Why M&G wrote a £303m London office loan despite the worsening covid outlook

The investment manager says long leases and quality tenants are among its reasons to finance the transaction.

On 7 January, M&G Investments’ real estate finance team announced it had provided a £303 million (€335.6 million) loan in December to finance the purchase of an office and retail building in London, in one of the largest debt deals done by a non-bank lender in 2020.

The loan was provided to Singapore-based multi-asset investment firm Sun Venture, which acquired the five-year-old complex, located at 1 & 2 New Ludgate in the City of London, from Land Securities Group for £552 million in December 2020.

The asset comprises 389,615 square feet of office and retail space. With 183,305 square feet, 1 New Ludgate is multi-let to several occupiers, including law firm Ropes & Gray International and financial firm Commonwealth Bank of Australia. The second part of the complex, 2 New Ludgate, which comprises 206,310 square feet, has its offices let entirely to Japan’s Mizuho Bank.

The acquisition was announced on 6 December, before the latest tightening of covid-19 restrictions in London, and subsequent third national lockdown in England, but amid a surge in the number of cases of the virus in the UK capital and much speculation as to the government’s response.

However, John Barakat, head of real estate finance at M&G, argued the quality of the property’s underlying tenants, its core location and BREEAM Excellent sustainability rating, made it an attractive financing prospect.

Barakat: ‘We expect high quality office assets will continue to attract occupiers’

“Despite the current economic uncertainty, we now know there is a vaccine on the way,” he told Real Estate Capital. “Although its roll-out is going to take time, when it is safe, we expect well-located, high-quality office assets will continue to attract occupiers.”

Barakat added that, against the current uncertain economic backdrop, the loan also represents an attractive opportunity for its investors, due to the security of income provided by the asset’s underlying tenants.

“We continue to see strong investor appetite for this asset class given the additional yield on offer, relative to government and corporate bonds, with the security over a real asset.”

The availability of finance for office properties in London, Barakat added, varies depending on the quality of the asset and its lease length. “Generally, we find more challenging market conditions for assets with short-leases and for secondary assets.”

According to Paul Coates, head of debt and structured finance UK and EMEA, at property consultant CBRE, which acted as debt advisor to Sun Venture on the transaction, lenders’ appetite to fund quality office space remains strong.

“We were able to run an extremely competitive process with a targeted number of parties demonstrating strong appetite to fund institutional, Grade A office space,” Coates said. “This highlights the long-term confidence in the London office market, despite the challenges posed by covid-19 over the course of this year.”