2021. To the executive, it was clear the state pension doubted 8 Canada Square’s longevity as a fully occupied headquarters building. The executive described it as a single-tenant building in a market dedicated to single-tenant buildings. As he recalled, there were no options to make it multi-tenanted. Furthermore, he revealed HSBC’s CPI-indexed lease had resulted in its rent being 25 percent higher than comparable buildings. To paraphrase him, he assumed the lease renewal effort would be “painful” and so NPS “decided to take the profit and put it somewhere else.”

NPS could not have forecast the ‘black swan event’ that would be covid-19 starting five years after selling. But the institution did sense the building was becoming outmoded well in advance of the pandemic.

It would be wrong, however, to read into NPS’s now-validated sale of HSBC Tower in Canary Wharf as tantamount to the investor having a negative attitude on large, institutional-quality office towers.

Moreover, you would be hard-pressed to find an organization that has made a bigger commitment to the sector. NPS is a major investor in the poster child of modern offices: developer SL Green’s One Vanderbilt in New York. That property sits within approximately 45 direct holdings, also including Toronto’s CIBC Square at 81 and 141 Bay Street; and Frasers Property’s Frasers Tower in Singapore – all valued over $1 billion and, critically, all multi-tenanted, well-amenitized buildings brimming with ESG credentials. “We are a defensive player and buy landmark assets in key cities – or we will produce them there,” the NPS executive source told us.

NPS’s bets on today’s super prime working spaces have only recently begun. But HSBC’s decision to quit its tower at Canary Wharf has meant the South Korean institution’s judgment has already proven to be sound.