Sign Of The Times: A Hong Kong-Based Owner Is Walking Away From A £270M London Office Building

A report on one of the largest London office insolvencies of the current downturn highlights the challenge facing office investors right now: Higher interest bills and falling valuations are making refinancing harder and leading to the prospect of forced sales. 

That was the case when the Hong Kong-based owner of a London office building purchased in 2017 for £270M was “unresponsive” to efforts by its lender to determine how it planned to refinance the building.

Now that building, 5 Churchill Place in Canary Wharf, is in administration, according to a report from FTI Consulting. In May, directors from FTI were appointed receivers to the special-purpose vehicle that owns the 319K SF office building and administrators to the SPV that manages it.

The administrators and receivers are collecting rents and service charges, letting up a vacant floor of the 12-storey building and laying the ground for a sale, the report said. But that sale may not take place for the next 12 to 18 months, and FTI put no price on what it might sell for. 

The building was owned by Hong Kong investment group Cheung Kei, which bought it for £270M in 2017. That purchase was financed with £196M of debt, the report from FTI said, with Bloomberg reporting about £175M of that was senior debt provided by Lloyds Banking Group. 

J.P. Morgan leases 10 of the 12 storeys on a 20-year lease expiring in 2029, but most of its staff are in the nearby 500K SF 25 Bank St. The company that owned the building produced revenue of £6.9M in 2022.

FTI’s report confirmed that it had been appointed by senior lender Lloyds. 

“The senior loan facility was due to expire in April 2023 and the borrower appeared to have limited prospects of refinancing on time given current market conditions,” FTI said in its report. “Furthermore, with significantly higher interest rates than when the loan was first put in place, alongside falling valuations, any available refinancing was likely to require material additional equity.”

The report added that the landlord had breached insurance provisions, and £800K were in arrears on service charges payable on void or vacant space dating back to 2020. 

The loan matured on 27 April but was not repaid.

“The borrower had been largely unresponsive throughout this process and the likelihood of securing a successful refinancing appeared to be low,” the report said. 

On 28 April, the borrower and its advisers were asked for a final refinancing proposal by 8 May. Despite an initial cooperative response and the deadline being extended to 15 May, “no substantive proposal was ever received,” per the report.

Receivers and administrators were appointed on 23 May.

The SPV that owns another Canary Wharf building bought by Cheung Kei, the 581K SF 20 Canada Square, went into receivership in June. That building was bought for £410M in 2017, with a £265M loan provided by Lloyds. 

Cheung Kei did not respond to a request for comment. But a week after the appointment of receivers and administrators at Churchill Place, it released a statement on the debt situation at its London assets and in its wider business.

“The two properties located in Canary Wharf, London, are undergoing an orderly reorganization,” it said, as translated by a Google translation tool. “Among them, 20 Canada Square will be transformed into a large-scale comprehensive commercial complex in cooperation with senior investors, and will be renamed ‘Asia Center.’

“The rental income and bank loan ratio of No. 5 Churchill Square have a rate of return of 7%. The project is also negotiating with investors to sell part of the equity. I believe that the problems of subsequent financial institutions can be properly resolved.

“I hope that all walks of life, especially the media public, will have a little more understanding and tolerance for entrepreneurs, and rationally view the issue of enterprises' mild loan cuts.”