London’s costly office refurbishments push Chinese owners towards exit
The city stands out as the world’s most international real estate market, with the last decade seeing a major influx of investors from China in particular
[LONDON] Gingko Tree Investment, which is backed by the government of China, is considering pulling out of a prime piece of commercial real estate in London to avoid having to spend money on a costly refurbishment, according to sources familiar with the matter.
The property, 33 Holborn, which is the former headquarters of British grocer J Sainsbury, needs an upgrade in part to comply with stricter energy efficiency requirements. The consortium of investors that owns the property has already secured planning permission to start work. But Gingko Tree, which owns the building with Tishman Speyer and a Danish pension fund, is weighing an exit in order to avoid forking out the necessary capital, the sources said, asking for anonymity in discussing confidential information.
A representative for China’s State Administration of Foreign Exchange, of which Gingko is the investment arm, did not immediately respond to a request for comment. Spokespeople for Tishman Speyer, which acquired and manages the Holborn property on behalf of Gingko Tree and other investors, declined to comment.
The deliberations are ongoing and there’s no certainty they will result in a sale, the sources familiar with the matter added. However, Gingko Tree’s concerns reflect a wider trend as Chinese investors that piled into London’s property market more than a decade ago now face significant costs tied to upgrades needed to keep tenants and regulators happy.
London stands out as the world’s most international real estate market, with the last decade seeing a major influx of Chinese investors in particular. But the usual ebb and flow of purchases and exits has been disrupted, due in part to the pandemic, leaving international owners invested longer than many had intended and as new regulations kick in.
As a unit of the Chinese regulator, Gingko Tree is mostly unaffected by the country’s capital controls. But other Chinese investors dealing with refurbishment bills tied to their London CRE assets now need to figure out how to generate the necessary cash without getting on the wrong side of those restrictions.
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For some, the costs of staying invested are too high.
China Investment, the country’s sovereign wealth fund, chose to sell the former Deutsche Bank headquarters at Winchester House rather than take on the necessary refurbishment work. China Overseas Land and Investment, a unit of the China State Construction Engineering Corporation Limited, sold the mostly empty Centrium office building on London’s Aldwych earlier this year and has fielded bids for another block it owns in the City of London district.
Uncertainty around how Chinese property investors will act comes as large parts of Britain’s real estate market risk falling short of evolving requirements around energy efficiency. According to an analysis by the British Property Federation, 83 per cent of commercial buildings in seven major UK cities have Energy Performance Certificates (EPCs) below B. That means they risk being unable to accept tenants when energy efficiency rules become stricter, which is due to happen sometime in the next decade.
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In central London, 11.9 million square feet of office space that is rated C or lower will come onto the market by the end of 2027, according to real estate consultant CBRE. The cost of upgrading all London offices in line with proposed new energy efficiency standards could be as high as £18.9 billion (S$33 billion), research from the real estate consultancy Knight Frank found last year.
At 33 Holborn, which Sainsbury turned into its HQ back in 2001, the EPC grade is currently E, according to public filings. According to a listing seeking new tenants, the building is “targeting B”.
Though existing requirements formulated by the previous UK government are currently under review, most property owners are erring on the side of caution, says Mike Edwards, a director at building consultancy Arup.
A spokesperson for the UK government’s energy department said that it’s currently working through responses to a consultation on minimum energy efficiency standards, and will provide an update “in due course”.
China Life Insurance, which holds a majority stake in 10 Upper Bank Street in Canary Wharf, has been trying to persuade tenants to stay in order to generate enough rental income to help cover the cost of refurbishments, according to sources familiar with the matter. Law firm Clifford Chance has a lease on the entire 32-storey building, but is due to move its headquarters to the City of London soon.
Among Clifford Chance’s sub-tenants in Canary Wharf is Deutsche Bank, which is still considering its options, the sources said. The bank is in talks to sign a new lease in the nearby YY building, the Financial Times reported last month.
Using rental income to cover refurbishment costs would allow China Life to avoid having to deal with capital controls, the sources said. The firm also has the option of relying on its joint venture partners to absorb the costs of an upgrade in exchange for giving them a higher share of future returns on the investment, the sources said. Such a model could be applied to other China Life London properties, including 99 Bishopsgate and the Aldgate Tower, they said.
A representative for Brookfield declined to comment. A spokesperson for QIA did not immediately respond to a request for comment.
For Chinese investors without deep pocketed partners or offshore reserves, there are few options. China’s Hao Tian Development breached the terms of a loan on 55 Mark Lane, a building it bought in 2018 for about £130 million with the help of a facility from Barings.
Hao Tian was unable to inject additional equity needed to reduce the building’s loan to value ratio and pay for necessary upgrade works, according to sources familiar with the matter. Private equity firm Castleforge has since closed a £90 million recapitalisation of the building, and intends to use the loan to help pay for improvements. BLOOMBERG
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