Six bids in for £102m Project Neo government office portfolio

First round bids for Project Neo were lodged on Friday with a six-strong shortlist emerging for the secondary regional majority government-tenanted office portfolio, the former Wichford Government Income Portfolio (GIP).

CoStar News understands that Mountgrange, Oaktree, Telereal Trillium, Kennedy Wilson, Cerberus and Lone Star have all bid on the 34-strong office portfolio.

Project Neo is quite a difficult portfolio to inherit, with the asset management play for the winning bidder likely to be determined by whether or not the government chooses to re-let leases.

However, with the government widely considered to be over-encumbered by real estate space throughout the UK, and having already indicated a strategy to utilise space more efficiently as well as reduce its workforce in certain areas, these assets are considered a likely candidate for departing government tenants.

This level of risk, or even, expectation of tenant departure is thought to have fed into bidders’ cashflow forecasts for Project Neo.

More than two-thirds of the leases break before the end of 2018, with less than six years’ unexpired lease terms: around 23% of rental income has a break date prior to 2018, with 45% of rental income having a break date in 2018.

The remaining income, at around 31%, has varying maturities after 2018 through 2122, due to one 70-plus long lease skewing the weighted average lease profile.

This uncertainty within the portfolio is also likely to mean bidders will struggle to secure financing for the portfolio, or at least financers keen to lend will require a premium for the risk.

Hatfield Philips enforced against the Government Income Portfolio Mortgage Loan, within the legacy Lehman Brothers’ Windermere VIII CMBS, in January after it sought clarification from Redefine International, which acquired control of GIP after its take-over Wichford in July 2011, that it did not plan to recapitalise the defaulted loan.

Geoff Rowley and Philip Watkins at FRP Advisors were subsequently appointed in January as fixed charge receivers, and have readied Project Neo as a portfolio sale, following the completion of four individual asset sales reducing the portfolio from its original 38-strong size.

Rowley and Watkins are understood to be planning to contact first round bidders from this afternoon in respect of their participation in the second round process.

The original 38-strong UK regional portfolio has fallen in value from £280.1m to £125.4m, reflecting a strong increase in the properties’ initial yields, deteriorating unexpired leases and physical condition of the assets as well as downward pressure within local investment markets.

The four asset sales have reduced the value of the remaining pools subsequently further, with a  July US Bank note to noteholders stating that the outstanding balance on the GIP loan has fallen from to £177.2m. The £64.6m B-Loan is out-of-the-money.

FRP Advisors appointed Lambert Smith Hampton and Brown Cooper Marples over GIP in April.

The largest 10 GIP properties comprise:

  • The 104,875 sq ft Centenary Court in Forster Square in Bradford (2006 value: £26.85m)
  • The 78,263 sq ft Castle House Lisbon Street in Leeds (2006 value: £23.9m)
  • The 57,751 st ft Unicorn House at 28 Elmfield Road in Bromley, (2006 value: £18.925m)
  • The 57,384 sq ft Clifton House in Peterborough (2006 value: £13.35m)
  • The 62,504 sq ft Woodfield House & Riverside Chambers in Taunton (2006 value: £12.98m)
  • The 59,224 sf ft Inland Revenue Call Centre in Dundee (2006 value: £12.97m)
  • The 83,445 sq ft Great Western House in Birkenhead (2006 value: £12.13m)
  • The 55,008 sq ft Atholl House in Aberdeen (2006 value: £11.7m)
  • The 63,657 sq ft Archway Tower in London (2006 value: £9.7m)
  • The 36,682 sf ft West Midlands Police Authority HQ at Aqueous 2 in Aston (2006 value: £9.07m)

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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