The Gherkin – No Ordinary Victim of the Credit Crunch
4 August 2014 by Leon Pascal
30 St Mary Axe, the London landmark more commonly known by its nickname ‘the Gherkin’ due to its distinctive appearance has been put up for sale by receivers Deloitte after they were called in by its creditors, a consortium of German banks, in April.
Joint agents Savills and Deloitte Real Estate are hoping to receive offers of £600m to £650m for the 40-storey 505,000 sq ft (46,900 sq m) office building which opened in 2004. There is expected to be a great deal of interest from all over the world with potential buyers including a sovereign wealth fund from the Middle East or Asia, a large pension fund or a private equity house.
Despite being fully let to around 20 tenants including its original anchor tenant Swiss Re the global insurance group and having considerable scope for raised rents, the Gherkin has been described by commentators as “a good building with a bad finance deal attached to it”.
Current joint owners IVG Private Funds, the German fund manager, and Evans Randall, the London private equity firm (together referred to herein as ‘IVG’) bought the Gherkin in 2006 for £600m, having financed the deal with £396m from a consortium of German banks. IVG borrowed in Swiss francs in order to minimise the interest payable compared to if it would have borrowed in sterling.
Unfortunately for IVG, at the height of the financial crisis in 2007 and 2008, many other investors around the world had similar ideas, causing the value of the Swiss franc to soar. The appreciation of the franc caused IVG’s borrowings to rise by £100m. It is understood that a currency fluctuation of 10-15 per cent had been anticipated however in reality, the Swiss franc appreciated by approximately 60 per cent.
On its own, IVG may have been able to cope with the extra borrowing but together with falling interest rates and falling property prices, the deal quickly became untenable. By 2009 the value of the Gherkin had dropped to £480m, causing IVG to breach its loan to value covenants and default on its loans.
Today, exchange rates and the London property market have improved and the value of the Gherkin is now approximately £650m. As evidenced by the appointment of Deloitte as receivers in April this year, the banks are now keen to sell as £650m is enough to pay off the debts and allow everyone involved to walk away from the deal relatively unscathed.
It is likely that the sale will be closed by the end of September or beginning of October.
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