Outlook: High cost of Canary Wharf's success

WHAT WITH all the cranes, building work, the chattering of foreign tongues and the general air of conspicuous prosperity and consumption, it feels quite like the 1980s again down here at Canary Wharf. Certainly you wouldn't believe this was part of near recessionary Britain. The complex now even boasts its very own financial scandal - based around a group of high earning, high living CSFB traders allegedly calling themselves the Flaming Ferraris.

From where we sit, the level of activity is truly astonishing. Looking out from the Independent's City office in the South Eastern corner of the existing Canary Wharf tower, to our immediate left rises the near complete Citigroup office complex. Immediately to the East of that, work has already begun on the Salomon Smith Barney tower, which will eventually be linked to the Citigroup building via a connecting trading floor.

To its left, the foundations are being laid in the remains of a disused dock for Britain's largest ever non governmental office block - the HSBC tower. Looking out towards the City, the high rise cranes litter the horizon. There are luxury hotels, apartments, more offices and more complexes going up right left and centre. If ever there were a right time to tap the markets for extra money, this would seem to be it. Canary Wharf, in receivership less than seven years ago, is a success at last.

Unfortunately, this fairy tale comeback for Paul Reichmann and his fellow travellers, cannot be said to demand unquestioning admiration. The cost of success, to the taxpayer and other regions that might have benefited from such development, is a high one. To make it work, Canary Wharf has required the most expensive piece of road ever built - the Limehouse link.

On top of that comes the Jubilee line extension, a stretch of tunnelling of both unprecedented cost, and outside servicing the wharf, of highly dubious general worth. Without these two pieces of infrastructure, Canary Wharf would still be a millstone round its bankers necks. Massive tax breaks, from which construction of the HSBC tower will continue to benefit, has further subsidised the planned stock market flotation.

Still, it would be churlish to be unduly cynical. We are going to have to await publication of the prospectus to make any kind of investment judgement on this company, but on the face of it, the complex should be capable of attracting quite a following. Today's capital structure is completely different from the one that sunk the venture in the early 1990s. Most banking debt has been securitised against rents, and what remains will be covered by the proceeds of the share sale.

Future developments will be financed on a highly conservative basis, with the company promising to keep speculative development (where properties are built without tenants to occupy them) to a minimum. The chances of the company going bust again would therefore seem remote. Its longer term prospects are another matter. With rents for new tenants beginning to approach those of the City, the complex may need to demonstrate attractions other than just the promise of acres of cheap, modern office space to persuade financial institutions to keep moving east.

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