Reichmann’s Canary Wharf Vision Is at Investors’ Cost

(Corrects seventh paragraph of story published March 25 to show that 47 percent loss is based on reinvested dividends; adds London Docklands Development Corp. as seller in 20th.)

Canary Wharf took less than 25 years to fulfill Paul Reichmann’s vision of building a “mini Wall Street” in the U.K. to rival the City of London financial district. Investors are still waiting for their reward.

In the 1980s, the Canadian developer turned a derelict site on the Isle of Dogs, 3.6 miles (5.8 kilometers) by car from the Bank of England, into the home of Britain’s tallest office tower. Yet Canary Wharf’s shares fell 11 percent from their 1999 initial public offering to the end of a takeover battle in 2004. Since then, shareholders of Songbird Estates Plc (SBD), the group that won control, have lost almost half their money, based on calculations by Harm Meijer, an analyst at JPMorgan Chase & Co. (JPM)

“I don’t think anyone has criticized Reichmann, Olympia & York or Canary Wharf for what they have left as a legacy,” said Carl Gough, an analyst at London-based Matrix Group Ltd. He recommends his clients “add” Songbird shares because they are cheap. “Investors, depending on when they got in or out, have not enjoyed that bigger-picture success.”

JPMorgan, which employs more than 11,000 people in the U.K. capital, is moving to Canary Wharf in 2012 from the City of London, joining firms such as HSBC Holdings Plc, Credit Suisse Group AG (CSGN) and Bank of New York Mellon Corp. Those companies are paying rents that are at the biggest discount to London’s main financial district in 13 years, property broker CB Richard Ellis Group Inc. (CBG) estimates.

Earnings Jump

Songbird’s 2010 results, published today, reflect JPMorgan’s purchase of its new London base for 495 million pounds ($796 million) and an increase in the value of its properties. The company said net income more than doubled to about 278 million pounds and reported net asset value of 187 pence a share, matching analysts’ estimates.

Songbird closed at 141 pence yesterday. That compares with a closing price of 139.12 pence on Oct. 9, 2009, when Songbird completed an 895 million-pound share sale. Land Securities Group Plc (LAND), the U.K.’s largest real estate investment trust, climbed 16 percent during that period. British Land Co., the No. 2 REIT, gained 20 percent.

A Songbird shareholder who bought in 2004 would have lost 47 percent of the total investment, assuming reinvested dividends, according to Meijer, who has an “overweight” rating on the stock.

‘Selective Arithmetic’

“This analysis of performance is selective arithmetic based on assumptions which are unlikely to affect the vast majority of investors’ experiences,” Songbird Chairman David Pritchard said in an e-mail today.

Investors who didn’t reinvest their payouts would have received 105 pounds in cash dividends by the time of the refinancing in 2009 for every 100 pounds invested at the time of the takeover, Pritchard said. Shareholders who took part in the refinancing were showing a profit on their investment, he said.

Songbird paid 658 million pounds of dividends to its investors in four payments between November 2005 and June 2008, the company said.

The four biggest investors are Qatar Holding LLC, China Investment Corp., New York investor Simon Glick and Morgan Stanley Real Estate Funds. Together, they own about 72 percent of the stock. Morgan Stanley (MS), Glick, British Land, Qatar’s sovereign wealth fund and Saudi Prince Alwaleed Bin Talal made up the group that defeated Reichmann and Brascan, now known as Brookfield Asset Management Inc., in 2004. The Chinese sovereign fund first disclosed a stake in 2009 after the share sale.

‘Semi-Private’

“It’s a semi-private company,” said Matthew Churstain, a London-based analyst at Peel Hunt LLP with a “buy” recommendation on Songbird. “With all the sovereign and political risk, investors want more liquid stocks.”

Songbird has a 69 percent stake in Canary Wharf Group Plc, the company that owns 17 office buildings in the district and operates the remaining 18. The properties have space of 15.9 million square feet (1.5 million square meters), equivalent to slightly more than the area covered by Hyde Park in central London. Canary Wharf Group has local government approval for another 8.5 million square feet.

“London still leads New York as a global financial center and it certainly wouldn’t be if we didn’t have Canary Wharf with its capacity for big trading floors,” said Stuart Fraser, chairman of the City of London’s policy and resources committee.

Top Spot

London retained its top spot, ahead of New York and followed by Hong Kong, in the ninth Global Financial Services Index, published March 21. London has ranked top since the survey, which rates financial centers for banking, asset management, private banking, insurance, professional services and regulation, started in 2007.

In December, JPMorgan bought the former offices of Lehman Brothers Holdings Inc. in Canary Wharf to use as its European headquarters for investment banking. That means only four investment banks will still have their main U.K. offices in the City of London: Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc (RBS), UBS AG and Deutsche Bank AG. (DBK)

“The JPMorgan deal is a perfect example of why companies move to Canary Wharf,” George Iacobescu, Canary Wharf Group’s chief executive officer, said in a telephone interview. “It’s one of the best three or four buildings in London.”

Diverging Rents

Iacobescu, 65, was first appointed by Reichmann, an 80- year-old Canadian, to oversee the construction of Canary Wharf in 1988. He has been CEO of Canary Wharf Group since 1997.

Reichmann, who declined to be interviewed, started developing the site, now just 12 minutes from the Bank of England using the Docklands Light Railway, in 1987, taking advantage of government tax breaks to regenerate rundown areas.

His family company, Olympia & York, which was based in Toronto, bought the land from the London Docklands Development Corp., an organization created by the government to revive the district, Credit Suisse Group AG and Morgan Stanley. The two banks were among the first tenants to move there in 1991.

G. Ware Travelstead, Credit Suisse’s property adviser, secured the site’s status as an enterprise zone before selling the project rights to Reichmann.

A year later, the development was bankrupt. Reichmann got sufficient support from investors including Glick and Prince Alwaleed to buy it back in 1995. He sold shares to the public four years later.

Rents for prime Canary Wharf offices rose 7.2 percent to 37.50 pounds a square foot last year, according to CB Richard Ellis, while those in the City climbed 26 percent to 55 pounds. The 32 percent gap is the widest since 1997.

Former Marshland

Canary Wharf is part of Docklands. The financial district was originally marshland and, even now, a large part of the area is undeveloped. Some potential tenants have been put off by the unfavorable location and limited transport links, according to property broker DTZ Holdings Plc. (DTZ)

“Not everyone wants to go there because of where it is,” said Martin Davis, head of U.K. research at the company.

In contrast to the City of London, offices in Canary Wharf are usually built to order, which helped keep the vacancy rate in the offices owned by the company down to 2.9 percent at the end of last year. That compared with 6.8 percent in the district known as the Square Mile.

Land Securities, British Land and Canary Wharf itself are trying to take advantage of rising rents in the City by starting to construct office properties before lining up tenants.

Transport Links

The Crossrail transport link will increase Canary Wharf’s capacity to handle rail passengers by about 50 percent to 300,000 passengers a day and will cut the journey time to the City to seven minutes. Canary Wharf is contributing 150 million pounds to the cost of the 500 million-pound Crossrail station being built on the estate.

“Crossrail will be a massive help,” said Matrix’s Gough. “If there is one event that will take the location to the next stage of its growth, it will be 2017.”

To contact the reporters on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net; Tom Bill in London at tbill2@bloomberg.net.

To contact the editors responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net; Andrew Blackman at ablackman@bloomberg.net.

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