Songbird deal backs Canary Wharf

September 1, 2009

Nomura’s decision to move its Lehman staff from Canary Wharf to the City earlier this summer seemed a victory for London’s historic financial centre over its upstart rival.

However, the astonishing terms Nomura secured, combined with a recent rescue fund-raising for Songbird Estates, owner of much of Canary Wharf, show that the Docklands estate retains its pulling power.

When Nomura’s proposed move emerged in July, some thought it could mark the reversing of the tide that has seen many large investment banks abandon the City in order to move three miles downriver.

Watermark Place, the new development beside Cannon Street station to which Nomura is moving, provides the sort of benefits that Docklands traditionally offered: large trading floors, lots of light, river views and landscaped outside space.

The central location was also important. Nomura’s top brass in Tokyo wanted to be in London’s traditional financial district. The local honchos wanted to avoid the overcrowded schlep to Canary Wharf from west London, where most bankers live. Most clients are closer, too.
Nomura’s new base boasts that it is close to eight underground and five mainline train stations — a stark contrast with Canary Wharf, which depends heavily on a single underground line to get workers in and out.

However, the terms of Nomura’s deal suggests that this was not necessarily a case of the City’s quality winning out over Canary Wharf’s low rents.

Nomura is reportedly receiving six years rent free, and then paying just 40 pounds per square foot. This is the equivalent of just 28 pounds per square foot over the 20-year life of the lease — less than half the 2007 going rate.

Similar deals may prove hard to find. After all, at just over 500,000 square feet, Watermark Place is roughly half the size of a classic Canary Wharf tower. Moreover, analysts at KBC Peel Hunt reckon that rents in Canary Wharf have held up better than those in the City or West End.

Meanwhile, Docklands has just received a huge vote of confidence from a consortium of international investors.

Morgan Stanley, Simon Glick, an American private investor, and Qatar Holding, already backers of the group, were joined by China Investment Corporation (CIC), the country’s sovereign wealth fund, in jointly subscribing more than 800 million pounds for new equity.

This will enable Songbird to repay in full an 880 million pound loan to Citigroup Inc at a 5 percent discount. Without a capital infusion, Songbird would have breached its loan covenants.
For the existing investors, subscribing to the fund-raising means that they are protecting their existing investment. CIC has been sniffing around the London market for some time. Songbird’s shares are some 90 percent down from their peak, offering entry on better terms than a few years ago.

Looking ahead, Canary Wharf should feel a little bit less remote. The opening of the extended East London underground line next year should relieve some pressure on existing transport links. Crossrail, due to open in 2017, will bring fast connections to the far west and east. And the Olympics should kick-start the regeneration of swathes of East London.

Nomura is rightly pleased about its move. But the deal says more about the bank’s sharp negotiation and fortunate timing than it does about Docklands’ long-term future.

(Additional reporting by Alexander Smith)

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