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CANARY WHARF: Going for a song

Wood Wharf - Building Locations

Qatar Investment Authority (QIA) and Brookfield Property Partners finally reached an agreement with Songbird Estates on its management buy out and the related purchase of Canary Wharf Group in February. Cityscape takes a closer look at the transaction and what it could mean for London’s real estate sector.

March 2015

Following months of terse negotiations, a purchase price of GBP 2.6 billion [USD 4.01 billion] finally tempted the majority of Songbird shareholders into agreement to sell to Qatar Investment Authority (QIA) and Brookfield Property Partners in February.

QIA was already the largest shareholder in Songbird, with a 28.6% stake. However, it was the support of the company’s three major shareholders – Glick (25.9%), China Investment Corporation (15.8%) and a fund managed by Morgan Sindall – that saw the deal finally become a reality.

The transaction delivers one of Europe’s prized business assets into QIA’s already growing London real estate portfolio. For Songbird’s investors, it gives them the chance to exit a highly illiquid stock, which has not paid a dividend in five years. For Canary Wharf Group, the new ownership will enable it to embark on its next phase of development – a project that will undoubtedly require billions of pounds of investment.

Expansion plans for Canary Wharf Group comprise 30 new buildings, including 3,100 homes at Wood Wharf on the development’s eastern edge.

Songbird’s portfolio also includes a 50% stake in 20 Fenchurch Street – a 160 m tall tower dubbed the ‘Walkie Talkie, and the Shell Centre on the South Bank, which it had plans to redevelop with QIA subsidiary Qatari Diar.

The deal is arguably the largest London has seen for some time, if ever, and already the city’s financiers and real estate agents are surmising what this could mean for Canary Wharf tenants, potential investors, and London in general.

RENTAL INCOME

Canary Wharf commands some of the highest business and residential rents in the city. Office space starts at GBP 40 per sq ft while residential units in the vicinity range from GBP 350 per week for a studio apartment up to GBP 6,000 per week for an eight-bedroom property.

“In the short term, there should not be any day-to-day impact on the tenants as both the existing landlord and the new landlord are experienced institutional investors. Longer run, businesses based in Canary Wharf should take comfort from the fact that the properties here are owned by major international investors, which are demonstrably capable of supporting the ongoing capital requirements for the Canary Wharf estate,” said Ross Owen, Head of Investment and Fund Management, Cluttons.

“In the short term, there is no impact on rental income arising from the change in ownership. Longer run, further investment in the district may lead to enhanced levels of rental income but it is difficult to judge whether the new owners will wish to make any significant change to the investment objectives that were in place with the existing management,” he added.

However, QIA’s investment is a timely one from a rental income perspective, with recent research by BNP Paribas Real Estate pointing to 2014 seeing the highest annual take-up across the Central London office market since 2000. According to the firm, average rents will increase 17% to GBP 655 sqm in 2015 across the city as vacancies continue to drop.

LONDON’S ECONOMY

Questions are already being asked as to what this transaction could mean for London’s economy, as lucrative rental income could leave the UK? Some financiers are concerned that the UK’s balance of payments – the balance of economic transactions between the residents of the country and the rest of the world – could point to a deficit, with the QIA purchase just one transaction that is ringing alarm bells.

However, those in the real estate market are confident in London’s allure and believe that while rental income may leave the country the investment will still benefit the city’s coffers.

“The London property investment market is a dynamic, highly liquid, open market and there is extensive ownership by a wide range of both international and domestic investors. This is another significant transaction by two major international investors which re-enforces the position of London as an attractive centre for international capital,” said Cluttons’ Owen.

“The London economy will benefit from this international capital, as the provision of high quality commercial premises is one of the building blocks required to facilitate the high value-add economic activities that London is renowned for. Yes, the rental income from these buildings will flow outside the UK, but the London economy will benefit from the infrastructure that Canary Wharf brings to the business community here.”

CONTINUED INVESTMENT

The QIA’s buyout of Songbird and the addition of Canary Wharf expands an already enviable portfolio of London property. The investment authority and its subsidiaries also own Harrods, The Shard, part of the Olympic Village, and the U.S. Embassy building in London’s prestigious Grosvenor Square in Mayfair.

“The QIA has been investing in large, best in class, assets in prime locations throughout London. Such assets tend to provide resilient cash flows and offer a combination of rising incomes and capital performance over time. This latest purchase follows this familiar pattern with Canary Wharf providing exposure to high quality commercial blocks, in a well-established location and significant further development opportunities over time,” explained Owen.

REIT RETURNS

The ink was not even dry on the purchase agreement when QIA and Brookfield Property Partners made public plans to delist Songbird from the FTSE AIM 100 should they achieve a 90% ownership of the company.

It has also been rumoured that the new owners may convert Canary Wharf Group into a publically listed real estate investment trust (REIT), which could open up opportunities for would-be investors.

“There are a number of great estates in London that hold multiple property assets in a concentrated geographical area. Examples include The Crown Estate, the Grosvenor Estate, the Cadogan Estate, and the Howard de Walden Estate. Concentrated geographical ownership brings opportunities to manage investments for the longer term and to pursue investment objectives, which can deliver superior performance. All of these great estates are in private ownership,” commented Owen.

He added: “If Canary Wharf was converted to a REIT it would offer a wide range of investors an opportunity to invest in a high quality ‘estate’ situated in a dynamic part of London. The REIT status would bring liquidity to investors but the main attraction is the ability to participate in the ongoing management of a concentrated ownership – a unique and highly attractive investment proposition.”

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