How the Recession Is Poisoning the Wharf; ECONOMICS ANALYSIS

The Evening Standard (London, England), June 2, 2009 | Go to article overview

How the Recession Is Poisoning the Wharf; ECONOMICS ANALYSIS


Byline: Hugo Duncan

CANARY Wharf was in the midst of the banking boom that turned London into the most powerful financial centre in the world -- but it could now become one of the most high-profile victims of the bust. Its majority owner Songbird Estates is perilously close to breaching a debt agreement that could lead to its collapse, and subsequently a new owner for Docklands.

It would not be the first time the owner of Canary Wharf has gone bust -- its previous parent Olympia & York crashed into administration in 1992 during the last recession.

Analysis by London-based property agent BNP Paribas Real Estate shows more than [pounds sterling]60 billion of debt is outstanding against property in the capital. That is a quarter of the [pounds sterling]240 billion debt wrapped up in property in the whole of the UK.

As property values plummet in the recession, that debt becomes ever more of a burden, leaving many borrowers on the brink. Debt may have driven the property boom, but it is now fuelling the bust. Commercial property has lost 40% of its value during the slump and while there are signs the rate of decline is slowing, the general trend remains down despite talk of "green shoots".

There are cash-rich investors out there snapping up bargains but there will be no sustained recovery until the credit markets thaw and big business starts looking for new office space, to buy or rent. With the recession still raging, even if the worst has passed, this looks unlikely any time soon.

Like Songbird, landlords, developers and investors all over the country hope they will be able to renegotiate agreements with their banks, and in particular relax loan covenants, and there are reasons to be optimistic, as Keith Steventon, head of research at BNP Paribas Real Estate UK, explains.

"The banks are less concerned about the money they are owed than one might think. My understanding is that while the debt is being serviced, then it looks as if they are reluctant to force the issue over values," he says.

But the borrowing binge has already claimed a number of victims, including Spain's Metrovacesa, which bought the HSBC Tower for [pounds sterling]1.1 billion in April 2007 but forced to sell it back to HSBC for [pounds sterling]250 million less than it paid a little more than 18 months later.

All eyes are now on Songbird and the future of London's second financial hub. …

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