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Citigroup is reportedly in advanced talks to buy its 1.2M SF London office tower for around £1.1B. The deal has been cited as a sign of confidence in London in spite of Brexit, but it actually has a far more pragmatic element to it. Stay awake at the back, but it could be all about lease regulations and structures. And it may mark the start of a trend.
When 25 Canada Square in Canary Wharf was sold to entrepreneurs Glenn Maud and Derek Quinlan for £1B in 2007, just before the credit crunch, Citigroup agreed a new lease expiring in 2037. At that point it was paying about £47M a year in rent.
When Maud and Quinlan put the building up for sale in 2011, under pressure from lenders, broker JLL released details on the lease. At that point Citi was paying £57.6M a year in rent on a lease that had an uplift in 2015 and from there on was index linked, rising at 3.2% a year.
A quick indexation calculation shows that between the end of 2018 and when the lease finishes in 2037, Citi will make around £1.4B in rental payments. So buying the building for £1.1B will actually save it money.
Also, from this year on, changed international accounting rules mean that companies need to register future lease payments on their balance sheets as liabilities. Estates Gazette pointed out that buildings a company owns are held as assets, so Citi is changing a big liability to a big asset.
Citi only occupies about 40% of 25 Canada Square, and sublets the rest. But over time it will move in staff from neighbouring 33 Canada Square, owned by Canary Wharf Group.
In a note on the lease rule changes, PwC said the new regulation means companies will increasingly look at buying rather than leasing buildings, and other banks with index-linked leases have run the rule over such deals. Sale-and-leasebacks are also likely to decline.
Santander is bidding against the Reuben brothers to buy its Madrid headquarters for €3B (£2.6B). The building was also bought by Maud and Quinlan during the last boom.
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