Canary Wharf, the financial centre in east London's old wastelands, is entering a new phase – one the project's late Canadian founder, Paul Reichmann, would never have imagined.
A hint of Canary Wharf's future can be found on the 39th floor of the development's signature skyscraper, One Canada Square. It is stuffed not with bankers but with young men and women trying to invent the next killer app or software breakthrough. In the 1990s, this collection of 140 startups would have been called an Internet incubator and might have been housed in a decrepit warehouse. Today it's a "technology accelerator" and their home is a pristine office space atop Britain's second-tallest building.
Songbird Estates PLC, the London company that controls the Canary Wharf development, has a vested interest in the success of the startups. It hopes they will gain traction and expand into Wood Wharf, the centrepiece of Canary Wharf's next big expansion phase. For Canary Wharf, the future is not the monster banks courted by Mr. Reichmann. It's small offices for small companies, and apartments that will see Europe's premier financial centre evolve into a proper residential neighbourhood.
One residence, called the Newfoundland tower, will rise 58-storeys and contain about 600 apartments.
"To cater for future demand, we are now looking at residential development and commercial buildings specifically designed for London's burgeoning TMT sector," said John Garword, Canary Wharf's company secretary and legal counsel, referring to the technology, media and telecom industries.The expansion will see Canary Wharf add 11-million square feet of commercial and residential space, most of which will be built in the next decade.
The heady growth might be why the Qatar Investment Authority and Brookfield Property Partners, the real estate arm of Toronto's Brookfield Asset Management Inc., made a £2.2-billion ($3.89-billion) takeover bid for Songbird in early November. It is also why Songbird rejected the bid.
Songbird chairman David Pritchard said the 295 pence-a-share Qatari-Brookfield bid, pitched at a discount to net asset value (NAV), "significantly undervalues" Songbird and its development pipeline. Analysts Miranda Cockburn and John Cahill of Oriel Securities said "we agree that 295p is too low given the potential of Canary Wharf." Songbird should have a December, 2014 NAV of 352 pence a share, they said, and they could "comfortably justify" 400 pence given the company's growth prospects.
Under British takeover rules, the bidders have until Dec. 4 to make a new offer. Brookfield declined to comment.
Songbird and Canary Wharf have a fearsomely complicated shareholder structure and one of the biggest investors, Simon Glick, the secretive diamond trader who was close to Mr. Reichmann, seems to have deep affection for Canary Wharf. Mr. Glick, 66, and his father Louis backed the project from the beginning. Mr. Glick is known as a long-term investor, not a flip artist, and unless he sells, Songbird might be takeover proof. His New York office declined to comments about his plans.
A new offer for Songbird will have to please a lot of investors. The Qataris already own nearly 29 per cent of Songbird, which is not nearly enough to put them over the hump. Mr. Glick is the second-biggest shareholder, with 26 per cent. Farther down on the ownership pile are China Investment Corp., with almost 16 per cent, and Morgan Stanley, with 8.5 per cent. A smattering of funds and public shareholders owns the rest of the thinly traded stock.
Brookfield is in the basement. It has no ownership at the Songbird level; instead it owns 22 per cent of the subsidiary – Canary Wharf Group itself. Songbird owns nearly 70 per cent. Oriel Securities says the messy ownership helps to explain why the shares have always traded at a discount to NAV. It also explains why Brookfield is keen to end its position of powerless ownership and nab control. Brookfield did not use passive slivers of equity to build a managed asset portfolio worth US$192-billion at last count.
To call Canary Wharf a great success would be an exaggeration even though the development is now profitable, 97 per cent occupied and alive with restaurants and expensive shops that sell everything from rare scotch to Italian shoes. The project's roller-coaster history has shown that is highly vulnerable to property downturns, the whims of politicians and the outsized egos of developers.
In the 1980s, the area, known as Tower Hamlets, was full of decaying docks that had been attacked by the Luftwaffe in the Second World War. Paul Reichmann, whose Olympia & York Developments had built First Canadian Place in Toronto and Manhattan's World Financial Center, fastened onto the 83-acre site with the encouragement of Maggie Thatcher. They envisioned Canary Warf as the symbol of new Britain's free-wheeling capitalist economy and Mr. Reichmann embarked on what was then the world's biggest office development.
Howard Dawber, strategic adviser to Canary Wharf, remembers Mr. Reichmann fighting an uphill battle from the beginning. At a ground-breaking ceremony in 1987, a local stevedore named Peter Wade, who didn't like the idea of towers replacing docks, released a herd of sheep into the VIP gathering and threw in a few bee hives for added fun."Reichmann was smart," Mr. Dawber says. "He met with Peter Wade, offered him a job and made him the first head of public affairs."
Eventually, Canary Wharf's relatively low rents and massive, purpose-built trading floors with double-backup power systems attracted some of the biggest names in banking, including Credit Suisse, Morgan Stanley and Lehman Bros. But by 1992, both O&Y and Canary Wharf fell victim to the recession, the global property glut and the massive debt used to finance Mr. Reichmann's build-it-and-they-will-come vision. Crucially, Canary Wharf also suffered because it lacked adequate subway and light-rail connections.
In 1995, with the help of the Glick family and other investors, Mr. Reichmann regained control of Canary Wharf, only to lose it again less than a decade later, when a Morgan-Stanley-led consortium took control of Songbird. Mr. Glick went with Morgan Stanley, leaving Mr. Reichmann out in the cold. At the time, Mr. Reichmann in a rare interview told Property Week magazine that he did not feel bitter towards Mr. Glick. "Simon Glick invested with me in Canary Wharf, but I took it as a matter of course that Simon's family's interest should be his priority," he said. "And he got a deal from Morgan Stanley that would have been impossible to get from anyone else."
By then, Canary Wharf could be judged a success, thanks in good part to billions of pounds of tax waivers and the extension of the Jubilee subway line to the development. It took another hit during the 2008 financial crisis, when Lehman vanished. Its new strategy recognizes that growth will no longer come from the big banks even as it prays the banks it has will stay put.
Canary Wharf will get another boost in 2018, when the £15-billion east-west Crossrail project is completed. The new train system will allow travellers to reach Canary Wharf from Heathrow airport in 40 minutes. By then, Canary Wharf's status as Europe's premier commercial megaproject should be assured, barring a banking meltdown. The question is whether Brookfield, with Qataris at its side, will make it a "Canadian" development once again.