Bondholders rejoice as ’mini-bubble’ buoys Central London’s property sector. By Luke McLeod-Roberts
Paul Hastings partners Conor Downey and Michelle Duncan will be patting themselves on the back this week. Having been instructed by CB Richard Ellis (CBRE) to act on the receivership of a string of corporate vehicles and the sale of nine properties used to back the White Tower 2006-3 loan note, they have managed to sell eight of the buildings, avoiding a firesale and getting a good return for the bondholders.
Carlyle European Real Estate Partners III, assisted by Herbert Smith partner Simon Price, has bought a number of the London properties, picking up 60 Victoria Embankment, Ludgate House, Sampson House, Millenium Bridge House, BSI Tower and Alban Gate.
The other two buildings in the portfolio that were recently sold are New Court on London’s Carey Street, which was bought by Schroders fund Welput for around £60m, and Leadenhall Court, which was sold to Hammerson for around £65m. The buyers were advised by Norton Rose partner David Sinclair and Nabarro partner Simon Staite respectively.
When a valuation of the White Tower in summer 2009, which revealed that the portfolio was worth half the £1.8bn it had been valued at three years earlier, came on top of a series of wind-up petitions from HMRC, portfolio owner Simon Halabi’s holding company defaulted on the White Tower loan. There was talk at the time that the sales would have to be staggered to avoid bargain basement prices.
But a year on and one lawyer close to the process says there is no question that purchasers got the buildings “on the cheap”. Carey Street, for example, was valued at £86m in November 2006. When CBRE took over servicing in July 2009 it was valued at £35m, but was eventually sold to Hammerson for £60m.
This is partly due to evidence of a ’mini-bubble’ that is absorbing the central London property market, with private equity funds, UK-based institutional investors and Middle East investors all circling properties with good long-term tenancies. Similar interest is believed to have been elicited in Tower 42 in the City, which is currently being sold by a Hermes-BlackRock joint venture.
The question that is on investors’ lips, however, is whether this bubble is poised to burst anytime soon. Occupancy in the regions may be vulnerable to impending public sector cuts, but Downey believes that the perspective in central London at least is positive because of questions of limited supply.
“If you look across the City at the cranes, most projects are on go-slow,” he says. “There’s relatively little speculative space about. There’s a significant demand for new space for headquarters. At the same time there are quite a lot of equity investors who are willing to put their money into things.”
But the successful disposals were in no small part thanks to the work done by Downey and Duncan in unpicking what Downey has referred to as a “patchwork structure” of ownership arrangements surrounding the White Tower portfolio.
While there had been a lot of secrecy surrounding the exact composition of these arrangements, it is now possible to reveal that the portfolio was held by 23 separate corporate vehicles, many of them offshore-registered. A number were tax-efficient Jersey-formed limited partnerships and two – including the vehicle that owns JPMorgan’s London headquarters – are Jersey Property Unit Trusts.
The absence of Halabi from the picture meant that it was not easy to ascertain the history of these vehicles, so Downey and Duncan Roberts worked with Alasdair Hunter at Bedell Cristin and the Jersey-based corporate service provider Volaw to piece this together.
This was vital to provide basic levels of comfort to potential investors surrounding issues such as their respective tax obligations, but also to allow the corporate vehicles to remain intact. Doing this would reduce the stamp duty payable from 4 per cent (for the purchase of an individual property) to 2 per cent (for a corporate vehicle) or 1 per cent (for a unit trust).
Only one property in the portfolio – Aviva Tower No 1 – has yet to be sold. “We’re releasing it pending a sale at the end of this year or beginning of next,” explains Downey. “The reason we’ve retained it is because it’s seen as similar to [JPMorgan’s HQ at Alban Gate] and if we put them together they would compete with one another.”
The buildings are of a similar size and were valued at similar prices in 2006 – Alban Gate at £410m and Aviva Tower at £370m. The major difference was that at Alban Gate JPMorgan has various break options whereas Aviva has a more stable lease.
If the Paul Hastings duo play their cards right they could secure as good a deal on that building as they have on the other eight.
Firm: Allen & Overy
Lead partner: Arthur Dyson
Client: SocGen-led lending consortium to Carlyle Group (financing)
Firm: Berwin Leighton Paisner
CB Richard Ellis (conveyancing)
Firm: Herbert Smith
Client: Carlyle Group
Firm: Norton Rose
Lead partners: Conor Downey
and Michelle Duncan
CB Richard Ellis