Gherkin Tower in Receivership Seen Drawing Lines of BuyersPatrick Gower and Neil Callanan
International investors will be lining up to bid for London’s iconic, cucumber-shaped skyscraper known as the Gherkin after lenders to the building appointed receivers yesterday to end years of defaults.
“Brokers will be salivating at the change of ownership of this one; it’ll be well bid,” JPMorgan Chase & Co. analyst Tim Leckie said by phone. Investors “want big-ticket size, they want a core location and they want a good tenant on a long lease and the Gherkin fits the bill.”
The building at 30 St. Mary Axe has become one of London’s best-known landmarks since it opened 10 years ago this month. The 180-meter (590-foot) tower in the City of London financial district is fully occupied, according to Evans Randall Ltd., a London-based company that bought the property with a fund managed by Germany’s IVG Immobilien AG for 600 million pounds ($1 billion) in 2007. Tenants include Swiss Re, which developed the Gherkin, and the U.K.’s Standard Chartered Plc.
Investment in the capital’s commercial-property market climbed to 4.13 billion pounds ($6.9 billion), a record for a first quarter, according to data compiled by broker Cushman & Wakefield Inc., as rising rents attracted overseas buyers including the Kuwait government and Houston, Texas-based Hines Global REIT Inc.
Lenders to the Gherkin hired Deloitte LLP yesterday to take control of the building. Buildings placed into receivership are often sold to recoup funds owed to lenders. James Igoe, a spokesman for Deloitte, declined to comment on whether the tower will be offered for sale. The building was valued at 473 million pounds to 510 million pounds in 2012, IVG said last year.
If the lenders do seek offers for the property, it would probably be Europe’s biggest sale of a single building out of receivership or foreclosure since at least 2005, according to data compiled by broker Cushman & Wakefield Inc.
“Demand for that building will be strong, given the search for trophy assets in the core of the City,” Development Securities Plc Chief Executive Officer Michael Marx said by phone. “The world is awash with money.”
Marx, whose company builds and invests in U.K. properties, said most interest is likely to come from investors based in North America, Asia and the Middle East.
Tenants pay 8.3 percent more to lease office space in a tower in the City of London than in other buildings in the district’s center, according to broker Knight Frank LLP.
Part of the loan that IVG’s fund used to buy its share of the building was in Swiss francs, which have gained about 63 percent against the pound over the last seven years. As the amount of the loan increased in pound terms, it breached rules on how much debt could be held against the property.
The receivership is a “real wake-up call for cross-border equity and debt investors in commercial real estate that haven’t spent enough time digesting the currency risks involved in their transactions,” Dan Fasulo, managing director at New York-based research firm Real Capital Analytics Inc., said in an e-mail.
The Gherkin is the most high-profile London property to go into receivership since Canary Wharf was taken over by creditors in 1992 after Paul Reichmann’s Olympic & York Developments Ltd. said it couldn’t pay interest on its loans. Three years later, the east London financial district was sold to Reichmann, who died in 2013, and investors including billionaire Saudi Prince Alwaleed bin Talal Al Saud and Franklin Mutual Advisers Inc.
Deutsche Fonds Holding AG, a privately held German company, bought IVG’s private fund-management business, including the fund that owns part of the Gherkin, on March 20. Bonn-based IVG and Deutsche Fonds declined to comment. Bayerische Landesbank, a closely held company based in Munich, led a group of banks that provided the financing for the Gherkin’s purchase, according to Evans Randall.
The other lenders included Landesbank Hessen-Thueringen Girozentrale, DekaBank Deutsche Girozentrale, Landesbank Baden-Wuerttemberg and ING Groep NV, Evans Randall said.
Office values in London fell by more than 45 percent from the peak of the market in June 2007, shortly after Evans Randall and IVG bought the Gherkin, through September 2009, according to Investment Property Databank Ltd. They remained 20 percent below their peak at the end of December, the researcher said. Since the beginning of 2011, values have gained more than 17 percent.
“The senior lenders were reluctant to appoint a receiver, but felt they had no choice due to the ongoing defaults, which have remained uncured for over five years,” Deloitte partner Neville Kahn said in the statement. The default, related to the loan-to-value ratio, is a technical breach of the credit terms.
The Gherkin was both ridiculed and admired when it opened as the Swiss Re tower.
“Architects do not design icons,” Peter Rees, the City’s former planning officer said in an interview. “The public adopted the Gherkin and made it an icon.”
Still, the building’s design may result in lower bids than for towers of a similar size in the district, Marx said. “Space in a circular-type building is more difficult to utilize efficiently,” he said. “I wouldn’t expect it to reach the same yield level as some of the buildings for that reason.”
Yields for the best City of London buildings fell from 4.75 percent to 4.5 percent in the year through March, indicating an increase in values, according to Savills Plc.
IVG applied for a Schutzschirmverfahren, similar to U.S. Chapter 11 bankruptcy, in August. The company will be handed over to creditors after lenders approved a plan to restructure 3.2 billion euros ($4.4 billion) of debt last month.
“Evans Randall has equity ready to invest and has been unable to do so because of the inability to agree a consensual solution with IVG,” Dominic Morgan, a spokesman for Evans Randall, said by e-mail. “The Gherkin is a strong, well-let asset and one that we are firmly minded to continue our involvement in.”