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Inside the deal: RDI’s serviced offices refinancing with Aberdeen Standard

Real Estate Capital speaks to borrower RDI and lender Aberdeen Standard about their recent debt deal in London’s flexible office market.

Income-focused UK REIT RDI refinanced its London serviced office portfolio earlier this month, in a transaction that highlights lenders’ growing recognition of demand for flexible office space.

The £75 million (€84 million) refinancing of the portfolio of four central London assets was provided by alternative lender Aberdeen Standard Investments. When RDI bought the portfolio for £161.7 million in January 2018, the acquisition included existing debt facilities of £73.5 million, reflecting a 45 percent loan-to-value.

The new seven-year facility refinances two existing loans which were due to mature in December 2019 and August 2022. A first stage drawdown of £25 million has already been completed to refinance the first at a fixed rate of 2.9 percent. The second stage drawdown of £50 million is anticipated to complete in August.

RDI’s deputy CEO Stephen Oakenfull told Real Estate Capital several lenders expressed willingness to provide finance against the serviced offices. “We own the underlying real estate assets, which have a good track record in terms of occupancy and revenue, and that gives lenders a lot of comfort,” he said. The company has direct control over the building management, service provision, desk rates, cost base and use of the properties.

“Lenders are realising that serviced offices aren’t a niche part of the market anymore. They are becoming fairly mainstream, due to increasing demand,” Oakenfull explained. “More lenders are now accepting that leases are generally getting shorter and that occupiers want more flexibility around the ability to expand or contract space, as well as services available to clients and staff.”

RDI’s serviced offices offer shared services and facilities to tenants, including conference and meeting rooms, staffed reception areas and IT services. The standard license term the REIT offers tenants is 12 months.

“As a lender, it’s easier to finance an office with a 25 years lease to a good quality tenant,” commented Neil Odom-Haslett, head of commercial real estate lending at Aberdeen Standard Investments. “In the serviced office space, however, you really need to look at the operational side of it and the track record demonstrating that the operator has the ability to consistently manage and re-let space in an efficient manner.”

RDI’s serviced office portfolio, which provides an unleveraged yield of approximately 6 percent, has maintained an occupancy rate of 94.5 percent as of February 2019, with EBITDA increasing 0.9 percent since August 2018. The average stay of tenants is more than 30 months, according to the company.

Oakenfull argued the overall pricing of the deal is “competitive”, with not much of a premium over loan pricing for offices leased on conventional terms.

Odom-Haslett added: “When lending to the serviced office sector we don’t necessarily charge higher margins because of the nature of the business – operational business with short-term leases. We do stress test, particularly if occupancy levels fall and this affects the operational business and profitability. Typically, our leverage has been at around 50-55 percent for this sector.”

Considering the impact of a possible market downturn, Odom-Haslett argued the importance of the location of RDI’s office assets. “The portfolio has well-established office locations and if, the occupational market weakens, we are confident that RDI has the ability to manage [the assets] effectively.”