Derwent London plc has exchanged contracts with LaSalle Investment Management ("LaSalle"), the global real estate investment manager, to acquire a minimum 175-year long leasehold of 20 Farringdon Road, Clerkenwell EC1 in London’s Tech Belt. LaSalle will retain the building’s virtual freehold with the right to receive 10% of all rents.
In return Derwent London has disposed of two properties: 22 Kingsway WC2 for £64.5 million and Mark Square House EC2 for £32.1 million, representing net initial yields of 4.4% on both properties, and a 50% interest in a joint venture at 9 and 16 Prescot Street E1 to LaSalle. The price of the acquisition is £88.0m before costs, and the combined disposal proceeds are £115.3m. Derwent London will receive the balance of £27.3m in cash before costs.
Colliers and Cortex Partners acted as property advisors and Wragge Lawrence Graham & Co as solicitors for LaSalle. The Wragge Lawrence Graham & Co team was led by John Burns and included real estate director Michael Twining and tax & funds partner Lee Nuttall, along with real estate associates Paul Lloyd, Rachel Kerr and James Richards. CBRE acted as property advisors and Macfarlanes as solicitors for Derwent London.
John Burns, Partner, Wragge Lawrence Graham & Co, said: "As always, it was a privilege to work as part of the LaSalle team on this significant transaction. Swap deals tend to have their own particular challenges and this one was no different; but that of course makes them all the more satisfying to conclude. We are delighted to have played a part in making the transaction happen and wish both parties much success with the future of the joint venture."
20 Farringdon Road is a prominent corner property, adjacent to the site of the new Farringdon Crossrail station and opposite 19 Charterhouse Street, which Derwent London acquired in November 2013. The six-storey property totals 170,600 sq ft comprising 141,400 sq ft of offices, 5,700 sq ft ancillary space, 1,200 sq ft retail, and a 22,300 sq ft gym. The passing rent is £3.6m per annum or £3.2m per annum less the 10% ground rent. The ground floor offices (26,200 sq ft) are let at a peppercorn with a break in December 2015. The average rent on the other office floors is c.£27 per sq ft with leases expiring between 2015 and 2022. The net initial yield is 3.4%, which reflects a capital value of £545 per sq ft after costs.
The acquisition has significant near term potential to raise the rental income, as well as representing a substantial development opportunity in the medium term.
The two outright disposals of 22 Kingsway WC2 (91,400 sq ft offices and 44,000 sq ft theatre) and Mark Square House EC2 (61,700 sq ft) will raise £96.6m before costs, which is a 10% uplift on December 2013 values. It also represents a premium to June 2014 values. The combined rent was £4.5m per annum, which represents an initial yield to the purchaser of 4.4% (or a capital value of £670 per sq ft excluding the theatre space or £520 per sq ft overall).
In addition, both partners will take a 50% share in a joint venture being established to hold 9 and 16 Prescot Street E1. These two properties have been valued at £37.4m which represents an initial yield of c4.9% to the purchaser or £370 per sq ft. In the short term these properties are income producing, but longer term there are redevelopment opportunities across the whole site.
9 Prescot Street is a 98,500 sq ft office building, which following recent management activity is let to two tenants. Barts Health NHS Trust occupies the lower three floors, comprising 60,000 sq ft, on a five year lease for a rent inclusive of service charge of £1.5m pa. The Co-operative Bank ("Co-op"), whose lease over the whole building was due to expire this year, now lease the top three floors. In total the Co-op occupy 36,600 sq ft, where the lease will break later this year. The joint venture intends to refurbish this space once it becomes available.
16 Prescot Street is an 8,800 sq ft restaurant let at £9 per sq ft. The lease expires in 2021.
John Burns, Chief Executive Officer, Derwent London, commented: "We are pleased to have secured a major potential project adjacent to the site of Farringdon Crossrail station in the heart of Clerkenwell, an area where we already have substantial interests. In return we have sold two smaller properties and have established a joint venture in Whitechapel. Both Clerkenwell and Whitechapel are being transformed by the impact of Crossrail and new creative industry occupiers, and we look forward to working with our new partner, to maximise these opportunities."
Julian Agnew, Chief Investment Officer, LaSalle Investment Management, said: "We have agreed a deal with Derwent London that has enabled us to retain an interest in one of Clerkenwell's premier development opportunities, whilst diversifying our London exposure. The assets that we have acquired offer good rental growth prospects off low passing rents, and in the longer term have significant asset management and redevelopment potential. Derwent London's track record at delivering best in class redevelopments and refurbishments will ensure that our interests in both 9 and 16 Prescot Street and 20 Farringdon Road are maximised and that the buildings are well placed to benefit from the occupational demand Crossrail will bring to Whitechapel and Clerkenwell."
