Webhosting danger warnings

Copyright: David Lawson - Property Week   Oct 2000

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One of the world’s biggest property developers has warned against rushing into web hotels  following the meltdown in telecom operators’ share prices.  ‘Developers shedding core assets are embarking on a very risky strategy,’ says Jim Clewlow, senior vice-president for investment at CenterPoint Properties, the $1bn US industrial real estate investment trust.

 Many high-tech groups that will take space in this new kind of development  are struggling to raise capital after a collapse of confidence among investors.  ‘The well ran dry early in the summer and it shows no signs of refilling,’ says one Wall Street analyst who is also privately cautioning clients about rushing to deal with telecom companies offering to wire up buildings.

 CenterPoint is not shunning the sector. In fact it has let half its own 100,000 sq ft HQ in Chicago to Exodus and is looking for sites to build another 400,000 sq ft communications centre for the firm. But Clewlow points out that there will be a huge shakeout and developers need to pick tenants like Exodus, which it believes will be among survivors able to pay the soaring rents to buildings with racks of computers.

   The message is not lost on this side of the Atlantic. ‘It is beginning to look a lot like the high tech market in the Eighties, when high hopes – and values – could not be sustained,’ says Roger Saper of Saper Hall, which has been involved in a clutch of web hotel deals for companies like Chancery Gate.

  Even where a tenant provides a three-year rent guarantee, plus the cost of restoring highly customised fitouts, buildings could be left well above market rents if  an occupier goes bust. ‘Institutional backers insist that we do a lot of research and stick to market leaders,’ he says.  ‘But sometimes it might be better to take the money and run.’

   Even market leaders are facing problems as shares are dragged down. Nettel Communications, a potential star a mere three months ago, has gone bankrupt.  Allied Riser, Teligent and Winstar are all modifying ambitious plans for wiring office buildings because of difficulty raising finance. Venture capital has dried up because the chances of a quick return through flotation have disappeared.

  Even financial giants are feeling the heat. Heads rolled and shares crashed at Morgan Stanley Dean Witter after rumours swept Wall Street of $1bn losses from high-yielding ‘junk’  bonds it issued to back web hotels.

     Developers should be aware that this is a high-risk sector, says Clewlow. He worries about a glut of  specialised space, as has happened before in headlong rushes into high-tech markets. Tenants of web hotels spend millions to fit out buildings before a penny is received in return. Specialists offering to wire buildings also have to pay up front – and then share the proceeds with landlords.

  European banking regulators are beginning to worry after discovering that almost £100bn  has gone into loams to build networks for mobile phone operators. This is on top of an even bigger amount paid in the auctions for licences in the UK and Germany.  They are now understood to be delving further because of fears of how much is involved once figures are added for related sectors such as the Internet and media.

  Dozens of telehotels are being planned across Europe and many developers are salivating at the prospect of  rich rewards. One deal near Heathrow, when IXEurope took a standard warehouse  raised local rents from £11.50 to £14 a sq ft, while Chancery Gate sold an old warehouse in Hayes for more than £8m to Digiplex.

 At least half a dozen companies like Global Crossing, which has just agreed a $6.5bn merger with Exodus, are opening centres almost by the week, anticipating a scramble for faster data transmission. But Probe, the US research group, says the shortage of bandwidth [cable capacity] could disappear by next year and bring down the prices hosting companies can charge.

  ‘No-one should be making plans based on today’s prices,’ said one analyst. ‘Even those with tenants already tied into long leases  should consider what could happen if they start to see business failures.’