(Bloomberg) -- The diverging fates of two London office blocks located less than a mile apart highlights how landlords with older properties and looming vacancies are facing the most pain.

The buildings, both acquired by Korean investors who splurged on European real estate in the years leading up to the pandemic, are currently under negotiation. While one has lost significant value as a result of rising rates, its imminent sale shows the prime office market is finding a floor. The other — which is facing potential vacancy and substantial upgrades — could indicate what lies ahead for all but the best buildings.

No. 1 Poultry, an office building opposite the Bank of England, has seen its valuation plummet since the pandemic, exacerbated by the risks associated with its largest tenant – bankrupt flexible office operator WeWork Inc. Now, a unit of Daishin Securities is in exclusive talks to purchase a senior loan secured against the building, according to a spokesperson from the South Korean brokerage and people familiar with the matter. The spokesperson declined to comment on the price. 

The debt was put on the market by Bank of Ireland after owner Hana Financial Group struggled to refinance following the drop in value and uncertainty about the future of the building’s main occupant. Bank of Ireland made a £104 million ($132 million) loan against the building in 2018 to facilitate its £182 million purchase by Hana.

Daishin already provided a junior loan against the building in 2021, and the proposed deal to take over the senior debt is primarily a means of protecting that investment. It would buy the firm time to find a solution for the property, and prevent Daishin’s mezzanine loan from potentially being wiped out in a forced sale triggered by the senior lender. 

A representative from Bank of Ireland declined to comment. 

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Elsewhere in the City of London, another Korean group led by Mirae Asset Global Investment has been attempting to refinance 20 Old Bailey, an office building it bought from Blackstone Inc. for about £340 million in 2018 and financed with a £204 million loan from Dekabank.

Mirae is now in talks to sell the property to Indonesia’s Sinar Mas Land for about £240 million, two other people said, reflecting a discount of near 30% from the previous purchase price. Representatives for Sinar Mas did not respond to emails seeking comment. A spokesperson for Mirae declined to comment. 

While the proposed deal would mean a significant loss for the building’s owners, it also indicates that the market for fully leased and modern buildings is finding a floor that would allow senior lenders to escape relatively unscathed. Almost all commercial property has been impacted by rising interest rates, as investors have demanded better returns to justify investments in illiquid properties. 

The divergent fate of these buildings show that while all landlords have been upended by rising rates, those with older properties and looming vacancies are struggling the most. Blackstone comprehensively overhauled 20 Old Bailey and fully rented the building on long-term leases, meaning that Mirae was ultimately able to find a buyer — albeit one willing to pay less than it did for the building during the ultra-low interest rate era. At One Poultry, uncertainty over the future of WeWork has led to concern that the building will need to find a new tenant, something that is only likely to happen in the wake of a major renovation.

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As a result of that, potential One Poultry buyers would likely demand an steep discount to the previous purchase price to offset construction costs and leasing risks. Should that happen, it could leave even the building’s lenders with losses.

Before the pandemic South Korean investors tended to focus on larger properties with blue chip tenants, rather than prioritizing factors such as energy efficiency. Five years on, as the loans they used to acquire those buildings begin to mature, that’s made some particularly vulnerable to the shifting dynamics unleashed by more flexible working patterns and the need to lure staff back to the office.

--With assistance from Daedo Kim.

(Updates to include Bank of Ireland’s decision not to comment.)

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