Citigroup in Talks to Buy London HQ

Citigroup is in talks to buy its Canary Wharf headquarters, which it currently leases, for a reported £1.2bn from owner AGC Equity Partners.

The US bank’s bid for 25 Canada Square is the latest step in the group’s long-term goal of taking direct control of its most important offices, after it acquired its global New York HQ in 2016 for £1.6bn. Citigroup chief executive Michael Corbat said at the time of the New York office acquisition that owning its own office headquarters would make the bank’s operations smaller, simpler and more cost-efficient.

Citi has occupied the 42-storey skyscraper as its EMEA HQ since 2001 and currently holds a leasing agreement on the entire 1.2m sq ft space lasting until 2037. However, it only occupies less than 40% of the building, subletting the majority of the space to other businesses and housing its own additional staff at the neighbouring 33 Canada Square. The group’s lease on the adjoining 18-storey building ends in seven years, after which time the company plans to consolidate its London workforce under one roof at 25 Canada Square, displacing some subtenants.

According to reports, the American bank pays an estimated £46.5m annually in rent for the parts of the skyscraper which it does occupy. If successful, Citigroup’s acquisition bid would and mark the latest near-record in a string of £1bn commercial property acquisitions.

Currently, the record for the highest value commercial property transaction is the £1.3bn sale of 20 Fenchurch Street (the Walkie Talkie building) to a Hong Kong investor in 2017.

Commercial property unaffected by Brexit

Aside from Citigroup’s £1.2bn bid, the last 12 months have seen Goldman Sachs agree a sale and leaseback of its London offices for £1.2bn and UBS’ 13-storey London ‘groundscraper’ sold for £1bn.

The trend of high profile office transactions marks a vote of confidence in both London’s financial sector and commercial property market, despite uncertainty regarding Brexit. Knight Frank’s Canary Wharf head Chris Paxton says letting agents “haven’t seen the trend of thousands of finance jobs leaving the UK play out at all,” adding: “There was a lot of the so-called banker Brexodus chatter six months after the EU referendum but now it’s not even a conversation that comes up.”

Since the EU referendum, Citigroup has maintained that London will remain its EMEA headquarters, regardless of the outcome of Britain’s withdrawal from the European Union. The firm has projected that only 60 roles out of its 6,000 London-based workforce will be moved from the UK to EU countries after Brexit.

The company in fact expanded its London property portfolio last year, setting up its new innovation lab at a Wework flexible office space in Moorgate.

New regulations incentivise firms to own offices

In part, Citigroup’s bid to buy the building may be motivated by recent changes to accounting regulations, effective from the start of this year. The new IFRS 16 affects how commercial leases are accounted for and assets and liabilities are presented on a company’s balance sheet.

Under previous rules, companies were able to decide whether a lease should be classified as an operating lease – which could be omitted from their balance sheet – or a finance lease, which could not be omitted. The new rules mean that the vast majority of long-dated, indexed-linked company leases will now have to be classed as finance leases and therefore factored into a company’s balance sheet as a liability.

Should Citigroup buy the building however, they will instead be able to list the property as an asset on their balance sheet.

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