Bank of Scotland’s £88.9 million (€112.6 million) green loan for the construction of Glasgow’s largest new office building shows lenders’ increasing appetite to back core developments across the UK’s regional cities, provided they are not speculative.
Through its Green Lending Initiative, which offers margin discounts of up to 20 basis points on loans that finance energy-efficient schemes, Bank of Scotland, a subsidiary of Lloyds Bank, has provided a four-year loan to HFD Property Group to fund the completion of 313,116 square feet of office space at 177 Bothwell Street.
The financing deal comes as Glasgow continues to see increasing demand for grade A office facilities. In 2018, 1.4 million square feet of city centre office space was leased, an increase of 127 percent compared with the previous year, according to property consultancy JLL.
Record take-up has been driven by significant deals, including Barclays 470,000 square foot purchase and letting at Buchanan Wharf; a 187,000 square foot pre-let to HMRC at Atlantic Square; and Clydesdale Bank’s 116,000 square foot pre-let at 177 Bothwell Street. More than 60,000 square feet of the office building has also been pre-let to HFD’s managed office division.
“Development funding for speculative development is extremely challenging, despite the very strong property fundamentals in the Glasgow office market, with significant occupier demand and very little supply,” Stephen Lewis, managing director at HFD Property Group, told Real Estate Capital.
“However, our 177 Bothwell Street development benefited from being 60 percent pre-let, so securing funding was significantly more straightforward,” Lewis said, adding that the firm had a number of alternative funding options to back the development, but it opted for Bank of Scotland due to its previous relationship and its green loan scheme.
For Alan Brennan, relationship director at Bank of Scotland, 177 Bothwell Street is “exactly” the type of deal the bank’s development funding should support.
“The demand-side fundamentals are very strong with an undersupply of new, Grade A space in Glasgow, and the building itself is majority pre-let,” Brennan said.
“This was our fourth major development deal with HFD. We know they can deliver, mitigate against construction risks and move quickly to fix things when they arise,” he added, noting that the UK’s big regional city markets are increasingly competitive for lenders.
Despite debt providers’ growing appetite for core assets in the main regional markets, lenders continue to favour real estate finance in London, and disparities in lending across the UK regions remain. New lending in the UK totalled £45 billion last year, of which the London accounted for 46 percent, while Scotland made up 4 percent, according to data from Cass Business School.