EUROPE NEWS: Lehman’s London legacy

Take note of two recent headlines in the Financial Times. “Nomura wins 6-year rent holiday by moving headquarters” and “China aids Canary Wharf owner”.

The two stories behind the headlines provide an interesting dichotomy in the London office market.

The first concerns Nomura’s search for a new headquarters in London. The Japanese bank has been looking for an office for several months. Not only does it need a new European HQ for its own staff, but for Lehman Brothers’ Europe, which it took over last year. Nomura currently sublets about 350,000-square-feet in Lehman’s one million-square-foot office in Canary Wharf in London’s Docklands.

Staggeringly, Nomura has managed to negotiate nearly six years free rent at an office development it has chosen, called Watermark Place, which is co-owned by a subsidiary of Ontario Municipal Employees Retirement System (OMERS) and UBS Global Asset Management.

Getting a six-year rent free period is a graphic reminder of the softness of the London office market at this moment – which makes the investment by the Chinese Investment Corporation in Canary Wharf all the more notable.

The sovereign wealth fund CIC decided last month to help recapitalise Songbird Estates, the majority owner of Canary Wharf Group, whose tenants include bankrupt Lehman Brothers and an array of large financial institutions, such as Bank of America and Morgan Stanley. 

Songbrid has been facing pressure to refinance an £880 million (€999.7 million; $1.5 billion) loan from Citi used to take over Canary Wharf in 2004 for £1.7 billion.

The loan is due to be repaid next May, but in the meantime the value of the Canary Wharf estate has fallen so much that Songbird has been in danger of breaching loan-to-value covenants.

The answer has been for new investor CIC and the existing Songbird shareholders Morgan Stanley Real Estate, Qatar Holding and GF Investments II, to subscribe to new shares. In addition, the parties have agreed to put £150 million equity into an escrow account. Songbird will use the funds to buy the Citi loan back at a 5 percent discount.   

Despite the softness of the office lettings market in London, the overall vacancy rate at Canary Wharf has stayed below 5 percent according to Songbird’s 2008 results. Of the recapitalisation, David Pritchard, chairman of Songbird, said it secured the future of the company and was a strong vote of confidence in Canary Wharf by long term institutional investors and existing shareholders. 

Nevertheless, the two apparent divergent stories have been noticed by private equity real estate firms operating in London. One general partner said: “This is a very schizophrenic market, I think. Investors from China, Korea and Libya want to be in, but rents are still falling and rent frees are still very long.”

The presence of sovereign wealth funds, however, seems to suggest that investors are backing London offices as a long-term play.

There is also evidence that shorter term players are also putting London offices back on their investment map.

At press time, The Blackstone Group was due to announce details of a £150 million deal to buy 50 percent of a London office complex at Broadgate at Liverpool Street Station. If the deal is signed as expected this will be Blackstone’s first acquisition in London for at least five years.

Some investors tell PERE it is hard to work out how much equity value there is in the Broadgate deal. Nevertheless, according to those with direct knowledge of the transaction, it is highly structured and one that clearly makes sense for Blackstone and the seller, British Land. In much the same way, CIC’s investment in Canary Wharf offices makes sense to it.

As long as investors continue to make sense of London office deals, transactions looks set to continue.