The classic property squeeze goes like this: The cost of servicing debt goes sharply up at just the moment that the value of the asset goes sharply down.

This unhappy place is where Birmingham's Mailbox office-led mixed-use scheme now finds itself, as talks continue with Deutsche Bank and other lenders after a bruising valuation.

The project, owned by Mailbox REIT, fell into technical loan default on 20 April after the loan-to-value ratio landed above 60%.

In 2021 Mailbox REIT plc became the first company to be admitted to trading on IPSX, the International Property Securities Exchange. The market was meant to open a £1T asset class to a much wider group of investors. It is a vehicle that is listed and owns a single asset.

The REIT announced in January that a year-end valuation by Avison Young showed a drop from £189.7M to £157M as at 30 September 2022. This triggered talks with Deutsche Bank, the lender behind the £108.5M loan. The loan-to-value ratio had risen from 57.2% as at 30 September 2022 to 69.1% now. The loan has an agreed LTV covenant of 60%.

“The Company remains in constructive discussions with the lending syndicate, which has now reserved its rights in relation the facility following the loan becoming in default as of 20 April 2023,” a statement last week from Mailbox REIT said. “The company will update shareholders further in due course.”

The move followed a November 2022 announcement that the REIT's interest rate cap expired in January 2023 and that the cost of servicing debt would therefore grow significantly. However, the REIT did not, at that time, expect to refinance because loan extensions were available to it.

“We will not be looking to refinance the company's debt in the short term, as we have two potential extensions of 12 months each available to us, at our option, from the same lender,” Chairman Stephen Barter said.

The revision of the loan-to-value ratio put a stop to planned loan extensions.

Mailbox REIT plc is the owner of The Mailbox. The 4.8-acre site includes 200K SF of offices and nearly 100K SF of retail, including a 45K SF Harvey Nichols department store. It totals 698K SF.

In May 2022 IWG opened a new 50K SF serviced office facility under its Spaces brand.

In its 23-year life the Mailbox has had to endure several reinventions. The next is expected to come in 2026 when the BBC, currently the anchor office tenant, moves out.