Sale-leaseback of a bank's London headquarters: a record sale and a buyback eighteen months later
An international bank sold its London office tower for about £1.1bn and stayed as a tenant for 20 years. The buyer failed to refinance its bridge loan, and eighteen months later the bank took the building back at a discount of about 25%.
Carte Capital · 5 min read
The idea
In a sale-leaseback an owner-occupier sells its building and immediately leases it back long term. It releases capital without moving out; the investor gets an asset with a strong tenant and predictable income. A bank’s sale of its London headquarters in 2007 was one of the largest property deals in UK history, and it also shows where the structure is weak.
Structure
- In May 2007 the bank agreed to sell its headquarters to a European property company for about £1.1bn.
- At the same time the bank signed a 20-year lease at about £44m a year.
- The buyer funded about a quarter of the price with equity and the rest with a bridge loan provided by the bank itself.
- The buyer was expected to refinance the bridge with a long-term loan secured on the building.
Parties
| Party | Role |
|---|---|
| Bank | seller, tenant and bridge lender |
| European property company | buyer and landlord |
Numbers
Rent of about £44m against a price of about £1.1bn is an initial yield of about 4%. That is very low: the investor paid for the tenant’s covenant and the length of the lease, not for current income. The buyer’s equity was about 26% of the price; short-term debt covered the rest.
What went wrong
In autumn 2008 credit markets froze, commercial property values fell and the buyer could not refinance the bridge. In December 2008 the parties agreed that the bank would take the building back for about £0.8bn. The bank booked a gain of about £0.25bn on the deal, while the buyer lost most of its equity. The lease stayed in force throughout: the bank never left the tower.
Risks
- For the buyer: refinancing. A low-yield purchase on short debt works only while credit markets are open.
- For the seller: if the investor fails, the building and the debt can come back to the tenant. Here that worked in the bank’s favour, but it need not have.
- The rent: the tenant fixes its costs for 20 years; if the rent is set high to lift the sale price, it overpays for years for what it received once.
Lessons
- A sale-leaseback turns a building into cash without a move, but price and rent are linked: the higher the price, the higher the rent.
- The buyer needs long-term debt at signing, not a plan to refinance later.
- A seller that lends to the buyer should agree in advance what happens to the security and the lease on default.