Occupancy fears prompt Canary Wharf share slide

Canary Wharf was accused of hiding liabilities yesterday after it admitted that vacancy levels could rise much faster than expected by investors.

The property group, which owns the giant office complex in London's Docklands, has always maintained that it is almost "recession proof" because its tenants sign up for 25 years. It emerged that some of the recent high-profile letting agreements allow occupiers to return parts of their buildings to Canary Wharf, for five or 10 years, through put options.

Jeremy Anagnos, an analyst at Deutsche Bank, said: "The management have lost credibility. They have disclosed something that should have been disclosed before.... This [put options] is a liability that we did not know about. You have to question what else we don't know about."

Mr Anagnos added that "you could reasonably come to the conclusion" that investors were mislead. The market punished Canary Wharf severely, sending the stock down by over a third at one point, closing down 22 per cent at 180p.

Reporting interim results yesterday, the company revealed that of the 1 million sq ft recently let to Lehman Brothers, 189,000 sq ft can be returned to Canary Wharf, while Barclays can put back 330,000 sq ft of space from its 1 million sq ft tower currently under construction.

Michael Prew, an analyst at Schroder Salomon Barney, said: "The economics of the [recent] leases are by no means what we thought."

The company said that 1 million sq ft of existing or soon to be completed accommodation was yet to be let. A further 625,000 sq ft can be "put back" to the company over the next two years – meaning that Canary Wharf will have to rent this space from the lease-holder. The vacancy rate could jump from 6.7 per cent to 11 per cent over the next two years, the company said.

Fears were compounded by a 20 per cent drop in the independent valuation of the Canary Wharf estate and there are concerns that the remainder of the company's programme to return £2bn to shareholders will now be deferred. The net realisable value fell from 705p a share to 563p a share in six months to the end of December.

There were write-downs in the value of the company's development programme and the independent valuers sharply reduced assumptions of rental growth for the next few years, with virtually no increase in rents now expected until 2006. Pre-tax profit fell to £4.9m for the period, from £15.2m, mostly as a result of increased interest charges.

Mr Prew said that Canary Wharf was now in serious competition with its tenants to let surplus space on the estate. By the middle of next year, the estate will have a total of 14 million sq ft of accommodation, while longer-term developments can take this to 20 million sq ft.