Major UK REIT Prepares For a £500m Sale

on Aug 17, 2012

British Land, the UK’s second largest real-estate investment trust (REIT), managing £14.9 billion with a share of £9.6 billion, is mainly focused on Central London offices and retail premises with high quality tenants, with long leases and high occupancy rates. Last week, The Times published an article in which they highlight an embarrassing mistake made by the REIT two years ago when it was developing one of the Square Mile’s biggest office buildings.

The incident involves a serious drafting error in a lease signed with Macquarie Bank of Australia, the main tenant at the Ropemaker Place office complex near Liverpool Station. Macquarie occupies a third of the building with approximately 217,000 sq ft of offices and has a 20 years lease running until 2030.
!m[](/uploads/story/267/thumbs/pic1_inline.png)The particular error in question leaves British Land vulnerable to the threat of unpaid rent. According to The Times, a vital clause, which would otherwise prevent Macquarie from assigning its lease to a subsidiary company, was omitted. It is a serious mistake as in the event of a default by the tenant, British Land will not be able to pursue the parent bank for its accrued rent. It would be a considerable loss with Ropemaker Place currently bringing in £20 million in rent a year. There are of course no current signs of Macquarie attempting to assign the lease.

To be on the safe side and negate the risk of a possible loss, British Land decided to take out insurance until it sells the property, which is currently listed for £500 million. The insurance in question will cover the full length of the Macquarie lease and will protect the REIT as well as any future owner of the building. It is unclear how much this insurance policy has cost the developer.

The 20-storey Ropemaker Place was completed in May 2009, back when Stephen Hester, now chief executive of Royal Bank of Scotland, headed British Land. The building is rated as BREEAM “Excellent” and was the first of its kind in Europe to obtain pre-certification for LEED “Platinum”. The REIT was able to achieve its first letting one month prior to the building’s completion with Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Securities International securing 187,000 sq ft of space. Since then, British Land has concluded deals with Liberum Capital, Mint Equities and the already-mentioned Macquarie Group. All of the building’s 594,000 sq ft are fully let.

In the last year, large sovereign wealth and opportunity funds have been spending billions on “safe haven assets” and Ropemaker Place’s sale would likely attract significant interest. If there is a successful sale, British Land will acquire some extra funds to help reduce its debt while developing the illustratively named “Cheesegrater” skyscraper. The trust could also use the money to invest in its broad Central London development programme. The Times reports that the problem with the lease will not seriously impede the potential of a future sale but still remains an embarrassing and costly error.