It used to be said that at the first sign of trouble or danger, canaries were the first to turn up their toes. The aptly-named
Canary Wharf in east London’s docklands is at present proving this old aphorism true. The future of this prestige office development site in the Isle of Dogs is currently in jeopardy. Its owners, the Olympia & York international property company controlled by Canadian brothers Paul and Albert Reichman, are in serious financial difficulties and have called in the receivers.
Olympia & York itself owes about £7 billion, with Canary Wharf accounting for about £1.1 billion of this debt. It is extremely doubtful to say the least whether all the planned phases of the project will now be completed.
Work on the Canary Wharf site was started in 1987 and was expected to take up to 10 years to complete. Its centrepiece, the fifty-storey Canary Wharf Tower, has now been finished and is Britain’s tallest building at 800 feet. A monument to free- market capitalism, it was meant to encapsulate the brash enterprise culture of the 1980s. breathing life into a degenerated and depressed area of the capital. Now over half-empty with 500,000 square feet of vacant office space, it has become Britain’s biggest white elephant. Indeed, the Canary Wharf development as a whole has over 2.3 million square feet of vacant office spare out of a total capacity of 4 million.
Though Canary Wharf is the biggest folly of them all, it is far from being the only one. There is currently 40 million square feet of unused office space in London alone, much of it developed by now insolvent companies like Speyhawk which in its last trading year amassed losses of more than £300 million. It has been estimated that 20 percent of London’s office space is now vacant, almost twice as much as in the last major commercial property slump in 1973-4.
The source of this predicament is not hard to find. The Daily Telegraph (16 May) explained Olympia & York’s particular problems well enough:
Canary Wharf was planned in the mid-1980s boom when the Big Bang meant that expanding City firms were competing for the limited space in the Square Mile. Office rents soared and firms were forced to take space outside the City core. By the time Canary Wharf was almost complete sufficient new space had been built in the Square Mile to satisfy demand. The surplus caused rents to collapse.
It has been much the same story for the dozen or so other property companies who have lost out spectacularly in the present slump. A massive extension in the supply of property has not been matched by a commensurate expansion of effective demand for it:
The prospect of the stock markets Big Bang in 1986 and the booming service economy in the south-east created a feeling that demand for London office space was almost insatiable. Developers went on a building spree the like of which the country has never seen. At the start of the 1980s £1 billion-worth of offices, in todays prices, was built each year. By 1990 that figure has risen to £5.6 billion . . . Entrepreneurial developers did not bother to secure tenants before ploughing hundreds of millions into their schemes. They assumed that in the four years or so it took them to put up a building, the demand would materialize . . . In retrospect. Black Monday, in October 1987, was the first sign that the dream was about to go sour. But the holes in the ground had been dug and there was little alternative but to keep pouring money into them. Only now, when the buildings are being finished, is the full horror of the oversupply becoming apparent. (Sunday Times, 5 April).
Without a doubt, the over-expansion of the commercial property industry has been a key factor in the present slump, with the downturn in its fortunes being transmitted to other sectors of the company.
As companies like Olympia & York and Mountleigh become insolvent there could be even more difficulties ahead. The four major British clearing banks have in excess of £12 billion loaned out to British property companies, with Barclays alone having lent £5.4 billion. With banks often lending up to 70 percent of the development costs of commercial property, once property prices start falling by more than 30 percent the security of the banks starts disappearing. The potential loss to the major UK banks—already having to cut back sharply—could be colossal. Capital values in London have already fallen 40 percent in this slump, without, as yet, having reached the bottom.
All sides will try to minimize their losses, but the real losers probably won’t even rate a mention. While millions of square feet of prime office space lies empty and while thousands of building workers are thrown on to the dole because of the slump, thousands of Londoners go homeless with tens of thousands more on ever-expanding council house waiting lists. There is certainly no shortage of demand for accommodation in London—only a shortage of effective demand, that is, demand backed up by ability to pay, the only kind of demand capitalism recognizes. And while the homeless roam the streets the capitalist class build ridiculous monuments to their system in the endless pursuit of the next swift buck. It is enough to remind somebody of an old socialist aphorism—if capitalism is the answer, then it must have been a bloody stupid question.
Dave Perrin
