HSBC building hits the heights of £1.1bn

HSBC building hits the heights of £1.1bn
By Sophie Brodie
Last Updated: 1:19am BST 01/05/2007



Regular users of London City Airport will know the sickening feeling of swooping around the Canary Wharf skyscrapers minutes after take off. A fraction more to the right and the plane would seemingly come within a hair's breadth of what has just become Britain's most expensive office block - HSBC's 210m-high London headquarters.


Spanish property family the Sanahujas will receive £43.5m rental income each year from the 210m-high HSBC tower
It's only an illusion, of course, but so perhaps is the impression of an equally dizzying UK property market.

Yesterday HSBC offloaded its Canary Wharf HQ to Spanish property family the Sanahujas for the staggering sum of £1.1bn.

It cost the bank just half that to build. The sale-and-leaseback agreement is the UK's biggest single property deal, the latest evidence of the mad rush for commercial property in the UK.

In the last few months, a German real estate fund has bought the Swiss Re tower, known as The Gherkin, at 30 St Mary's Axe, for £600m and American firm Beacon Capital bought the Citypoint building near Moorgate for £650m, the second time the building has changed hands in as many years.

Prior to the HSBC deal, Citypoint was the biggest ever seen in London.

Meanwhile, other banks have sniffed the air. Goldman Sachs has sold its Fleet Street building for £355m; HBOS sold its City premises at Old Broad St for £200m; and Merrill Lynch is putting the final touches to a £600m deal with GIC, the investment arm of the government of Singapore, for its London base.

advertisementCredit Suisse is known to have considered selling its main building in Cabot Square in Canary Wharf. Sources say, however, that the plan was abandoned for tax reasons.

Interest has mounted in other areas of commercial property, such as retail, after Robert Tchenguiz put pressure on supermarket Sainsbury, of which he owns 5pc, to spin off its property assets into a separate business for sale and leaseback or securitisation.

Yesterday fund manager New Star announced it was launching a new international property fund on the back of its highly successful UK venture. Since New Star inherited its UK fund from Edinburgh Fund Managers three years ago, it has grown from £144m to over £2bn.

According to data from the International Property Forum, UK commercial property has delivered "super-returns" of 18pc per annum over the last three years. An average year is around 11pc to 12pc.

More than £60bn was invested in UK commercial property last year, the highest volume in the last 20 years, and £13bn of that was by foreign investors. As a result, prices have soared to record highs, causing some observers to wonder where they will land.

Mat Oakley, head of research at Savills, said: "Realistically it is hard to see how prices can go much higher, as investors are being forced to drop their target rate of returns or raise their rental growth expectations to justify the prices that they are paying."

According to specialists, however, there is no need to panic. No crash is imminent. Instead agents are predicting a "return to normality". Overall, UK commercial property will grow 9pc this year.

Vincent Tchenguiz, property tycoon and brother of Robert, agrees. His prediction for the office market? "Sideways."

But Stephen Hubbard, deputy chairman of agents CB Richard Ellis, who ran the HSBC deal, is still predicting double-digit rises in central and west London, despite rents catching up with prices as five-year reviews readjust prices to current levels.

He said: "It's just a question of supply and demand. The vacancy in the West End is down at 2pc. Landlords can pick their tenants. There may be a potential downturn at the end of the decade as supply builds up, but no crash."

The extraordinary demand is being driven by foreign investors and businessmen pouring into London - the world's new capital city. While it continues, so will the rise in commercial property prices.

One agent said: "There used to be an old joke about when the Scandinavians came to London, it was time to sell. But now everyone is coming from everywhere."

Overseas buyers who don't live and work in London also want to invest because UK property is low risk in comparison to other countries. Leases are long and tenants, not owners, must bear the cost of upkeep. Most importantly, contracted rents go only one way - up. Even if rents are falling in the wider market, owners are insulated as long as tenants do not move out or go bust.

At first glance, however, buying a giant monolith like the HSBC tower looks like a tricky investment. With such a large price tag, it is difficult to sell on and has a yield of less than 4pc. So why is Spanish company Metrovacesa taking the risk?

First, says Mr Hubbard, the company has a history of buying landmark office buildings. Second, Metrovacesa's Jesús García de Ponga hints that the buy reflects the company's global ambitions. More importantly, the 20-year lease provides Metrovacesa with a highly secure rental income of £43.5m a year from HSBC.

The bank will bear all the costs of running and maintaining the building which houses 8,000 staff. It will look after the canteen, staff gym and car park. In short, it will provide the Spanish firm with the security of one of the world's biggest banks - a sort of HSBC bond.

What may suit the Spanish, however, may not work for everyone. According to Duncan Owen of Invista, the HSBC deal is a one-off.

He warns that the UK property market is very cyclical and getting in and out at the right time is crucial.

In the last three years, investors could buy almost anything and see their investment grow. But Mr Owen says: "Not everyone will be a winner. This year for the first time there will be losers too."