Canary Wharf confounds critics

When Enron, the giant US energy group, ran out of expansion space within months of moving to London., it was no surprise when the story leaked out about negotiations with Canary Wharf. There was little hope of finding almost 1.5m sq ft of offices anywhere else in the capital, let alone the crowded West End. The real shockwaves were reserved for a more formal announcement recently that the deal was off.

If anyone had forecast even a few years ago that managers of the landmark Docklands development would shrug off such news, they would have been laughed out of town. It shows how far – and how fast – fortunes have changed for the silver tower and its cluster of futuristic neighbours.

For the best part of a decade the critics held sway, sneering at the great white elephant which brought down its over-ambitious developers. Only the coming of the Dome diverted them to an even more vulnerable target. What they didn’t notice was the transition from white elephant to white hope.

Enron did not pull out because of any dissatisfaction with the accommodation: it was rejected by Canary Wharf for wanting to sublet. The US firm has learned the lesson of other high-tech companies that you can never have enough space. It wanted something in store for expansion, and defray costs by short-term letting to others.

That is normal practice in central London but the Canary Wharf managers are understood to have feared this might weaken potential rents that could be extracted from other tenants for new space still to be built. Talks were still going on as The City went to press, so the two sides may still cobble together a deal. But the disagreement shows how times have changed.

Five years ago Enron would have been welcomed with open arms – and probably given a hefty rent-free period. Ten years ago Canary Wharf would have even offered to take responsibility for rents on Enron’s new West End HQ as well. Not any more.

Top names are queuing to move into the complex. Clifford Chance agreed terms in the summer to take most of a 1m sq ft tower and two other giants are being built after earlier deals with Citibank and HSBC. Existing tenants are also expanding. At the same time as Enron was given the cold shoulder for wanting room to breath, it was announced that Morgan Stanley Dean Witter had increased its 1m sq ft of accommodation by 50%.

The deal was even more significant because the giant US bank is one of the founding consortium of tenants who kickstarted the revolutionary scheme way back in the Eighties. Insiders regularly grumbled that they regretted being enticed into Docklands for various reasons such as remoteness, and would have gone back to their City heartland if possible. Not any more.

Rumours persist that Deutsche Bank is considering rationalising all its London accommodation here, involving another 1m-plus sq ft. But this sort of rumour flies around every major name looking to expand. Where else can they find the towering blocks that have become the norm in today’s booming economy?

The man least likely to be surprised by all this is executive chairman Paul Reichmann. After all, he forecast that Canary Wharf would play safety vale to the booming City financial markets after striding into the UK more than a decade ago. It was no more than his company Olympia & York had done for Manhattan by creating the soaring twin towers of the World Financial Centre in New York’s docklands.

What he couldn’t foresee, however, was the biggest property crash in history – so severe that it swept O&Y into bankruptcy as potential tenants retreated into their shells on both sides of the Atlantic. Yet this merely postponed the inevitable.

New technology and globalisation have led to demand for increasingly large, high-quality buildings for merged banks, lawyers and other service groups. Traditional city centres normally struggle to fit in such behemoths. Paris has long had a safety valve in La Defence, a proto-Canary Wharf well away from the historic city heart. New York has Battery Park. London took up some of the strain with Broadgate, London Wall and London Bridge City. But it was never going to be enough.

Many see the turning point for Canary Wharf as completion of the Jubilee Line, providing swift access to the West End. That is too simplistic, however. The Docklands Light Railway, although admittedly erratic and overcrowded, had offered a 15-min link to the City since the outset. In fact, Reichmann ensured its birth by promising to underwrite much of the cost.

The simple fact is that the development had to reach ‘critical mass’ – in other words have enough people working there to make it a force in its own right. Ironically, this was the very term used by G Ware Travelstead – the American brought in to draw up the first plans way back in the early Eighties.

Even today there are grumbles about remoteness, particularly among the hundreds of journalists on papers like The Mirror and Independent, which have moved out en masse to make this the new Fleet Street. They have a preference for the pubs and restaurants of the City and West End – and tend to live in fashionable areas well away from Docklands.

But the moans are fading as a new generation emerges and the second part of the masterplan kicks in. A critical mass of 28,000 well-heeled workers has underpinned the creation of one of London’s major shopping centres. Within three years more than 500,000 of retailing will be open under and around the landmark silver tower as the final employment figures climb to a planned 90,000.

The economics of the whole development are now making the sense Reichmann anticipated all those years ago. He almost missed the chance to benefit, however, when the scheme went into administration in 1992. It was reformed the following year, but under new management. He never lost faith in the idea and brought in a consortium of international investors to buy back Canary Wharf at the end of 1995.

As long as the development was under private ownership, however, there was room to doubt its viability, as figures tended to be kept firmly under wraps. In the spring of 1999 those clouds were blown away when Canary Wharf Group plc was floated on the stock market so some of the new owners could put a hard value on their investment. The company immediately became the second largest listed property group in the UK and flashed lights on the boards of tracker funds who needed to show an interest in such a giant.

The first annual results published in September were a revelation to remaining critics. It showed the investment portfolio of nearly 4.5m sq ft was almost fully let, with another 2.5m sq ft pre-let or subject to sale on completion. Demand was so high that only 2m sq ft of the 85-acre estate was left available in five remaining planned buildings.

‘This has been the most successful year in Canary Wharf’s history,’ said Reichmann. Leasing had hit a record level of 1.7m sq ft and development was well ahead of plans outlined at the float. In one year alone the investment value rose from £1.5bn to more than £2bn. Rent levels, kept secret through the early years of private ownership, were finally revealed at a shade under £40/sq ft – easily matching fringe areas around the City and West End.

The City, which had been suspicious for so many years of both the draining effect on its lifeblood and the value of the investment, is now convinced enough to give a market capitalisation of almost £3.7bn – more than four times the level when floated. Providing there is no repeat of the last crash, this will continue to grow. Most of the early lettings were at rents as low as £10 a sq ft once incentives are taken into consideration. As five and 10-year reviews come up, the income flows will soar.

This has helped Canary Wharf to underpin its finances with two massive bond issues raising almost £1bn to complete its plans. And these are coming through even faster than anyone anticipated. The massive development could be fully let within 18 months.

But that may not be the end of this saga. Chief executive George Iacobescu has denied speculation that Canary Wharf Group will look for similar investments elsewhere around London. But that still leaves the relatively wide-open spaces of Docklands. Demand is likely to outstrip even the massive output of Canary Wharf and is already spilling into neighbouring areas such as South Quay. The group is also shortlisted to buy land around City Airport.

Whether another giant tower will emerge is debateable, considering the brickbats it has endured over the years. But nothing this group does is ever going to be ordinary. Reichmann and then Iacobescu never aimed for size for its own sake. ‘Quality sells,’ Reichmann said more than a decade ago. He expected to attract international companies not just because they needed elbow room but also the fact that they could not get the high standard of office space required for modern, high-tech operations elsewhere. Canary Wharf II could be as startling in its own way as the tower which has become an established part of London’s skyline.