Oxford’s new course adds a degree of debt diversity

With backing from giant Canadian pension fund OMERS, Oxford Properties seems to be a property company with no great need to run to banks to finance deals. OMERS is due to grow to C$100bn (£55bn) in 2018, so its biggest problem is knowing how and where to allocate its capital.

However, Oxford receives its equity from OMERS at a 6.5% charge, plus 0.5% for operating costs, and has a 7-11% total return target. So it also seeks leverage to enhance returns, and in July arranged a £250m corporate facility with Wells Fargo, CIBC and Lloyds to fund its projects.

The move is also part of a new Oxford strategy to diversify its debt and increase flexibility across its portfolio. Oxford aims to invest in other European countries as its cash pile grows and is considering providing mezzanine finance on the Continent.

“It’s not a function of not having access to capital, but of trying to be smart with how you use capital, so leverage is an element of everything we do across the asset classes [at OMERS],” says Paul Brundage, Oxford’s senior managing director for Europe.

The European business has previously used debt arranged by parent OMERS, but the pension fund tries to limit its borrowings to maintain its AAA credit rating. Therefore Oxford has built up its own European balance sheet so it can borrow autonomously and cost-effectively.

Its European assets, each individually financed, are held in a special-purpose vehicle that is being bulked up to enhance its borrowing abilities. Brundage says the new £250m facility, guaranteed by OMERS, will give it greater flexibility in line with its development and asset management needs.

“When our little business started [in Europe in 2008] we had no assets, people or reputation,” he says. “We built an SPV that owns the majority of our assets and built its balance-sheet strength, but it’s not strong enough to have its own credit line yet.”

Looser debt relationships

Alison Lambert, Oxford’s European finance director, adds: “All the asset lending was with German pfandbrief banks until about a year ago, but we needed to diversify and for relationships to be less rigid in terms of loan-to-values and covenants, which was a key factor with the banks we chose.”

The corporate facility will partly fund 500,000 sq ft City of London office scheme London Wall Place. The scheme, which has a 310,000 sq ft prelet to Schroders and is owned by a joint venture with Brookfield, will cost around £165m to develop and is being financed with £130m of debt.

Wells helped lead the negotiations with Oxford to determine the debt used from the facility to fund the development, which Brookfield matched using debt from HSBC.

“We can recapitalise once it becomes income producing, with some equity, or put in place a longer-term facility, potentially with the same banks,” says Lambert.

Oxford’s portfolio is worth around C$30bn, with around C$20bn in Canada, C$5bn in the US and C$5bn in Europe.

Since setting up its European business, it has bought only in central London and the south east. Its portfolio includes 50% of the “Cheesegrater” at 122 Leadenhall and luxury shopping centre The Royal Exchange, both in the City. Its most recent purchase, last month, was 130-137 Bond Street in the West End, bought from Swiss luxury retailer Richemont for £300m.

Oxford is understood to be close to sealing its first Paris deal and is looking for German investments, as its need to allocate ever more equity becomes more pressing.

To keep in line with the pension fund’s growth, Oxford aims to increase in size to C$50bn by 2018, doubling up both its US and European portfolios. It has a target gearing of 50% across its European portfolio.

Despite its growing equity pile, Brundage says Oxford will not sideline debt and that its sole focus is hitting its return targets.

“Even if there was an abundance of equity, debt will enhance our returns and hitting those is essential. If we can’t achieve them within real estate in Europe, then that is another debate altogether.” ■