London office space: Canary Wharf makes a comeback

It has become conventional wisdom that the pandemic is bad news for the commercial property sector. The shift to working from home will be partly permanent with people spending only two, three or four days a week in the office. Offices will need to be reconfigured to allow for desk-sharing, an increased number of meeting rooms and improved amenities to make working there more attractive, but overall demand will still be lower. 

The principal victim of the downsizing of space requirements will be the owners of large office spaces into which nobody will be downsizing. The most obvious of these is Canary Wharf, a development based on office spaces of half a million to one million square feet. Perhaps Canary Wharf could even become a white elephant as competition from other modern developments siphons away demand and empty offices put off new tenants.

If this is what investors believe, it is nonsense. Tenants are moving in, not out. Societe Generale arrived in 2020 and the European Bank for Reconstruction and Development EBRD will do so this year, “plus half a dozen smaller tenants in the last year”, according to Howard Dawber, the managing director of strategy at Canary Wharf Group (CWG). US banking giant Citi is spending £100m revamping the 200-metre tower it bought as its Europe, Middle East and Africa headquarters in 2019 for £1.2bn. Moreover, CWG is adding five million square feet of new space to its existing 21 million. This is mostly in smaller buildings with “state-of-the-art” office space of 100,000 to 200,000 square feet, competing with the More London development near Tower Bridge. This appeals to smaller occupiers, including specialised buildings for the tech and life-sciences sectors.

In addition, Wood Wharf has four blocks of residential flats, both for sale – “selling well” – and rental. So much for the view that everyone wanted to move out of central London. This is part of the diversification of Canary Wharf, which initially focused on the financial sector but is now more broadly spread. Retail and destination leisure space has been expanded catering not just for the 100,000 who work there, but also the 180,000 who live within walking distance.

Customers are coming back

“We have the second-highest footfall of any shopping centre in London and trading is almost back to pre-pandemic levels. Food and beverage outlets, now a major attraction to Canary Wharf in their own right, are even beating the 2019 numbers,” says Dawber. Rumours of the demise of London’s shops and restaurants have also been exaggerated. Many have closed down, but new tenants have moved in to take their place, perhaps drawn in by lower rents.

The switch to cashless trading has been a bonanza for bars, sandwich shops, bakers and other high-volume retailers, increasing service efficiency, reducing the tedious and time-consuming tasks of till reconciliation and the banking of takings. This reduces both till shortfalls and staff requirements. Online shopping has its limitations and may even have reached maturity as a share of spending ,while take-away or home-delivered food can never compete with the middle- or upper-market restaurant experience.

CWG, now owned half by the Qataris and half by the Canadian-listed Brookfield Asset Management, has also moved outside its core area, in recent years developing the “Walkie-Talkie” building in the City and the old Shell headquarters, once voted London’s ugliest building, on the South Bank.

Why is Canary Wharf doing so well? “We went into the pandemic with a shortage of high-quality office space in London,” says Dawber. “The last two years will have brought speculative development to a halt while underlying demand for good space is strong.” It looks likely that the economic data, which shows GDP having recovered to pre-pandemic levels and record employment, is still understating the strength of the London and maybe the whole UK economy.

Canary Wharf can only be boosted by the imminent opening of the cross-London Elizabeth line, which will reduce the travel time to Heathrow to just 38 minutes. The government wanted CWG to contribute £1bn to the cost of a station originally priced at £1.2bn. The group offered to take on all the risk of building the station in return for contributing just £150m towards a fixed-price contract. The station was completed on time and on budget for a cost of £550m. The government saved over £750m and CWG’s contribution will have been offset by the value of the 120,000 square feet of retail space built above it.

Not all of London’s office space is prospering. Rents on small, poorly located, outdated tertiary office space have fallen. The demand is for new or refurbished, flexible space that is well located and has good amenities. Demand for tertiary space will pick up as central London returns to normal, but this is not an investable proposition. Unfortunately, CWG is not listed and Brookfield (up 140% in five years) gives only a very diluted exposure. However, if Canary Wharf is doing well, so is all central London property, to the benefit of Great Portland Estates (LSE: GPE) and Derwent London (LSE: DLN).