Criterion Capital’s £937m refinancing deal with Aviva announced this week is one of the largest agreed by a private UK property firm with a single lender.
It will allow the company, led by chief executive Asif Aziz, to lock down trophy West End assets for a generation and fuel its private rented sector strategy with £500m of investment.
The collateral for the loan includes prime assets such as the Trocadero, W1, and the Criterion Building, SW1, both on Piccadilly Circus; the St Giles Hotel and YMCA on Tottenham Court Road, WC1; and Fountain House on Park Lane, W1.
Criterion agreed a deal that involves repayments after 35 and 50 years. These are not individual loans secured against individual buildings; instead, the loan is secured against the whole pool.
The loan-to-value ratio on the deal is slightly more than 50%, putting the value of the 14 assets supporting the loan in the region of £1.8bn.
Aviva has increased its exposure to Criterion but was already a major lender across the portfolio. Royal Bank of Scotland was the sole lender on the Trocadero and has been refinanced out, while bondholders of a CMBS issued by Barclays and secured against the Criterion Building have been repaid.
Criterion has reduced its gearing level by adding value to the assets in the portfolio through letting and repositioning.
“The LTV ratio has been brought down through asset management and no properties were sold or new equity injected, although there have been more assets brought into the structure,” says Criterion chief investment officer Graham Wood, who led on the deal.
Built-in flexibility
The long-term, fixed-rate nature of the agreement means that some flexibility has been built in to the deal through substitution rights. These allow the company to sell assets but swap in ones that are similar while providing the lender with assurance that it will still receive a steady income stream from the loan throughout its term.
As with most fixed-rate, long-term deals, the agreement also includes heavy early repayment penalties.
“Our investors are really long-term holders of these assets. Our intention is to hold these for posterity, but circumstances can change and you do need the flexibility to substitute them. That has been factored in, but the current intention is to hold them,” Wood says.
Aviva’s financing also allows for elements of the facility to be used for development. The Trocadero is currently undergoing a transformation that includes a new 1,000-seat Picturehouse Cinema, 58,000 sq ft of reconfigured retail space and a 583-bedroom Ibis hotel scheduled to open in 2017.
“Construction of the Trocadero is moving ahead nicely. We are targeting completion before December 2017 and the current retail units will close in December this year,” says Wood.
“With the Trocadero undergoing development, it is therefore not really recognised in terms of its full value on day one and that provides sufficient upside going forward that will make the LTV position even more comfortable for us and them.”
Trocadero: up to the job?
Given its location, the Trocadero has been widely regarded as not fulfilling its potential, and market chatter has at times linked it with financial difficulties. But Wood says that this has never been the case.
“The proof is in the pudding. We haven’t had to tip any new equity into this transaction and Aviva has increased its commitment to us.”
Although some development is to be undertaken within Criterion’s West End portfolio, this is not expected to be the company’s main driver of value in the coming years.
PRS for commuters
Criterion is aiming to aggressively build its PRS portfolio in “commuter London”, which broadly covers zones three to seven. The West End refinancing has allowed the company to take cash out of the assets and release equity that, once geared, will allow for £500m of investment in the sector.
Its three completed schemes and its further eight under construction will by March give it a portfolio of 1,639 units. It owns sites with planning that can provide another 2,505.
“In PRS you have a whole host of tenants, not just one or two as in an office building, which is more risky,” says Wood.
“We are aiming at a low-cost market of £800 per sq ft to broaden appeal. We also believe that the UK is going to move more towards the US and continental Europe model of renting.”
