Gherkin sold for a record £600m

The City's iconic "Gherkin" skyscraper has been sold by Swiss Re for £600m, marking the most dramatic transaction in a London's runaway commercial property boom.

The sale price for the 41-storey tower, designed by Norman Foster, was a record for a British office block and only some giant shopping centres in this country have changed hands for more. Swiss Re will continue to occupy the building as its principal tenant. It was jointly bought by the UK investment banking group Evans Randall and the German fund manager IVG Immobilien.

The news came as two other huge London deals look possible. CityPoint, a 36-storey tower by Moorgate, has been put up for sale by its owner, Tishman Speyer, with a price tag of £650m - less than a year after Tishman bought it. The structure is home to 20 tenants, including the law firm Simmons & Simmons and Macquarie Bank.

HSBC said yesterday that it is looking at a sale-and-lease-back transaction for its London headquarters at Canary Wharf. The bank's tower, which provides 1.1m sq ft of space and is also designed by Norman Foster, could be worth some £800m.

The commercial property market in London took off at the start of 2005 and shows no signs of coming off the boil, as global money floods into the capital and the needs of financial services tenants continue to expand. As a result, property yields have fallen over the past two years, from some 6.25 per cent to 4.25 per cent.

Angus McIntosh, the head of research at the property consultants King Sturge, said: "It is mind-bending the amount of money out there looking for something to invest in. It is almost taking leave of reality. One view is that people are not so much investing in London, as buying London."

Last year, investment in property in the City alone - not counting the business districts in the West End and Docklands - totalled some £8.5bn, according to King Sturge, up from less than £6bn in 2005.

In 2006, 1.1 million sq ft of office space in the City, Canary Wharf and the West End was taken up by new occupiers, a 35 per cent increase on 2005 and the largest total since 2000, according to property advisors Jones Lang Lasalle.

Rents in the City jumped 20 per cent during 2006, while the price of prime rental space in the West End soared 27 per cent, as banks, private equity and professional services firms all took more space to house their booming businesses.

Chris Northam, of the City investment team at Jones Lang Lasalle, said that there are another couple of years left of rental growth in London and investors remain keen to buy into the stellar performance of the market.

"People feel very comfortable with London. They are attracted by the London growth story. It is a very transparent market and it offers longer leases than elsewhere," Mr Northam said.

Property has enjoyed a re-rating as a global asset class. London in particular has benefited as it is now vying with New York as the world's premier financial centre, as a result of tighter regulation in the US and a reluctance among Middle Eastern investors to put money in the US post 9/11.

Mr McIntosh said that City and West End rents should grow some 10 per cent in 2007. He said that vacancy rates in the City had dropped from around 15 to 18 per cent two years ago to just 6 per cent now, while vacancy levels in the West End were running as low as 3 or 4 per cent.

Tim Sketchley, head of the capital markets group at Cushman & Wakefield, said that a differentiation would emerge between "prime" London property, which offered tenants the most modern space and bigger floor plates of accommodation, and "secondary" property.

"As interest rates go up, there will be a move to better quality office space," he said.

Mr Sketchley pointed out that rents for prime property in the City were now running at some £55-£60 per sq ft, compared with £100-£105 in the West End, leaving plenty of room for City rents to rise to catch up with the West End.

For Swiss Re, yesterday's transaction represented a profit of some £250m. The reinsurance group funded the construction of the tower, which opened in 2003, on the site of the old Baltic Exchange which was damaged by an IRA bomb attack in 1992.

Although the Gherkin's striking looks and commanding position have helped raise Swiss Re's profile, property experts said that the building was inefficient in its use of space.

Due to its shape and environmentally friendly design, only some 60 per cent of its space is useable - that compares with 85 per cent useable space in the towers at Canary Wharf. And the shape of its floors are irregular and ill-suited to the requirements of many of the major players in the financial services sector. Swiss Re has had difficulty renting out the floors in the building that it does not need.

Mr McIntosh said: "As a piece of real estate it's not very clever. But it has put Swiss Re on the map and it's been good for London."

IVG plans to put the bulk of its 50 per cent share of the property into tax-efficient German property funds, while Evans Randall will tout the bulk of its stake to private and institutional investors.