£1.1bn Citi Tower under offer

A deal has been struck to sell one of the UK’s most recognised skyscrapers, the Citi Tower in Canary Wharf.

US bank Citigroup, which itself holds the lease on the entire 1.2m sq ft building, has placed the asset at 25 Canada Square, E14, under offer. It was most recently valued by its current owner, AGC Equity Partners, at £1.2bn, but it is thought that a deal is likely to have been agreed at closer to £1.1bn, reflecting a yield of around 4.25%.

A sale at that price would make it one of the largest single-asset real estate transactions in the UK, but still behind 2017’s record £1.3bn sale of the Walkie Talkie at 20 Fenchurch Street, EC3, by Landsec and Canary Wharf Group to Lee Kum Kee.

A source close to the deal said the transaction was still expected to take a number of weeks before completion while senior Citi executives in New York thrashed out the future structuring of the asset.

Market boost

With less than 40 days until Brexit, the prospective deal is a boon for both the real estate market – which was anticipated by many to experience a dearth of activity in the run-up as investors played safe – and for the City of London and UK plc, with a bank from across the Atlantic making such a significant financial commitment.

Stephen Clifton, partner and head of commercial at Knight Frank, said that Citi was taking advantage of hesitation in the market in the weeks before the UK is due to leave the European Union on 29 March: “This is another great example of the breadth of international appeal of London office investments, where – for mainly political reasons – assets are offering great value compared with other global cities. When political stability returns, the arbitrage will disappear quickly, and this is smart timing.”

Shrinking occupation

Citi has an index-linked lease on the building that expires in 2037, although Radius Data Exchange records show that the bank now occupies less than 40% of the building, having agreed sublets to a range of tenants including Boston Consulting Group and the General Pharmaceutical Council.

Citi buying a building of which it now occupies less than half may seem counter-intuitive. However, it also holds a lease until 2026 on around 562,700 sq ft of space in the adjoining 33 Canada Square, which is owned by Canary Wharf Group, and it ultimately plans to consolidate all of its staff across the two buildings into number 25.

Balancing the books

Also a factor in buying out the current long-dated, index-linked lease on 25 Canada Square is that, as of the start of the year, leases must now be considered a liability and recorded on companies’ balance sheets due to a new international accountancy regulation called IFRS 16.

Even though Citi would have to utilise cash to buy 25 Canada Square, the building would ultimately be registered as an asset on its balance sheet and it would provide the bank with greater flexibility over its future occupation of the building.

Kuwaiti-backed AGC bought the 42-storey asset in 2013 for £1bn out of the hands of administrators at EY, which had been appointed to a holding company established by Derek Quinlan and Glenn Maud.

At the time, AGC financed the acquisition using £661m of debt from Bayerische Landesbank, although this was refinanced last year by Société Générale, according to a report by Bloomberg.

CBRE is acting for AGC. Cushman & Wakefield is acting for Citigroup.

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