Monday, 27 December 2010

With JP Morgan on their way to 25 Bank Street in 2012, what’s next for Canary Wharf Group?

Kicked off before the recent global economic crisis and highlighted by the collapse of US investment bank, Lehman Brothers, Canary Wharf Group (CWG) has recently moved to reduce its high exposure to the banking sector and is aiming to diversify its tenant mix away from the large investment banks that it has previously worked so hard to attract, as witnessed by the recent completion of 15 Canada Square for global professional services company, KPMG and the adjoining 30 North Colonnade for ratings agency, Fitch. There was however, one investment bank that CWG needed to sign on the dotted line; New York based JP Morgan (JPM). After last week's announcement that they have purchased the long leasehold on 25 Bank Street for £495m however, questions around the long-term future of both JPM in London, and indeed CWG have been answered, which now leaves the question, where next for the Dockland developer?

With the sale of 25 Bank Street to JPM, the occupancy rate in the portfolio of buildings across the Estate that are owned by CWG is an impressive 97.1%. CWG is keen to stress that whilst there may be a perceived lack of construction activity, its development programme is entirely demand led and therefore there is no set timeline for full construction, which in turn allows it to control the supply of new space and keep rental levels high. Whilst major occupiers such as Citi have successfully let several floors in their building at 25 Canada Square to the likes of Crossrail and SunGard Europe Limited, there is still a small amount of ‘grey space’ across the 14m sq ft office portfolio, of which CWG own around 8m sq ft, where existing tenants sublet their space, which ultimately lowers rents as CWG are effectively competing for new deals with their own occupiers. It was recently reported however that Bank of America (BoA), who sublease approximately 300,000 sq ft across 10 floors from Credit Suisse has decided to remain in Canary Wharf, thereby keeping grey space at low levels.

The last remaining plot from the original master plan, 25 Churchill Place was previously set to become the London headquarters for Aon Corporation, after the leading global reinsurance intermediary entered into exclusive talks with CWG to occupy 255,000 sq ft in a purpose built office. After both that and a later deal with News International collapsed however, the site has been capped at ground level following the completion of the basement levels. Owing to the additional piling work carried out, there are now three separate proposals with active planning permission for the site, which shows the flexibility that CWG has going forward in its ability to deliver an almost custom built office scheme. The most recent plan is for a 19-storey tower, which sits in between the previous 23-storey scheme, which was designed with News International firmly in mind, and the 15-storey scheme approved under the Enterprise Zone consent for the original Canary Wharf Estate.

At 25 Bank Street, CWG has confirmed that the existing occupiers, New York Stock Exchange (NYSE) Euronext and Jones Lang LaSalle will move out in early 2011, with the latter set to take space in the multi let 40 Bank Street next door. This will allow for the internal fit out of the one million sq ft office space prior to the banks move from the City in the first half of 2012. The 33-storey tower, which was completed in 2003, will likely be renamed as the JP Morgan Building, in a bid to disassociate it from the now defunct Lehman Brothers name.

At the Riverside South site, construction up to ground level, or ‘to grey’ as the group call it is expected to restart imminently in 2011. In the original design brief given to architects, Rogers Stirk Harbour + Partners (RSHP), CWG were clear that the development could be constructed and occupied in separate phases, which is now looking increasingly likely despite the most recent design changes being made in order to accommodate a single potential occupier in the form of JPM. The next phase of works, which is considered to be the most time consuming at around 18 months, yet relatively cheap includes the construction of four levels of basement that comprises building plant and servicing areas, a maximum of 140 car parking spaces, 132 motorcycle and 466 bicycle spaces. In order to mitigate the potential risk of any disruption to the utility supplies, Riverside South will also feature dual plant as well as the most advanced communications and IT infrastructure.

CWG and JPM have extended their development agreement to October 2016, which means that the US bank now has several options, the first of which is to continue to occupy the building in its currently proposed form, which will provide approximately 1.9m sq ft of space across two towers of 45 and 35 storeys, to be known as RS1 and RS3 respectively and RS2, a lower central link building of seven levels that allows for column-free trading floors of approximately 95,000 sq ft, exceeding JPM’s original 72,000 sq ft requirement. The US banking giant has over 11,000 London employees with only 8,000 of these working within the investment banking arm and expected to move into 25 Bank Street, which means that there is scope for further consolidation in 2016. If JPM do choose to develop the entire building then they always have the option to sublease space, similar to what the likes of both Barclays and Citi do across the 97 acre Docklands site.

If JPM decide not to occupy the Riverside South development at all, then it will almost certainly need a significant design change to allow the office scheme to be multi let through the likely separation of the three buildings or indeed an overall reduction in floors. There are no current plans to adapt the site for luxury private apartments, despite recent speculation given the prominent riverside position. This is principally governed by the fact that the basement works are designed around a high-resilience and high-security office scheme, whilst CWG has given no indication that it wishes to develop residential-led schemes. George Iacobescu, CWG Chief Executive has also recently stated that Riverside South is “definitely going to be offices”.

In a bid to diversify however, CWG has made no secret of its long-term desire to increase its presence in the City of London after considerable success with the 292,418 sq ft Drapers Gardens development, a joint venture with Exemplar Properties, which was let in its entirety to BlackRock Investment Management (UK) Limited in February 2010 before being sold to Evans Randall for £242.5m just six months later at an initial yield of 5.2%, which excludes a deduction for the 36 month rent free period. The next phase of its development in the historic square mile will be at 20 Fenchurch Street, a 50:50 joint venture with Land Securities, which will deliver 638,732 sq ft of Grade A office space with construction of the substructure expected to start early in 2011 and have reached ground level by February 2012.

Construction of the £500m development by Canary Wharf Contractors (CWC) is planned to complete by the second quarter of 2014, which will pit it directly against several high profile City neighbours, which include British Land’s 122 Leadenhall Street, Great Portland Estate’s 110 Bishopsgate and the Pinnacle. Whilst being built speculatively, CWG is confident of being able to secure a single occupier for the office space, which offers more value to the developer by providing a fixed income stream, likely to be over a minimum 20-year lease. The 37-storey landmark building has proved controversial however, having battled its way through a planning inquiry supported by English Heritage (EH), something that CWG does not have to contend with in Docklands.

As an integrated property company, CWG maintains a distinct advantage over rivals in that they can construct buildings quicker and cheaper than anyone else, with the group confident that if they were to find a tenant for the likes of 25 Churchill Place, then CWC could feasibly complete the build within 18 months to two years. Similarly, the Canary Wharf Estate also benefits from its natural riverside position, with construction materials and demolition waste delivered and removed via the River Thames, which does not have the same strict time restrictions that construction contractors in the City have to adhere to, whereby works often have to take place overnight and at weekends when road closures can be put in place, at considerable extra cost.

The Docklands developer currently has planning permission from Tower Hamlets Council for approximately 10 million sq ft of development space, if you include their 25% interest in Wood Wharf; however CWG has said that Wood Wharf, a joint venture between CWG, Ballymore and British Waterways is unlikely to be developed until the major schemes on the Canary Wharf Estate are completed, which includes both the Richard Rogers designed Heron Quays West (HQW) development and the North Quay site. The remaining interests in the HQW development site were acquired in June 2010, and whilst no firm timeline exists for construction, CWG could choose to clear the site and develop the three buildings to street level at any time should the occupier demand be there for the 1.3m sq ft scheme. With trading floors of up to 87,500 sq ft, the investment banks, Deutsche Bank and Goldman Sachs, currently based in the City and Fleet Street respectively remain the most likely potential occupiers for the scheme, which is not being actively marketed at present.

The 2.4m sq ft North Quay development site is currently being used by construction firm, Laing O’Rourke for the enabling and civil engineering works taking place as part of the £500m, fixed price project to construct the new Canary Wharf Crossrail Station, of which CWG are contributing £150m to the total cost. The new station will provide direct access to Heathrow Airport in just 43 minutes and the City in just seven, with CWG expected to complete and hand over the station box to Crossrail by summer 2012 before the first trains start running in 2017. It is not thought that enabling works will commence on the approved office scheme until post-2015.

One Park Place, a further key strategic site that predates the first phase of construction at Canary Wharf was acquired by CWG for just £17.5m in January 2010 from Park Place S.A.R.L acting by its receivers. There is separate planning permission for two alternative schemes, one of which is an impressive 950,000 sq ft office scheme designed by Skidmore, Owings & Merrill LLP (SMO), yet neither provides direct access to the Canary Wharf Estate. Whilst CWG has no concrete plans for the development site, the current building is in the process of being demolished, however a major design change will be needed to provide street level access to West India Avenue and fully integrate any new scheme into the existing Docklands portfolio.

With regulation seen as a major growth area in the future, the Financial Services Authority (FSA), who currently occupy 25 North Colonnade in its entirety as well as several floors in One Canada Square on a variety of different lease agreements, is still expected to announce plans to consolidate its London offices into a single location of approximately 500,000 sq ft. Whilst no timescales have been given for any such move, an announcement may be made in 2011 with the financial services regulator expected to stay in Docklands.

Moving into 2011, CWG will continue to try and let the remaining space on the estate, approximately 230,000 sq ft in total, tower cranes will arrive back on site at both 20 Fenchurch Street in the City and the Riverside South site, whilst work will continue on the Crossrail Station. Speculation will continue as to what happens in 18 months at Riverside South; however CWG sees no reason to be fearful for its future or that of its Estate.

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