BRITAIN’s longest property boom has come to an abrupt halt, but one deal above all others embodies the dizzying heights reached during the unprecedented period of growth: the sale of the HSBC Tower in London’s Canary Wharf to the Spanish property giant Metrovacesa.

The £1.1 billion deal to buy HSBC’s global headquarters was the largest in British property history. Financed by investment bankers keen to keep cashing in on the boom, Metrovacesa was able to see off fierce competition to buy the 45-storey skyscraper.

However, little more than a year later, it may prove to be the biggest casualty of the downturn in the property market. Today, it is estimated the HSBC Tower is worth much less than was paid for it, and its Spanish owners may be forced to sell it at a loss. Metrovacesa’s investment has raised questions about the overall health of Spain’s biggest property company and fuelled concerns about the value of commercial property assets elsewhere.

The 210-metre tower at 8 Canada Square was sold to Metrovacesa in May 2007, only weeks before capital markets virtually ground to a halt. HSBC agreed a sale-and-leaseback deal and even provided the loan that would help the new proprietors conclude the transaction.

Having achieved a sale price of more than twice the £500m it cost to build the tower six years earlier, HSBC agreed to lease the building for £43.5m a year, on a 20-year term. It also provided the Spanish with a £810m short-term senior loan.

The loan was due to be repaid at the end of November this year but attempts to refinance it hit problems after Metrovacesa failed to inject the fresh capital required for the syndication of the loan. It agreed to raise the equity through the sale of existing assets or loans secured against properties but this has been unsuccessful.

With the clock ticking on the November deadline, the two sides are now locked in tense negotiations and a number of options are being considered, including repossession of the block by HSBC or the sale of a stake by Metrovacesa to a new partner to raise the equity needed. Several parties, including London property tycoons Sol and Eddie Zakay, are said to be interested.

Metrovacesa’s predicament with the HSBC Tower is one that so often befalls assets bought largely with cheap debt at the peak of a market — values eventually fall while debt payments rise, leaving owners nursing big paper losses.

In Metrovacesa’s case, commercial property values have fallen so much that it is facing every property owner’s worst nightmare — the possibility of negative equity, which means the building is valued at less than the value of the loan used to buy it. The current value of the HSBC Tower is estimated at £700m-£800m, a decline of as much as 30% in just over a year.

“HSBC secured the tower on a ludicrously low yield of 3.9% — the lowest seen for years,” said James Crawford, head of City investment at Savills. “Metrovacesa paid an astronomical price and the deal represented the absolute peak of the market. The mid-1980s was the last time we saw similar prices and it may be another 20 years before we witness them again. Yields are now closer to 6%.”

The Standard and Poor’s ratings agency said: “The UK commercial property market has experienced significant falls in value over the past 12 months. Reduced investor demand, weakening occupier markets and greater economic uncertainty are all contributing factors. Yields have increased from their lowest levels for over 10 years.”

The future for Metrovacesa’s investment in the HSBC Tower is grim, but there are also concerns that the firm’s troubles could get worse. The 90-year-old Spanish company has a £10.2 billion portfolio of European assets, making it the fifth-biggest property company in Europe. Many of its other developments are highly leveraged and a property crisis in Spain has plunged the country’s biggest developer, Martinsa Fadesa, into administration. Metrovacesa has already sold several Spanish assets at knock-down prices to raise money but there are fears that values have fallen so far that its debt burden could become too great.

As well as repayment of the HSBC loan, Metrovacesa must pay £251m to Legal & General before the end of October for the agreed purchase of the 1m sq ft Walbrook Square development site close to the Bank of England. Leading property agents say that the land has probably lost £100m of its value and the company is already seeking to sell a stake in the site.

Earlier this year, Metrovacesa’s chief executive Jesús Garcia de Ponga unveiled a three-year business plan called Phoenix that outlined the sale of ¤500m (£400m) of assets. This has already been revised and asset sales in the pipeline quadrupled to ¤2 billion. Garcia de Ponga will be hoping that his Phoenix plan prevents Metrovacesa from having to rise from the ashes.

Others seem less sure. Harm Meijer, property analyst at JP Morgan, said: “Metrovacesa is at the mercy of the banks. We are concerned about Metrovacesa because of the company’s leverage, loan-to-value covenants and type of assets. It is heavily into Spanish residential property, which is probably the worst portfolio you could have right now.”

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