COVER

DIAMOND IN THE ROUGH

CAN CANARY WHARF PAY ITS OWN WAY?

DEIRDRE McMURDY April 6 1992
COVER

DIAMOND IN THE ROUGH

CAN CANARY WHARF PAY ITS OWN WAY?

DEIRDRE McMURDY April 6 1992

DIAMOND IN THE ROUGH

CAN CANARY WHARF PAY ITS OWN WAY?

It was supposed to be the palatial headquarters for the new European economic order—a $7-billion jewel rising from the derelict former docklands of east London. Development plans for Canary Wharf included 24 buildings, including three marble-clad office towers, and 25 acres of parks and promenades along the River Thames. At the centre of the project was to be its crowning glory: Canada

Square, a 50-storey pyramidtopped tower and the tallest skyscraper in Britain. Because of its dramatic proportions and its location five kilometres east of London’s financial district, known as the City, Londoners have debated the merits of Canary Wharf ever since construction began in 1987. Last week, that debate took on a new urgency when the Reichmann brothers of Toronto acknowledged for the first time that they are in the midst of a painful financial squeeze. Ambitious: Although the family has jealously guarded all information about its privately owned holding company, Olympia & York Developments Ltd., it has been unable to conceal the fact that its most ambitious real estate venture is under acute pres-

But according to at least one Canadian analyst, Canary Wharf is not yet carrying the cost of what has already been spent on it. Torontobased Dominion Bond Rating Service Ltd. estimates that O&Y needs $100 million a year to service its existing Canary Wharf debt, which the rating service says is more than the complex is generating for the Reichmanns in rental revenues. Although major tenants, including American Express Ltd., Bear Steams Interna-

sure. So far, the Reichmanns have spent $3.9 billion to construct the first 4.7 million square feet of Canary Wharf—including Canada Square. They will need an estimated $850 million more to finish the project. As well, they owe Morgan Stanley & Co. $265 million as a result of an earlier undertaking to buy back one of the Canary Wharf buildings that the New York City investment banker initially financed.

tional and Texaco Ltd., have rented 60 per cent of Canary Wharf’s first phase, the likelihood of the complex attracting additional occupants soon is low. Since the Reichmanns first disclosed plans for Canary Wharf in 1987, vacancy rates in London have soared to 15 per cent from three per cent. In all, London analysts estimate that 14 million square feet of office space is vacant in the City. In step with rising

vacancy rates, City office rents have fallen to an annual average of about $53 per square foot from a high of $143 in 1988. That compares with Canary Wharf’s prevailing rate of about $62 per square foot.

Rivalry: At the same time, there has been intense rivalry among London’s landlords for the few new tenants entering the market. In fact, the Reichmanns own shares in two London developers whose newly opened Broadgate and Ludgate projects have managed to attract some of the same prime tenants that O&Y had targeted for Canary Wharf. Among them: the European Bank for Reconstruction and Development, which passed over Canary Wharf in favor of the Broadgate development. A further setback could occur if Britain’s April 9 general election results in the toppling of the Tory government, which actively encouraged

the Reichmanns’ docklands development and is expected eventually to occupy up to 10 per cent of Canary Wharf.

And there are other clouds over the elegant white towers and curved walls of Canary Wharf—notably the difficulty that many commuters experience in getting to and from the out-of-the-way location on the Isle of Dogs. The Docklands Light Railway, which operates on a monorail, is considered to be unreliable and inadequate to handle the 3,000 workers who already travel daily to the complex. The main road to the site is frequently clogged, and it can take more than an hour to travel the seven kilometres between central London and Canary Wharf. Parking at the complex, meanwhile, runs to $75 a day. One possible solution is a $1.8-billion extension to the existing Jubilee line of the London Underground. But that is unlikely to begin unless the Reichmanns fulfil an undertaking to contribute $400 million to the project’s cost—with $82.3 million of that amount due this week.

Not all has gone amiss for Canary Wharf. For one thing, the Reichmanns have found a friend-

ly ally and tenant in fellow Canadian Conrad Black. The financier, who owns London’s Daily Telegraph newspaper, recently moved its editorial and administration offices to Canary Wharf from elsewhere in east London. And for his part, John Zutter, vice-president of Manufacturers Hanover Corp., which moved 1,000 employees to Canary Wharf from six separate buildings around London, said: “We are able to bring together our London operations in a single building for the first time.”

In fact, most analysts say that Canary Wharf will one day fulfil even the Reichmanns’ soaring hopes for it. But the challenge facing the family now is to retain control of it until that day arrives.

DEIRDRE McMURDY

JASON NISSE

London