Inside ING and LBBW’s £400m London office deal

Uncertainty around the office sector’s future did not deter the banks from financing 110 Bishopsgate again.

The UK’s third covid-19 lockdown has left London’s usually bustling financial district largely deserted. However, that did not prevent the owners of one of its most prominent skyscrapers from securing a £400 million (€465 million) refinancing package this month, in what its lenders say is London’s largest single-asset financing since the pandemic began.

The 46-storey 110 Bishopsgate – also known as the Salesforce Tower – is owned by a consortium including its developer, UK property company Heron International, as well as the State General Reserve of Oman and members of the Saudi royal family. According to February press reports, US investor Madison International Realty could soon be joining the consortium with the purchase of a 25 percent stake in the building.

The five-year refinancing was underwritten by the two banks that previously financed it in April 2016: Dutch lender ING and Germany’s LBBW. Japan’s Sumitomo Mitsui Banking Corporation joined as a mandated lead arranger. The loan was also syndicated to several other banks.

The decision to commit to a further five years of funding for 110 Bishopsgate, at a time when the post-pandemic future of the office remains a subject of debate, was not a difficult one, according to LBBW’s global head of real estate, Patrick Walcher.

“The question is not whether people will return to the office, it is how will they return?” he told Real Estate Capital. “Not everybody will work from home in future, and we will see a flight to quality for prime office buildings such as 110 Bishopsgate.”

Walcher said the successful syndication of the loan showed there is strong demand for prime office product from bank lenders. His colleague, LBBW’s head of UK finance origination, Craig Prosser, added that the incumbent banks faced competition for the mandate. “It was a competitive process, with several commercial banks, investment banks and non-bank lenders queuing up to finance this asset.”

Patrick Walcher, LBBW
Walcher: Expects a flight to quality in the office sector

The latest financing was closed amid very different market conditions from the previous deal. However, the deal participants argued there is strong liquidity for core, prime assets such as 110 Bishopsgate.

The loan amount was unchanged from the 2016 financing, which Real Estate Capital reported at the time was understood to reflect a loan-to-value ratio of slightly below 60 percent, with £30 million amortisation in the deal.

The deal participants declined to disclose the LTV of the latest loan or comment on the building’s valuation. Reports by UK publications including The Times and City AM on 23 February said Madison was in talks to buy a quarter stake in the asset for around £195 million.

Although conditions are markedly different from 2016, ING’s EMEA head of real estate finance, Mike Shields, said the previous deal was also closed amid uncertainty, with the UK preparing to vote on its membership of the EU.

“People predicted a mass exodus of tenants to Europe then, and it didn’t happen,” he commented. “We think there will be a flight of capital to buildings where employees will be happy. Lower-quality product will struggle to attract finance.”

Tenant mix

According to Nick Lawson, the director at ING who worked on the deal, the building’s performance during the previous loan term was a key factor in the decision to underwrite it again. “It has performed exceptionally well. In 2016, Salesforce was less well-known than it is now. The surrounding area has also improved, with a Crossrail [transport network] station and a residential hub being built.”

While Salesforce occupies 11 of the 46 floors, the remainder of the leased space is occupied by 22 tenants. According to the website of property consultancy Savills, which serves as the building’s letting agent alongside CBRE, 11,479 square feet of the 459,000-square-foot building is immediately available to rent, with a further 36,566 square feet across three floors available from Q3/Q4 this year.

Shields: Lower-quality assets will struggle to attract finance

While tenants’ future use of office space remains undetermined, Lawson added that ING considered the scope for reconfiguring the tower’s floors to suit post-pandemic demand. “The floorplates are 14,000 square feet and can be divided in two, which supports a granular tenant mix.”

The financing deal included a reserve account to be used by the sponsor to invest in the building specifications, including connectivity and lighting, explained Mike Clements, a director at LBBW who worked on the deal.

“None of us can predict how a back to work world will look, but the best buildings will thrive,” he commented. “This is a perfectly located building. The owners have done a great job keeping occupancy high and investing in the building to futureproof it and improve its sustainability.”

Syndication partners

The syndication of the loan was a crucial element of the financing. In the 2016 deal, the two banks syndicated more than £200 million to a total of eight lenders, including six Asian banks which had not previously invested in the UK commercial real estate market.

This time around, it is understood that the syndicate may comprise as many as 13 banks in total. At the time of publication, the lender group was understood to be split equally between Asian and European organisations.

Although the 2021 syndicate is so far more European than the 2016 syndicate, LBBW’s Walcher said demand from Asian lenders for prime European real estate such as 110 Bishopsgate remains healthy. “Real estate debt still offers Asian investors a good mid-point between the low-yielding short-term government debt and high-yield bonds,” he explained.

In a statement, Robert Carney, head of EMEA real estate finance at SMBC, which joined ING and LBBW to syndicate the debt, said the transaction demonstrates the “depth of financing available for top-quality London office properties managed by highly experienced sponsors”.

Transacting in lockdown

A challenge faced by the lenders was closing a deal of this magnitude during a UK government-imposed lockdown. The deal participants explained that in-person meetings and site visits remained necessary, although much of the intra-party discussions were done virtually.

“This was one of the largest single-asset financing deals to be closed since lockdowns began, and so lots needed to be discussed via conference calls and video meetings,” said Lawson. “Credit meetings would typically require face-to-face dialogue, but we were able to close this deal despite each lender being forced to work in our own little islands.”

Clements agreed: “Much of the deal was done in the virtual environment, which no-one had really done before in a deal of this magnitude, so it was impressive that we were able to make it work.”

Prosser added that, even with virtual meetings, the deal also required physical due diligence and site visits with valuers. “If you are comfortable to, and if your organisation permits, it is possible to conduct site visits and do socially distanced meetings,” he said. “But it did help that we knew the sponsors very well, and the lenders knew each other.”

The latest loan for 110 Bishopsgate, which was known as the Heron Tower on completion in 2011, marks the latest chapter in the financing history of a highly visible London office asset. According to its lenders, the location and quality of such an asset makes it highly financeable, even during unprecedented market conditions.