Finance: Real Estate
Canary Wharf Has Something to Sing About
An IPO is poised for success, and Reichmann's rep is secure
These days, Canadian real estate developer Paul Reichmann has reason to feel vindicated. Seven years ago, his plans to convert London's desolate Docklands into a modern financial center were scorned as speculative folly. But despite bankruptcy, a $1.8 billion bank refinancing, and even a terrorist bomb scare in 1996, he stuck it out. Now, if Canary Wharf PLC's Mar. 25 initial public offering on the London Stock Exchange goes as well as analysts expect, Reichmann may be remembered as a man ahead of his time. "It takes someone with a great deal of vision to put something like Canary Wharf together," says Alastair J. Hilton, a surveyor with a London property evaluators unit of Cushman & Wakefield.
A successful IPO will justify Reichmann's vision--but not necessarily his investment. His family lost at least $1.3 billion through Olympia & York Developments Ltd. when Canary Wharf went bankrupt in 1992. The family's equity was wiped out, and he was forced out. Now, after assembling an investor group that bought the development back and crowned him executive chairman in 1995, Reichmann, 68, will have an 11% stake in the new company, which will have a market capitalization of $3.8 billion to $4.1 billion. The deal, says a banker close to it, is "certainly not a financial home run, but it does demonstrate he was right."
The real winners will be the consortium of Canary Wharf's investors, who paid lenders $1.2 billion to pull the project out of bankruptcy. They include mutual-fund guru Michael Price's Mutual Series Fund and Laurence A. Tisch's CNA Investments, each holding a 15.1% stake. Price and Tisch will sit on the new company's board. New York investor Simon Glick will own 14.8%; Prince Alwaleed bin Talal bin Abdulaziz Alsaud, 6%; investment banker Edmond Safra and Republic National Bank of New York, 3% each; other investors, 7.2%, and the public 25%.
Bets are off if the markets dive, but the outlook seems rosy. Rents are lower in Canary Wharf at $58 per square foot, vs. $83 in the City, but the gap is closing. Some analysts say Canary Wharf, which lost $2.5 billion pretax in the past two fiscal years, may see profit by 2001.
Credit buoyant stock and real estate markets and a tenant list with the likes of Credit Suisse First Boston, Morgan Stanley Dean Witter, Barclays, and Citigroup. "Any project that attracts those sorts of global players has to be taken very seriously," says Alan Bloom, an Olympia & York bankruptcy administrator who now heads Ernst & Young's corporate recovery practice.
Construction is under way on HSBC Holdings PLC's global headquarters, a 42-story complex. Citigroup's Salomon Smith Barney announced it will occupy 600,000 square feet. One-third of the project is 99.5% occupied, another third under construction has "substantial commitments" from tenants, and the rest will be built over five to seven years, says a project spokesman. Of a planned 13.5 million square feet, 8.3 million has been built or is about to start construction."LOOKING SMART." Indeed, some now sing Reichmann's praises. "If [Canary Wharf] didn't exist, London wouldn't be able to house the global financial sector," says David G. Steventon, director of the DTZ Debenham Thorpe property adviser. Adds Commerzbank Global Equities analyst John W. Atkins: "Reichmann does come out of this looking smart."
Of course, many hailed the Canadian's vision early on, before London's real estate market collapsed. So long as the good times roll, Reichmann's reputation will shine. If the project becomes a full-fledged alternative to the City's pricey real estate, Reichmann may even restore a healthy chunk of the family fortune. But that challenge still looms even taller than Canary Wharf's towers.By Kerry Capell, with Heidi Dawley, in LondonReturn to top