Loan Burdened Gherkin Calls on Investors

on Sep 28, 2012
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The Gherkin, which has become one of London’s most well-known landmarks in recent years, seems to be in a bit of financial difficulty and has asked its German investors to inject £75 million in cash to remedy a complex loan default. The part-owners of the 30 St Mary Axe are unlikely to be excited about the news as dividends from the fund have been frozen since the financial crisis. It might come down to looking for new investors, who will be willing to inject new capital into the iconic skyscraper.

!m[](/uploads/story/486/thumbs/pic1_inline.png)The current loan complication is a result of an ownership transfer deal in 2006. Initially the building was developed by the insurance group Swiss Re, which later sold the 516,000 sq ft building to the Euroselect 14 fund. The fund is managed by German IVG Group and few wealthy clients of Evans Randall, a private investment bank. It was a half split joint venture and the building was acquired for £630 million – £234 million of equity and a £396 million loan from a consortium of banks. Because of fluctuations in the Swiss franc the £396 million loan rose to £509 million. At the same time the Gherkin’s value, estimated by a valuation in March, depreciated by £100 million to the current £531 million. The required loan-to-value (LTV) ratio by the consortium of banks is 67 percent so the current 96 percent is worrying the lenders. Bayerischen Landesbank and the rest of the banks have urged the fund to call on an equity injection and reduce the LTV. Despite their request, it is unlikely that the banks will call on the loan before the maturity date in 2022 because up till now the building’s income has been fully covering the interest on the debt. With dividends frozen as collateral and the units being traded in the secondary market at less than 20 percent of their face value, the owners will probably be hesitant to pour more money in the building, leaving the fund no choice but to look for new investors.

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The Times quoted a spokesman of IVG who seemingly confident tried to dissipate concerns over the current situation: “The Gherkin is fully let, and lives up to its reputation as a premium property in real estate economic terms. This is impressively documented by the average lease term of 12.5 years, the above-average rent rates for new letting contracts of £62.50 per sq ft, the tenants’ creditworthiness, and the attractive tenant mix. At the moment, we are conducting talks with the banks. IVG is convinced that a solution will be found.”

London’s skyline is in the process of being transformed with two new monolithic projects on the way – the “Cheesegrater” and the “Walkie Talkie” towers due for completion in 2014. The 47-storey Leadenhall Building, nicknamed the Cheesegrater, will be built by British Land, which has teamed up with Canada’s Oxford Properties. After signing a £500 million deal with Canary Wharf Group, Britain’s biggest land developer Land Securities has resumed its construction of the 37-storey Walkie Talkie building located nearby Frenchurch Street. The projects have been mothballed because of the recession until last summer when the commercial property market recovered due to the weak pound attracting international investors and a supply shortage of prime office space.

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