Canary Wharf offers more than a skyscraper collection

Bloomberg

London

Qatar is well versed in turning unused land into blocks of skyscrapers at home. Now it aims to do the same in London.

Qatar Investment Authority and Brookfield Property Partners on Thursday offered to buy Songbird Estates, which controls the Canary Wharf financial district. Qatar would have gained a chunk of undeveloped land twice the size of the World Trade Center site in New York if its latest joint bid for Songbird were successful. It would also have got a business district, dominated by a cluster of steel-and-glass towers around the UK’s second-tallest building.

Songbird “has a virtual monopoly on all of the land on the estate that can be developed,” said Hemant Kotak, an analyst at Green Street Advisors. Kotak estimates that buildings with 10mn square feet (930,000 square meters) of space could be constructed on the site.

Describing why they consider their offer fair, the bidding companies said about 14% of Songbird’s portfolio value is based on development projects that will take many years to complete and require substantial funding. Canary Wharf Group plans to construct more than 3,600 homes and other projects at Wood Wharf adjacent to the office district and that will cost about £2.5bn. Other developments are expected to cost at least £1.2bn.

Songbird’s debt has an average cost of 5.5%, at least one percentage point higher than Land Securities and British Land Co, and it is not a real estate investment trust. So it may face “significant capital gains tax on future asset disposals,” the companies said.

Buying Songbird would extend a Qatar London property portfolio that includes stakes in the Shard skyscraper, Harrods department store and the Olympic Village. It would also allow Qatar to construct thousands of homes in London, the best-performing part of the UK residential market in the past five years.

Qatar’s natural gas reserves have made it the world’s richest country per capita and Qatar Investment Authority, its sovereign wealth fund, is one of the biggest. Brookfield is a property investor with about $50bn in assets.

Paul Reichmann created Canary Wharf in the 1980s, anticipating a boom in Wall Street-style trading in the wake of impending financial market reforms. The late Canadian developer chose the Isle of Dogs, a derelict site on the north bank of the River Thames, as the site of a new office cluster to rival the City of London financial district.

The first tenants, State Street Corp, arrived in 1991. Now, more than 100,000 people work in the 35 office buildings and four shopping malls on the estate, which is home to companies ranging from JPMorgan Chase & Co to Gap Inc. The district is best known for the 50-story tower at One Canada Square, the UK’s tallest building until the Shard was completed in 2010.

Canary Wharf Group, 69% owned by Songbird, was formed in 1993. Since then, it has built more office space in London than any other developer, according to a July report by the two companies.

Canary Wharf Group won approval to construct residential and commercial buildings at Wood Wharf, east of the financial district, in July. The working population of the district will double by 2025, once the project is completed, according to Songbird and Canary Wharf Group.

The arrival of the Crossrail train network, which will add 10% capacity to London’s rail network from 2018, is expected to lift office rents at Canary Wharf, which have lagged behind the City of London.

The best-quality offices in Docklands, the district that includes the Canary Wharf estate, cost an average of £48.50 per square foot to rent, compared with 80 pounds in the City of London, according to Savills Plc. That gap is narrowing, according to Mat Oakley, director of commercial research at the property brokerage.

“There is a general eastwards drift of tenants across London at the moment,” he said. “Some tenants are considering Docklands at the moment, looking to do a good deal expecting that rental gap to narrow.”

Qatar Investment Authority and Brookfield said they would seek to simplify the shareholding structure of Songbird, which they described as an “illiquid investment.”

Songbird’s biggest owners are Glick Entities with 25.93%, China Investment Corp with 15.8% and Morgan Stanley with 8.53% as of September 18, according to a company fact sheet. Publicly traded shares account for 21.14% of the company. Brookfield owns 22% of Canary Wharf Group after attempting to buy the company in 2004.

Songbird Estates says renewed QIA offer doesn’t reflect value

Songbird Estates said a takeover offer by the Qatar Investment Authority and Brookfield Property Partners doesn’t reflect the full value of the Canary Wharf financial district owner.

The companies on Thursday offered 350 pence a share in cash, valuing Songbird at about £2.6bn ($4bn). The price “does not reflect the full value of the company, its unique position and future growth potential,” Songbird said yesterday in a statement. Songbird values its adjusted net asset value at 381 pence a share, it said. The company’s board plans to write to shareholders with a detailed view of the offer.

With Qatar already holding 28.6% of Songbird, it could theoretically gain a majority stake in the company without winning over all of the company’s main investors. The biggest owners are Glick Entities with 25.93%, China Investment Corp with 15.8% and Morgan Stanley with 8.53% as of September 18, according to a company fact sheet. Publicly traded shares account for 21.14% of the company. Third Avenue Management, which owns 3.5% of Songbird, agreed to accept the offer.

Songbird owns 69% of Canary Wharf Group, which controls London’s second-biggest financial district. The area includes undeveloped land twice the size of the World Trade Center site in New York. A successful bid would allow the new owners to construct thousands of homes in London, the best- performing part of the UK residential market in the past five years. If the offer is rejected by the shareholders, the shares will probably slide “to reflect, once again, the messy capital structure,” Miranda Cockburn, an analyst at Oriel Securities in London with a buy rating on Songbird, said in a research note. Within a year, the shares will probably rebound to a level close to the offer price, she said.

Songbird in November rejected an approach by Qatar and Brookfield that it said valued the company at 295 pence a share. The company later stated that it revalued its portfolio to give a net asset value of 381 pence a share, 9% higher than Thursday’s offer.

Describing why they consider their offer a fair value, Qatar and Brookfield Thursday said about 14% of Songbird’s portfolio value is based on development projects that will take many years to complete and require substantial funding.