Canary Wharf takes flight as Reichmann returns

Copyright: David Lawson January 1998

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Canary Wharf is London Docklands to most outsiders. The 800ft silver tower is visible right across the city, a pointer to an area that even most people living in the UK capital have never seen. It also became a symbol of an era. When the economy crashed, Britain's tallest building was an unavoidable reminder of broken dreams.

Now it represents new hope - ironically because of some of the scheme's harshest former critics. Newspapers which once used the tower as a focus for the property slump have moved into its vast office floors. They jostle with financial groups once sceptical that tenants would ever move there from central London.

This has generated another myth. Because the tower is almost full, it is assumed the project is drawing to a close. But just as Canary Wharf is not Docklands, so the tower (officially known as One Canada Square) is not Canary Wharf. The complex comprises a total of ten buildings, although most cluster around the skirts of the tower. And more are planned: in fact, Canary Wharf could be considered barely started on the path to becoming the mini-city proposed a decade ago.

The current buildings could be joined by another couple of less imposing towers if models produced for the original plans are followed. A further series of 'groundscraper' blocks will combine to create a total of around 10m sq ft, making this one of the biggest single developments in the world. New parks, roads, homes and shopping are also in the pipeline. Paul Reichmann, who recently returned to take the reins of the development he started, is on record as saying he would like the complex completed before he retires at 75. He is now 67.

One block of 560,000 sq ft is already under way for Citibank, while Credit Suisse First Boston is expanding into another 275,000 sq ft to be started this year. A further block of around 200,000 sq ft could begin this year and plans are being put together for starting work on Heron Quays, across the dock south of the main tower.

Shopping and parking will also be extended as the new owners raise the tempo to take advantage of the opening of the Jubilee Line extension. The Tube is - and always has been - a crucial factor in the success or failure of this development. Government delay approving the 450m pound line is the biggest single reason why the the scheme hit the buffers in May 1992, only four years after the foundations had been laid. Many major companies simply refused to move into an area without they felt was isolated from the rest of London.

Now these connections are almost complete, Canary Wharf has returned to the original motivation - providing high-quality offices for financial groups squeezed out of the City by lack of suitable premises. The property market has also come full circle, but this time around there will be no massive surge of development. When Paul Reichmann arrived in London in the mid-Eighties, Britain was in the throes of a financial revolution. Banks were amalgamating with brokers and desperate for space to expand. But they faced huge planning restrictions in the City. As an outsider, invited by the London Docklands Development Corporation to consider taking over the scheme, he did not share establishment convictions that financial groups would never leave their traditional home in a tight network of streets around the Bank of England.

Reichmann's family company, Olympia & York, had already shifted the balance of Wall Street by developing the hugely successful World Financial Centre on New York's river front. London's Docklands appeared to be an ideal location to repeat the exercise. It seemed only a short hop from the traditional heart of the City but with enough space to create the super-efficient buildings required by new office technology. The site on the Isle of Dogs was also an Enterprise Zone, offering huge tax incentives. Perhaps the biggest draw, however, was the enthusiastic support of Development Corporation planners.

But inventing a new location meant building a lot of space to produce what planners call 'critical mass'. It also needed a brash statement of confidence. On the advice of leading architect Cesare Pelli, plans for lower, more spread-out buildings were scrapped. Instead, much of the space was lumped together for Pelli to produce a silver-clad monster of a building - for a while the largest in Europe. And all this was to be created before a single tenant had signed up for the tower. Ultimately, this proved Reichmann's downfall. Rising interest rates and falling demand left him with massive amounts of empty space producing no income. The scheme was repossessed by the banks who had lent O&Y more than 550m pounds.

Today Reichmann is back in control after assembling a group of super-rich investors to buy the development back from the administrators. And he has returned to a repeat of the Eighties, with the City's financial community again desperate for space to expand. The Nineties offer an even more promising picture, however. Ten years ago the banks were suddenly showered with alternative locations by City planners desperate to hold onto their traditional tenants. Today there are also millions of square feet of planning permissions. But sites are pointless without buildings on them, and developers are much more cautious nowadays.

'There is a huge, unsatisfied demand for buildings of more than 200,000 sq ft,' says Guy Napier of Knight Frank, letting agent with Richard Ellis for Canary Wharf. But there is little rush to increase supply. 'Most potential schemes are being held back because investors are not ready to back big developments,' he says.

Canary Wharf has no such problems. 'The owners could call on 500m pounds tomorrow,' says Napier. This follows a financial reconstruction which saw the largest-ever securitisation of a single property. Beyond that are the deep pockets of consortium members like Prince Waleed Bin Talal Bin Abdulazziz Al Saud and the CNA Financial group, a subsidiary of the Loews Corporation. That does not mean we will see a repeat of the massive first phase, however. There is no longer a need to prove the address with a giant landmark; even if there was, it would strain the resources of even the richest backers as a speculative development. Instead, they intend to have no more than one speculative block on the go at a time.

How much the space will cost occupiers is sheer guesswork. No official rent has ever been prised out of Canary Wharf. Olympia & York dropped heavy hints that space in the tower was set at around 27.50 pounds/sq ft in the early Nineties. As the recession set in, however, this was treated by the market as fiction. While headline figures might appear strong, they were diluted by long rent-free periods and the acquisition of responsibility for some tenants' existing buildings.

When Ernst & Young took over as administrators for the banks, there was even less inclination to reject lower offers or long fixed-rent contracts. But at least that opened the door for tenants like the Telegraph and Mirror groups, helping staunch the bad Press and averting total disaster. The picture is no more clear today, although it is likely that rents have bounced back to exceed the early targets. 'Deals are definitely being done at more than 30 pounds/sq ft and fairly short rent-free periods for remaining space in the tower,' said one City agent.

There are few fears that Canary Wharf will price itself out of the market, however. Rents in central London are also rising. Canary Wharf also has a crucial advantage left from its Enterprise Zone roots. While tax incentives are no longer available to new developers, Reichmann held onto the capital allowances. And no VAT is charged on rents.

The caution over office development does not preclude other kinds of activity, however. Shopping, housing and leisure are a central part of the plan to create a self-contained mini-city. A big step has already been made with the launch of Canary Riverside, which forms the gateway between the river and tower. The first phase, due for completion next year, includes more than 300 apartments, an hotel, leisure club and swimming pool. World-famous designer Philippe Starck is likely to produce yet another landmark to complement the tower. It is no surprise that Reichmann is using such a big name; all the buildings in Canary Wharf have been designed by leading architects - part of the philosophy that quality will pay for itself.

The river front scheme also has a large pot of money to tap. It involves wealthy Far-east partners Hotel Properties and Pidemco Land and access to 100m pounds of credit from a consortium of British and overseas banks. The fact that banks are once again keen to lend shows how far Canary Wharf has bounced back from the days when it was written off as a vast folly which would never be finished. Equally significant have been the decision by Credit Suisse First Boston to expand its space into a new block rather than flee back to central London.

CSFB was involved in Canary Wharf even before Reichmann. In fact, it was then-chairman Michael Klemm who spotted a redundant banana warehouse on the Isle of Dogs back in the Eighties. After calling in US consultant G Ware Travelstead, this developed into the seemingly mad idea of creating a new financial centre for London. Only a few years ago another founder tenant, Morgan Stanley, was ready to pull out, blaming the government for reneging on a promise to improve access. One of its vice-presidents, Philip Henry, pointed out a couple of years ago that the bank became one of the largest coach operators in the country, with more than 40 vehicles bussing in staff. It also cost millions in incentives to keep staff.

But this giant bank has also expanded its space. Morgan Stanley also had the confidence to take the lead in organising a 500m pound bond issue last year which has secured the finances of Canary Wharf into the next century. While the major additions will still be emerging after the Millennium, much is planned in the run-up to the celebrations. There is now the money and confidence to resume the massive landscaping program which was always part of the plans.

That includes:

         a new square at Colombus Courtyard to complement the Credit Suisse additional building

         a walkway and extra shops beneath the tower to coincide with the Jubilee Line opening

         a two-acre formal park east of the tower on Canada Square

         a three-acre park designed by renown architect Sir Norman Foster on top of the new Jubilee Line station

         a new road along Heron Quays.

By the time the fireworks are going off across the river at the Millennium Dome in Greenwich, Canary Wharf will have finally taken fully to the wing.