Canary Wharf's Split Success

Canary Wharf took less than 25 years to fulfill Canadian developer Paul Reichmann's vision of building a "mini-Wall Street" in the U.K. to rival the City of London financial district. Investors backing the project are still waiting for their reward.

In December, JPMorgan Chase (JPM) bought the Canary Wharf building where Lehman Brothers had its offices to use as its European headquarters for investment banking. Next year it will move 8,000 people there from the City of London, joining firms such as HSBC (HBC), Credit Suisse (CS), and Bank of New York Mellon (BK). Jess Staley, chief executive officer of JPMorgan's investment bank, cited "the opportunity for our investment bank to be located in one state-of-the-art building" in announcing the move.

George Iacobescu, Canary Wharf Group's CEO, says the bank's new tower is "one of the best three or four buildings in London." After JPMorgan leaves, only a handful of investment banks will have their main U.K. offices in the City, including Goldman Sachs (GS), Royal Bank of Scotland (RBS), UBS (UBS), and Deutsche Bank (DB).

While Canary Wharf challenges the City as an address for bankers, it does not command similar rents. The average rent for prime Canary Wharf offices rose 7.2 percent, to £37.50 ($60) a square foot per year in 2010, according to property broker CB Richard Ellis (CBG), while those in the City climbed 26 percent, to £55. The 32 percent discount is the widest since 1997. According to property broker DTZ Holdings, some potential tenants have been put off by the location—about three miles east of the City—and limited transport links. "Not everyone wants to go there because of where it is," says Martin Davis, head of DTZ's U.K. research.

A new train line due to open in 2017, 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 from the 12 minutes it now takes using the Docklands Light Railway. "Crossrail will be a massive help" in spurring Canary Wharf's growth, says Carl Gough, an analyst at Matrix Group in London.

Canary Wharf Group owns 17 of the 35 office buildings and all common areas on the 97-acre property, which it manages. The buildings have 15.9 million sq. ft. of office space. Canary Wharf Group has local government approval to build an additional 8.5 million sq. ft. "London still leads New York as a global financial center, and it certainly wouldn't if we didn't have Canary Wharf with its capacity for big trading floors," says Stuart Fraser, chairman of the City of London's Policy & Resources Committee.

In 1987, Reichmann started developing a site on the Isle of Dogs in the River Thames, taking advantage of tax breaks to regenerate rundown areas. His family company, Olympia & York, bought the land from Credit Suisse Group and Morgan Stanley (MS), two of the first tenants to move there in 1991. A year later, after Olympia & York was unable to secure additional funding, the development was bankrupt, and Reichmann, who declined to be interviewed, lost control of it. He was able to buy it back in 1995 and sold shares to the public four years later. He no longer has any connection to the development.

Canary Wharf Group shares fell 11 percent from their 1999 initial public offering until 2004, when Songbird Estates won control of the company in a takeover battle. Since then, Songbird shareholders who reinvested their dividends would have lost almost half their money, based on calculations by Harm Meijer, a real estate analyst at JPMorgan.

"This analysis of performance is selective arithmetic based on assumptions which are unlikely to affect the vast majority of investors' experiences," says Songbird Chairman David Pritchard. Investors who didn't reinvest their payouts would have received £105 in cash dividends by the time of a refinancing in 2009 for every £100 invested at the time of the takeover, Pritchard says. Shareholders who took part in the refinancing were showing a profit on their investment, he said. The four biggest investors in Songbird are Qatar Holding, China Investment, New York investor Simon Glick, and Morgan Stanley Real Estate Funds. Together they own about 72 percent of the stock.

"I don't think anyone has criticized Reichmann, Olympia & York, or Canary Wharf for what they have left as a legacy," says Gough. "Investors, depending on when they got in or out, have not enjoyed that bigger-picture success."

The bottom line: A new rail link will shorten the trip from the City of London to Canary Wharf to seven minutes from 12, increasing its appeal to bankers.

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