Copyright: David Lawson – appeared Property Week 1999Home page
The IRA bomb which ripped through Docklands two years ago may have changed the course of history in more ways than seemed apparent in the initial chaos. On the world stage, it could go down as the last scream which drove politicians to peace talks. In the narrower confines of London, it could lead to another surge of occupiers fleeing the crowded centre.
Every headline referred to the 'Canary Wharf' bomb despite the fact that the blast centred on South Quay, far away across the dock. But that distortion has returned with an economic bang. The headline writers' mistakes changed outsiders' perceptions. Today they are beginning to see the area as a Canary Wharf extension rather than a secondary outpost.
Times have been relatively tough for the cluster of futuristic office blocks along Marsh Wall, at South Quay and Harbour Exchange. They were slow to let at near-secondary rents. But as bomb damage repairs are completed, space is coming on the market just in time to share Canary Wharf's revival and benefit from the Jubilee Line opening.
This could change all the assumptions about the future of this small stretch of Docklands. It has long been relegated as a fringe suitable only for low-grade tenants but three signposts to an alternative have emerged over the last few months.
* - Ballymore, a private Irish developer, switched plans for housing on the devastated former Builder Group HQ site on Marsh Wall to a 67,000 sq metre (721,000 sq ft) office building. The 200m pound tower, would be taller than anything in London except Canary Wharf.
* - Across the road in South Quay, the immensely rich offshore trust Capital & Income (CIT) paid more than 25m pounds for one of the three blocks in South Quay Plaza.
* - Around the corner in Harbour Exchange, Hammerson, one of the UK's top property companies, bought numbers 1 and 2 Harbour Exchange for 74m pounds.
A couple of years ago the Ballymore tower would have been considered a joke, as would the idea of a blue-chip company making such a big investment. But times have changed. 'A queue of US legal firms and accountants are weighing up the area,' says Jeremy Smith, a partner with Roger Lewis. That is encouraging investors to get involved.
Some movement has already begun. 'Take-up in the last 18 months has been phenomenal,' says Smith. Space at 30 Marsh Wall, part of the enterprise zone boom of the Eighties, struggled to let at 7 or 8 pounds/sq ft on 10 year leases. Headline rents are now 14.50.
Across the road in South Quay Plaza II, stripped back to the frame after the bomb, Connect Systems paid 18.50/sq ft for 8000 sq ft and Telecom Ireland slightly more for 7000 sq ft. Both have some rent-free incentives: 'But a year ago the highest we could have expected was 13.50,' said James Oliver of DTZ, letting agents for new owner, CIT.
Remaining space has been uprated to 19.50/sq ft while the 'guiding rent' for the bottom 120,000 sq ft of neighbouring South Quay III, owned by Allied Domeq, is 22.50. All this space, which has been classified Grade A since renovation, was raising the spectre of over-supply a year ago. Now it is basking in the prospects of a shortage if one or two big inquiries harden up.
That would spur activity next door on the first South Quay phase, which Capital & Provident has stripped back to the frame since the bomb. Chesterton's Rupert Cherryman points out that it would be a quick way into Docklands for a newcomer. The newly-dubbed World Trade Centre IV has 120,000 sq ft of space which could be fast-tracked to completion - plus the possibility of an extra couple of floors.
Alongside is the gaping hole of Arrowhead Quay with permission for another 200,000 sq ft of office space. The question remains whether Ballymore would progress this at the same time as its huge tower.
Big financial tenants are not the main driving force at the moment, however. Smaller Service sector occupiers are often drawn in by big clients moving to Canary Wharf, but unable to meet its rent levels of more than 32.50/sq ft. It raised fears that a retraction in the banking sector could hit the area doubly hard. But Cherryman, considered a leading commentator on Docklands after working there through 13 years of boom and bust, points out that the influx is much wider, including technology and other tenants.
'It is very healthy that demand is broad-based rather than concentrated on the financial sector,' he says.
In other words, the sub-market may be merging into the Canary Wharf complex but is complementary rather than a rival. That has inspired plans by Dollar Bay Developments for Sovereign House, a 63,000 sq ft office scheme in the shadow of Canary Wharf but pitched at lower rents aimed at smaller tenants. 'It will be architecturally timeless and have a front door onto the road,' says Cherryman.
The black-glass blocks of Harbour Exchange will never raise doubt among future historians about their timing. They are all too typical of the frenetic Eighties boom era. Ron Spinney used to dismiss Docklands in those early days when asked why top UK developers had not become involved. But Hammerson's chief executive surprised the market late last year by snapping up 46.450 sq metres (500,000 sq ft) for £74m.
'It is a market we have been watching for some time and we judged that it had reached a level of maturity to justify investment,' he said. 'It is clearly now an established location, has critical mass and is benefiting from public transport links.'
Cherryman also points out that this was a clever deal, buying at less than the cost of construction. Growth is almost assured, as rents averaging 10.50 a sq ft should soar when lease breaks fall due over the next four years. The 7.4% yield compares with around 10% when Spanish investors picked up one of the blocks in 1995 for 18m pounds
Capital & Provident now has a new valuation yardstick for its space in numbers 8 and 9 Harbour Exchange, where asking rents are around 17.50 a sq ft. 'One important advantage is that it is the only space of this size available in central London,' says Cherryman.
Classing this area with the rest of the capital implies that it is now a 'normal' market rather than one inspired by tax incentives. That appears to be true for occupiers but what about the all-important investors, whose support will be crucial? The last word should, perhaps, go to the converted sceptic who paid so much for a stake.
'Obviously the Canary Wharf flotation has put Docklands in the spotlight again,' says Spinney. 'We continue to feel that it will attract increasing interest from institutional investors.'