Debt And Development Bring Moment Of Truth For Brookfield’s London Office Empire

For a while, it seemed like Brookfield couldn't go wrong when it came to investing in London offices. 

It entered the market in earnest in 2012, buying a portfolio from Hammerson for £525M in a deal that the market widely considered a steal, building out developments and selling at a profit.

When it refinanced the £800M, 1M SF 100 Bishopsgate in 2019, it took £350M of cash out of the scheme. And its 2015 deal to buy Canary Wharf Group for £2.6B with the Qatar Investment Authority gave it control over a thriving London office district. 

Now, however, comes the hard part. 

Brookfield, one of the world’s largest office owners, with a $20B (£16B) global portfolio, is facing an unprecedented moment of change around its 5M SF London portfolio. That figure excludes Canary Wharf Group, and the issues facing the east London estate are another story entirely.

The firm is locked in complex debt negotiations on one of its largest London assets, with another needing a significant equity injection to allow a refinancing after its value dropped sharply. 

At the same time, Brookfield is overseeing a huge refurbishment and redevelopment programme as tenants leave older assets that need to be improved to meet energy-efficiency requirements and occupier expectations. 

The ongoing changes for one of the largest owners in the capital shine a light on the issues facing all London office landlords in a period of flux. 

“It's making sure that these schemes are viable,” Brookfield Properties UK President Dan Scanlon said. 

“You know the position around financing and interest rates. You know the position around construction cost inflation. You know the constraints on supply chain in the London market and the additional amenities and other things you need to put into your building.”

But “buildings are twice as expensive as they were 10 to 15 years ago, and ultimately, it is more difficult to bring them to fruition,” Scanlon added.

“You need rents to rise and to capture that demand at the right point in the cycle.”

Brookfield’s London office portfolio, which comprises 13 assets owned either directly or in joint ventures, has 98% occupancy for the operational assets, Scanlon said. The company completed 800K SF of lettings in 2024 — a record year, even though no major prelets on large developments were signed. 

The result reflects a lack of quality office space in newer fit-for-purpose buildings, Scanlon said, a situation that gives it the confidence to build new schemes and refurbish older assets. 

But maintaining that level of success is complicated right now. 

On the finance side, £460M of debt secured against the 598K SF Citypoint office building in the City of London was scheduled to mature on 20 January after loans were already extended by a year. 

The loan servicer said last week that a three-month extension had been reached to facilitate a longer-term solution. The official valuation of the building is £600M, but when revealing the short-term extension, Real Estate Capital said that a recent attempt to sell the property saw offers come in below the level of the debt. REC added that Brookfield is looking to extend the loan for a longer period. 

Scanlon and Brookfield declined to comment on matters relating to debt. 

The building, built in the 1960s and refurbished since Brookfield bought it, is 12% vacant, though that will drop to 5% when a new lease is signed, a November report to debtholders says. The weighted average unexpired lease term is eight years. 

Citypoint is not the only example of Brookfield dealing with a London office refinancing while the value of the asset is dropping. 

A joint venture between Brookfield and China Life bought the 324K SF Aldgate Tower office building on the eastern edge of the City for £346M in 2016. As of last year, the value had fallen to £260M, and the £192M of loans against the building had come due. 

Brookfield and China Life refinanced the building with a new loan of about £130M in October last year, but fresh equity had to be put in to get the financing across the line, a notice to debtholders says. 

The 200K SF Milton Gate office building, next to the Barbican in the north-east part of the City, is where debt and redevelopment meet in Brookfield’s London office portfolio. 

Brookfield bought Milton Gate for £215M in 2021 using a £164M loan from JPMorgan Chase, some of which was subsequently securitised. The building is let to law firm Addleshaw Goddard, which has exercised an option to break its lease, finishing in May this year. 

The debt matured in October, and its loan servicer explored options to get investors that bought the debt their money back. 

A consensual sale would likely have netted between £100M and £105M, a report to debtholders says. Enforcing the loan through a process like receivership and selling would have brought in approximately £75M to £90M. 

Ultimately, it decided to sell the loan to JPMorgan for £131M, leaving Brookfield and the U.S. bank agreeing to a restructuring. Brookfield declined to comment on that process.

What it has revealed are plans to demolish and redevelop Milton Gate, replacing it with a new scheme of 290K SF. Plans have been lodged with the City for a development that Brookfield describes as “retrofit-first” because 70% of the structure will be used in the new building. 

The building has an energy performance certificate rating of E, which means by 2030, it will be against the law to let it. The best way to improve the energy efficiency is a redevelopment, Scanlon said. To pay for that upgrade, Brookfield needs to put a larger building on the existing site. 

The difficulty in bringing forward large new London office buildings gives the firm confidence to undertake major new developments, he said. Another example is 99 Bishopsgate, where an existing 340K SF, 1995-vintage office building is set to be replaced with a new tower of more than 1M SF. The City planning commission is likely to give a recommendation on the scheme at the end of this month.

“We're very confident in our track record of being able to attract great tenants to headquarter buildings,” Scanlon said. 

“Tenants are looking much earlier in the cycle than they used to because of the scarcity,” he added. 

Whereas tenants might have once looked three or four years ahead of a lease expiry for a significant prelet, firms with a large requirement are now looking more than five years ahead to secure space in the limited number of larger buildings underway. 

“That gives us a really good opportunity on things like 99 Bishopsgate and Milton Gate to talk to tenants early and make sure that what we're delivering is going to be suitable for their requirements,” Scanlon said.

Elsewhere, Brookfield is undertaking a £15M refurbishment of the 545K SF 30 Fenchurch Street office building, which it bought for £635M in 2021. 

That building also has an EPC rating of E and needs to be upgraded. Fully leased, Brookfield is working with and around tenants to upgrade the plant to make it all-electric. 

Elsewhere in Brookfield's portfolio, it is emphasising trends currying favor with tenants at the best new developments. The £400M, 430K SF 1 Leadenhall skyscraper was 70% leased at the point of completion, with law firm Latham & Watkins having prelet 200K SF.

In contrast, 79K SF of the 120K SF The Gilbert office on Finsbury Square remains unoccupied. The building is a retrofit of an older building, which retains a 1930s facade designed by Sir Giles Gilbert Scott, the brains behind Britain’s famous red telephone boxes.

Scanlon pushed back on the idea that the diverging leasing levels of the two buildings indicate that retrofitted buildings are more difficult to lease. 

“I wouldn't necessarily read into that, to be honest,” he said. “I think if you're delivering best-in-class, well-located property, ultimately they are in very good demand.”