March 14 (Bloomberg) -- Tony Freail closed his window-dressing business after the world’s biggest sporting event landed outside his workshop in London’s East End. Seven years later, with the Olympic Games less than five months away, he’s still looking for full-time employment.
Freail’s former workplace was demolished as part of the construction of the velodrome, the potato-chip shaped venue where Britain’s Chris Hoy will try to retain three cycling gold medals; the International Broadcast Centre, the base for 20,000 journalists; and the Copper Box, which hosts handball. The opening ceremony of the U.K.’s biggest competition since the 1966 soccer World Cup takes place July 27.
“Once we got the Games, everyone knew it was going to be a nightmare,” Freail said by telephone. “It was a horrible feeling knowing that a year later, you were going to be offered an amount and told to leave. It meant I couldn’t carry on.”
The London Development Agency spent about 735 million pounds ($1.2 billion) to buy land and compensate businesses that owned or leased space at the site that will be used for the Olympics, according to the development agency’s latest accounts. The strategy hasn’t prevented more than 100 companies from going out of business or becoming untraceable after the owners were forced to vacate the 246-hectare (608-acre) site that will be used for the Olympics, public records show.
Most of these businesses, which range from auto-repair shops to fast-food manufacturers, depended on local customers. As a result, the money they received from the agency didn’t make up for the cost involved in moving to another location and building up a new client base, according to Juliet Davis, a researcher at the London School of Economics, who wrote a paper on the event’s legacy of urban regeneration.
London beat bids from Paris, Madrid, New York and Moscow in 2005 to win the Games after the organizers, led by former gold medalist Sebastian Coe, told the International Olympic Committee that the two-week event would rejuvenate the area. Since then, abandoned railways, wasteland and offices have made way for stadiums, homes and Europe’s largest urban shopping mall.
LDA documents show that about 460 companies were paid for their portion of the area, which will be renamed Queen Elizabeth Olympic Park after the Games. More than 50 of those went into liquidation or were dissolved, according to Companies House, a register of businesses in England and Wales. Another 50 cannot be traced using public records.
“We would have survived there,” Barry Bell, who closed his car-maintenance yard on the Olympic site, said by telephone. “We had enough business to work there and our customers around us wouldn’t have moved. We didn’t know if we were turning left or right at the time.”
The event will be held in Newham, a borough with about 270,000 residents that had the lowest average income in London in 2010 and the eighth lowest in England that year, according to a survey by the Department of Communities and Local Government.
The migration of businesses from the Olympic Park to other parts of the surrounding boroughs of Newham, Tower Hamlets, Waltham Forest and Hackney caused commercial rents to rise in those neighborhoods, said Davis of the LSE.
“Compensation didn’t recognize market forces,” Davis said by phone. “Anyone running a tight ship because they’re a small business found it quite hard. They had to be able to commit to a new lease that was going to cost two or three times more than their site had been worth.”
A government minister can force landowners to sell their property if they can’t agree on a fee with the LDA, according to the Department for Communities and Local Government.
The compensation is set by an independent organization and covers disruption caused by the Games, loss of earnings and the value of their land and property interests, according to the London agency. It doesn’t cover the cost of replacing old equipment.
“The London Development Agency went over and above its statutory obligations,” the organization said in an e-mail. “The LDA has compensated firms at the market rate.”
The agency recorded 208 businesses that relocated from the Olympic Park site, according to a Freedom of Information Act request by Bloomberg News. The agency has no record of what happened to those businesses.
Smaller businesses were hurt most because they lacked the time and resources to conduct negotiations and take part in legal proceedings with the agency, the LSE’s Davis said.
Beijing’s Water Cube
London’s Olympic organizers hope to avoid pitfalls of the 2004 summer Games in Athens and the Beijing Olympics in 2008, where facilities have been underused.
In China, the iconic Water Cube needed government sports funding to break even after falling 11 million yuan ($1.7 million) short from its commercial activities alone, deputy manager Yan Qiyong told China Daily in January. Athens has leased six of the 22 venues used in the Games, according to Public Properties Company SA and Hellinikon SA.
The idea that the Olympics can be used as an economic catalyst in the host city may be misguided, said Constantine Kontokosta, a New York University Schack Institute of Real Estate researcher who has looked at performance of the Olympic Games over the last six years.
“We found some negative results in L.A., Atlanta and Calgary,” he said of previous Olympic hosts. “The residential real-estate values in the city underperformed compared with comparable cities over the same time period.”
Some, like Lance Forman, moved nearby when his 107-year-old H. Forman & Son salmon-smoking business had to make way for the Games. His factory, built in 2003, was demolished to accommodate the 80,000-seat, white-steel-framed Olympic Stadium.
Forman, whose customers include the U.K.’s royal family and London department store Fortnum & Mason, rebuilt his pink and black colored facility on Fish Island a few hundred meters away from the Olympic Stadium on the banks of the river Lea.
“The negotiations were fraught,” Forman, a Cambridge University graduate, said by telephone. “In cases like this, there’s a danger of sacrificing your business. There was no certainty that everything that they thought would be compensated was actually going to be compensated.”
Most small businesses in London attract customers from within a 5- to 10-mile area only, according to Federation of Small Businesses spokesman Matthew Jaffa.
“When they get relocated, they’re stepping out of that comfort zone and losing the customer base they built up over the years,” Jaffa said by phone. “A company that was thriving has to go back to being a startup.”
Many of the businesses in the area were industrial, something Newham Mayor Robin Wales wants to change in a regeneration that spreads from Stratford to Canning Town by London’s City Airport.
“High tech and science industries are what we want to bring to the area,” Wales said in an interview last week. “We want jobs that are sustainable. London is moving eastwards.”
London had the highest percentage of businesses failing in the whole of the U.K. in 2010 with 15 percent of companies going out of business, according to a December 2011 report by the Office for National Statistics.
Bell, a 47-year-old company director, was given 60,000 pounds for the site where his automobile garage was. He closed the operation after failing to find a new site with similar rents to what he was paying in the city’s East End.
To stay in business, Bell had to leave London and move 12 miles (19 kilometers) to Rainham, Essex, where his rent has doubled. He also had to purchase new equipment as regulations prevented him using his old equipment.
Freail was less fortunate. After closing the business in 2006, he sold his tools and equipment for a loss to avoid paying storage costs. The 62-year-old was compensated 50,000 pounds by the LDA with the caveat that he couldn’t start up the same business within 30 miles of London for at least five years.
“The East End lost out big time,” he said. “I felt gutted at the time, but that’s the way the cookie crumbles.”
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