Feb. 27 (Bloomberg) -- The global financial crisis has come to London Mayor Boris Johnson’s doorstep.
The mortgage on the egg-shaped glass building on the Thames River where London’s City Hall has its offices is in default, a victim of the falling value of U.K. office properties. The building is part of a 13-acre development near London Bridge owned by developer More London Plc. Guy Hands’s private equity firm Terra Firma Capital Partners Ltd. is also a tenant.
“Another great deal negotiated by government ministers,” said Joe Derrett, a spokesman for Boris Johnson. “The Greater London Authority has a long lease and carries on paying rent to its landlord More London until someone tells us otherwise.”
Royal Bank of Scotland Group Plc, which yesterday reported the biggest loss in U.K. corporate history, packaged 670 million pounds ($960 million) of loans against the building and three other properties in the complex into bonds.
“Is there anybody in this deal who hasn’t got a broken back?” said Ken Livingstone, the previous mayor of London, who was in office when city hall was moved to the building in 2002.
Loan terms were breached in January when the property’s value fell to 754 million pounds, 21 percent below a valuation in October 2006, the loan’s trustee said in a Feb. 25 Regulatory News Service statement. Such defaults are rising after U.K. commercial real estate values fell 37 percent from their peak in mid-2007, according to Investment Property Databank Ltd., a London-based research company.
Sitting Tight
“We’ll see more of these kinds of default,” said Harpreet Parhar, a debt analyst at Calyon in London. “In this deal, senior investors will probably want to sit tight. The tenants are of a high quality and leases are long so as long as rents keep coming in to make the interest payments owed they will probably wait until maturity in 2014, when refinancing risk should be lower.”
More London spokesman Robert Siegfried said the property generates sufficient cash to make debt payments.
“The property is in technical default reflecting current real estate conditions generally in the U.K.,” Siegfried said. “We are confident about the property both in terms of today and its long-term potential.”
The glass-and-steel structure on the south bank of the Thames was designed by architect Norman Foster and completed in 2002 by developer CIT Group. Queen Elizabeth II opened the building on July 23, 2002. The design was chosen from among seven and when the building was completed, Nick Raynsford, minister for London, called it “a superb example of successful partnership between the public and commercial sectors.” The Greater London Authority has a 25-year lease.
“We will be calling for the appropriate civil servants to be hung, drawn and quartered if this has any effect on the lease terms or rent we pay,” said Mike Tuffrey, a Liberal Democrat member of the legislative assembly.
The building’s unusual design does have at least one drawback, according to Johnson, who declined to comment on the loan agreement.
“My profound thought about More London is it would be a wonderful thing if someone could organize the windows so they could be cleaned more efficiently,” Johnson said in an interview today.
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