Innovative thinking needed to secure Heron’s flagship tower
As traditional lending streams dry up, Gerald Ronson will have to seek other options as he tries to refinance the not-fully-let Heron Tower
Europe’s largest private aquarium is fully occupied but a slow take-up of office space in the City of London’s tallest building, in whose lobby it sits, will be one of the stumbling blocks to refinancing Heron Tower.
Practical completion of Gerald Ronson’s flagship was achieved at the end of March 2011 but, nearly two years on, less than 50% of the 441,300 sq ft of the prime office space that the building offers is let.
Two German banks, Hypothekenbank and Landesbank Hessen-Thuringen, provided the £370m financing. The loan is a development facility and will not be convertible to a investment loan without a renegotiation of terms. It is understood that these negotiations are continuing but, given that German banks have significantly scaled back their lending on UK real estate and banks generally avoid anything with a hint of risk, seeking to agree anything with them other than some temporary breathing space may be optimistic.
Tenants will be on significant rent-free periods to secure the headline levels that Heron is seeking. There would not be any significant immediate income to service loan repayments even if the building were fully let. That is usual for a newly completed and let development and can be provided for within the structure the loan. What will worry the Germans and other lenders is the uncertainty over whether the vacant space can be let soon. If Heron’s letting strategy is running late that will compound the concern as the competition, such as the Cheesegrater and the Walkie Talkie, secures prelets and the Shard attracts tenants across the river.
Uncertainty equals risk and in the current climate gives banks reason enough to refuse to lend. When billions of pounds of existing loans are due to come up for refinancing this year, along with billions more of potential new business, banks can probably find enough de-risked deals to satisfy their modest lending ambitions.
That said, Heron Tower is a high-profile scheme that has been successfully delivered by a high-profile developer and requires a big loan. If the UK banks are truly open for business, as some of them are saying, it would deliver a powerful message for one or more of them to come forward and provide the finance required.
It is unlikely that Heron is depending on that and will be considering other options.
The withdrawal of traditional lending to much of the UK real estate market has handed the opportunity to other sources of funding to step into the breach. Insurers and institutions are among various new faces that are having a significant impact on the UK real estate lending market. However, since there is plenty of fully let prime stock for them to share with the banks, the Tower may be too risky for them without further letting activity being demonstrated. But if Heron can do that, a refinancing, led by the likes of Legal & General or Pricoa, would make the banks take note.
Ronson’s own record is one of achieving success in the face of adversity.
He financed and completed the development of Heron Tower during the economic turmoil between 2007 and 2011, which was an enormous feat in itself. And recently he secured a £230m debt package to finance the development of Heron’s residential scheme at Riverwalk House. The arrangement includes senior debt from Lloyds and Barclays.
Development has almost become a dirty word to mainstream lenders and securing the Riverwalk financing should have been more difficult than refinancing the Tower. But by innovatively bringing together a range of funders, including those with an equity stake and mezzanine providers, to complement the senior debt, Heron has secured the financing it needs.
It is likely that such innovation will be required to refinance the Tower.
This article first appeared in the Estates Gazette on 16th March 2013 in its original format .