A Lesson in Gherkins and Foreign Exchange

How not to fund a property purchase

The Gherkin is one of the iconic images of modern London, as instantly recognisable as almost any piece of modern architecture. And it is up for sale, at price reported to be around £600m. The reason for its sale is a sad story.

The building was bought at close to the last London property market peak in 2006 at a price of £630m by two investors, one of which was a fund managed by a German largest real estate investment trust (REIT). Back then, when UK base rate was around 5%, borrowers could cut their interest bill dramatically by choosing a Swiss Franc loan rather than one denominated in sterling. That is what the joint investors chose to do (to the tune of £400m), without putting any (admittedly costly) currency protection in place.

Roll forward eight years and in the past seven the Swiss Franc has appreciated 63% against the pound, prompting the lending banks to send in the administrators – hence the ‘for sale’ sign on the Gherkin. A better example of the dangers of mismatching assets and liabilities would be hard to find. The loan first went into default in 2009, but the banks adopted the widely used crisis strategy of ‘forbearance’, mainly because pulling the plug then would have crystallised a large loss, while waiting might have produced deliverance.

Coincidentally, another landmark London office building has also been placed on the market. HSBC Tower, in Canary Wharf, may not be as architecturally stunning as the Gherkin (although both are Norman Foster creations), but it is much bigger. That size – and HSBC as a tenant – is reflected in the price tag, reportedly of “offers above £1.1bn.”

The fact that these properties are being put up for sale now is a reflection of the strength of the recovery of the London property market since the dark days of the financial crisis. The property market outside the capital has also been strengthening of since the middle of 2013. Values have now risen by 6.8% over the last 10 months of consecutive growth, according to the IPD UK Monthly Property Index.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.