Friday, 19 November 2010

Arab Investments fails to find a pre-let for the Pinnacle

Despite a throng of site activity, Arab Investments’ (AI) failure to sign a pre-let for its 63-storey office scheme on Bishopsgate in the City of London could yet see main contractor, Brookfield having to halt construction at the Pinnacle site early next year, as banks refuse to provide debt for speculative developments. Whilst it's almost certain that the Pinnacle will end up as a multi-tenant scheme, full construction is not funded past the first phase and commercial lenders are unwilling to commit high-risk development finance until a large pre-let, thought to be 40% in this case, is found.

This issue is one of the key drivers behind both Land Securities and British Land’s recent announcements to form joint ventures – with Canary Wharf Group (CWG) and Oxford Properties respectively – to progress their new City office schemes at 122 Leadenhall and 20 Fenchurch Street. Both developments were previously on hold but are now fully funded, and with construction due to restart next year may yet steal a march on the Pinnacle, who have chosen against a JV, where the project risk is shared. With the nearby Heron Tower currently being fitted out and schemes such as Minerva’s Walbrook sitting empty, competition amongst developers in the coming months for major property deals above 250,000 sq ft is likely to be fierce, with several high profile schemes arriving in 2014.

With the Pinnacle planned for completion in 2012, Arab Investments had hoped to benefit from bringing the one million sq ft scheme to market at a time when availability for Grade A space is predicted to hit a historically low level. The global asset management company, Schroders, whose current 160,000 sq ft headquarters are located at Stanhope's 31 Gresham Street, is one firm reported to have a space requirement of 250,000 sq ft and has been consistently linked with the 945ft building. Schroders have so far refused to comment, however and as yet no deal has been signed.

There is speculation in the media that once such a deal is completed, the global banking group, HSBC will act as the lead arranger and underwriter of development finance, which is expected to be upwards of £500m. The German bank, HSH Nordbank AG has already provided a £140 million loan facility to enable initial works, whilst the remaining £350 million of current funds came from a consortium of mainly Middle Eastern institutions and investors. The situation with the development is complicated by a lack of available numbers; however it is thought that the total scheme cost will top £1 billion.

The developer is somewhat stuck between a rock and a hard place, on the one hand it must announce a pre-let by early next year at the latest, and to do that it will likely have to offer the space at a discount to the projected City rents in 2012, which could see a deal signed at anywhere between £52.50 and £55.00 per sq ft based on current market levels. On the flip side, once finished the building will be a landmark for the City of London, offering some of the highest quality space yet, which could comfortably command anywhere between £67.50 and £75.00 per sq ft, breaking previous City records. To put that into perspective, a £10 difference per sq ft on the 250,000 sq ft that Schroders is potentially interested in is an impressive £2.5m per year, or £50m over a typical 20 year lease term.

It is a similar position to that faced across the river at the super-tall Shard. The developer, Sellar Property Group initially pre-let 200,000 sq ft to Transport for London (TfL) for what now appears to be a paltry £38.50 per sq ft. With the new consortium of cash-rich Qatari owners financing the towers full construction, Sellar has since bought out TfL’s lease for an undisclosed fee and recently appointed Jones Lang LaSalle and Knight Frank as joint letting agents on the tower element of the London Bridge Quarter (LBQ) scheme, with a view that they could now achieve rents of £70.00 per sq ft once complete. To maximise their potential rental income, AI is now said to be considering reducing the level of debt it requires to complete the Pinnacle and raising the additional capital from investors.

There is speculation that the international law firm Davies Arnold Cooper, who incidentally advised Arab Investments on the purchase, financing, construction and planning aspects of the Pinnacle will take space in the Kohn Pedersen Fox (KPF) designed tower, however this has not been confirmed and would only likely total 60,000 sq ft. Savills, the leasing agent for the office scheme will almost certainly be working around the clock to secure a deal, likely to be announced in the next few weeks, and it will be interesting to see just how high they can push potential occupiers.

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