Can the City halt London's drift to the east?

Now that Paul Reichmann is back at Canary Wharf, the capital's geography could shift fast. Paul Vallely and John Willcock report

The jarret d'agneau was reduced to half-price, a mere pounds 7, as was the ragout de lotte et coquillages; even the filet de boeuf was only half its usual pounds 17.50 per head. Starched white tablecloths came to Canary Wharf for the first time yesterday with the opening of a Docklands offshoot of the smart West End eaterie, the Cafe Pelican, decked out in its familiar green and gold and Art Deco lighting.

It is a sign of the times, that combination of up-market style and aggressive marketing. For though Pelican's meals may only be half-price for the restaurant's opening week, the war between Canary Wharf and the City of London will last a good deal longer as they recommence the contest to house the main growth in the nation's key financial institutions in the next century.

Canary Wharf, the 4.5 million square foot development featuring the 850ft tower that is Britain's highest building, was the great white hope of the Eighties boom and the great white elephant of the world-wide property crash of the early Nineties, when the Reichmann brothers and their Olympia & York company suffered simultaneous property disasters in New York, Toronto and London.

Canary Wharf went into administration in 1992 and was run by the 11 banks from whom the Reichmanns had borrowed until Monday, when a consortium of investors led by one of the brothers, Paul Reichmann, bought the development for a reported pounds 800m. City analysts are clear about one thing. The gentleman's agreement reached when the banks called the shots - that the Docklands development would not poach big banks and finance houses from the Square Mile - is off.

Reichmann is noted for his aggressive and adventurous deals to lure new tenants from the City, often involving the purchase of the leases on their old premises or tempting side-agreements on Manhattan properties in the Reichmann empire.

But one of the other key players in the consortium is Michael Price, an American financier who is known as one of the world's most pugnacious investors. Price has a vigorously interventionist track record of buying into troubled or undervalued situations, shaking the business with considerable force, and then selling at a vast profit - he bought one semi-bankrupt drug company for $9m, turned it inside out, and sold it not long after for $600m. The gloves will now come off in the fight between Canary Wharf and the City.

Things had already started to move in 1993 under Sir Peter Levene, former head of procurement at the Ministry of Defence, who became head of the new Canary Wharf Company when the banks took over from the administrators. Under his tutelage Canary Wharf has added to its client list the Personal Investment Authority (the Government's official personal finance watchdog) and the first European Union body to be based in Britain, the European Medicines Evaluation Agency.

More recently the investment bank BZW, the merchant banking arm of Barclays, announced a pounds 200m move of some of its 2,500 employees to the Isle of Dogs development, where it will join the oil multinational Texaco, the investment bank Morgan Stanley, the British arm of Credit Suisse, the advertising group Ogilvy & Mather, a large part of London Underground's administration and eight national newspapers including the Daily Mirror, Daily Telegraph and Independent. Sir Peter recently did a tour of the Far East in an attempt to persuade more corporations, including Samsung in Korea, to base their European headquarters at Canary Wharf.

"We're very pleased," said Sir Peter, who has been asked by Reichmann to stay on as chief executive. "This development was valued at pounds 50m two years ago, so to go for a price of around pounds 800m is not bad."

The City affects to be less impressed. Michael Cassidy, chairman of the policy and resources committee of the Corporation of London, yesterday firmly played down the significance of the Reichmann deal. "Whether the banks own Canary Wharf or Mr Reichmann owns it doesn't change our stance." He complains bitterly of Canary Wharf's recent "poaching" of City institutions and was clearly stung when parts of BZW decided in the spring to relocate from the City eastwards to Canary Wharf "without even talking to us".

Now Cassidy is bracing himself for a new phase of the battle. Canary Wharf currently offers almost half the rent and service-charge package of the City, and is holding out the inducement of substantial rent-free periods - as long as two years. For this, tenants are locked into long leases.

At stake in the forthcoming struggle are at least six investment banks looking for vast new offices. New technology and systems mean they all need big dealing floors. The problem is that the City has few sites to build the new blocks required, whereas Canary Wharf can build as big as required, and to the customer's specification. Cassidy counters, in defence of the City: "We can't compete on cost with Canary Wharf, but we have quality of environment, proximity to all the key players and transport access, particularly to Heathrow. And you can walk from meeting to meeting in the City - Canary Wharf has still some way to go."

Indeed. While the Docklands Light Railway has improved considerably since it was installed, it is still subject to irritating delays. And although access by road has been transformed since the opening of the pounds 450m Limehouse Link tunnel, the island will have to wait until 1998 - or 1999, say pessimists - for the opening of the Jubilee Line extension which will link it directly to the London Underground. Those who built a similar large-scale office development at La Defense outside Paris took the precaution of installing the transport infrastructure before anything else.

Will the eastward drift end in Docklands? Thirteen years ago, when Michael Heseltine was Environment Secretary, he set up the London Docklands Development Corporation (LDDC) to promote a grander scheme along a 40-mile corridor, across "a bead of towns" strung beside the Channel tunnel high-speed rail link. The dream of Thames Gateway - Hezzagrad, as it was irreverently dubbed - would cover six east London boroughs which had lost nearly 60,000 jobs between 1981 and 1991. "Docklands writ large," said Mr Heseltine's adviser, Peter Hall, professor of Planning at University College, London.

More recently Michael Howard, another Environment Secretary, spoke of a "golden corridor" up to 30 miles long on both sides of the Thames and announced a pounds 4.5bn plan for government investment in a new road and rail link which would bring 100,000 new jobs and the same number of homes to the region. We shall see.

Certainly the Jubilee Line is to be extended beyond Canary Wharf to the part of Greenwich which occupies the blasted dockland wastes inside the next great meander to the east. The LDDC is to concentrate now on developing the Royal Docks, a huge area to the east of Canary Wharf, the size of the West End and the City put together.

Three big projects are planned, according to Michael Pickard, chairman of the LDDC, to "increase the pull of the East End to investors". First is an urban village being developed by the building group Wimpey. Second, the corporation is planning an exhibition centre, and third there is a university of technology and a science park.

But the LDDC is soon to be wound up by fiat of the Government, leaving the development of the region to the combined influences of the market and a group of left-wing councils not traditionally friendly to new business development. "Never in 100,000 years would the Docklands have been regenerated if it had been left to the local authorities," says Pickard.

None of which will bother the Reichmann consortium. So far only one-third of Canary Wharf has been built. Planning permission exists for another 8 million square feet and the foundations - the most time-consuming part of a new building - are already laid. It will take months, not years, to throw up the rest. That is when the money will really start to roll in.

Additional reporting by Scott Hughes.

Late Fifties: Reichmann brothers Paul, Albert and Ralph move from Tangier to Toronto and launch Olympia Tile, which supplies floor coverings. The company is still going, run by Ralph. They win reputation for being secretive and hard-nosed wheeler-dealers. They borrow heavily from banks.

1981: First big break - the World Financial Centre in Manhattan. This $1.5bn project takes a run-down area of land called Battery Park and builds vast, high-quality offices on it.

1987: Paul Reichmann's family business, Olympia & York, takes over Canary Wharf development. They pump in pounds 1.6bn of their own towards the pounds 5bn development costs. But inadequate transport links and a world property slump blow it away.

1992: Canary Wharf collapses with debts of pounds 576m; the Reichmanns lose control. Olympia & York goes into administration in the US and Canada. (The Reichmanns are still locked in legal battles with creditors in these countries to this day.)

1993: Canary Wharf's 11 main banks take over the development.

1995: Paul Reichmann assembles new consortium to buy back Canary Wharf for pounds 800m. Investors include Prince al-Waleed bin Talal bin Abdulaziz of Saudi Arabia and US media mogul Larry Tisch.

3 October 1995: banks agree to sell Canary Wharf to Reichmann consortium for pounds 800m. The deal will be completed by Christmas, subject to investigations by buyers.

Eastward Ho! The mass exodus to Canary Wharf

London-wide moves

From outside the City of London:

London Underground (from Victoria), CS First Boston (from West End), Eurotunnel (from Aldwych), Mirror Group (from Holborn), Texaco (from Knightsbridge), The Telegraph (from Docklands).

Migrating businesses

From City to Canary Wharf: Bear Stearns International, BZW, Credit Suisse, The Independent, Morgan Stanley UK Group, Ogilvy & Mather. In the City rent is up to pounds 32 per sq ft, but a hefty service charge and rates - higher on older buildings - add up to pounds 30. Larger sites are in demand (hence Canary Wharf's attraction). New developments with this in mind include Winchester House (350,000 sq ft) and Baltic Exchange (500,000 sq ft).

Possible moves

Others who may move to the Wharf:

Citibank (from various sites), other branches of BZW (from City), ABN Amro/Hoare Govett (from City), HSBC/Midland (from City), London International Financial Futures Exchange (from City), West Deutsche Landesbank (from City).

Limehouse Link

A four-lane highway, opened in May 1993, which links Tower Hill to Canary Wharf. Previously, roads became very congested during rush hour.

Docklanders

68,000 people live in Docklands; 65,800 work there. Docklanders and commuters now enjoy the beginnings of a symbiotic

relationship, though this hasn't always been so. In the mid-80s building labour, low-skilled and high-income workers were drafted in from outside the borough. But in 1987, Tower Hamlets council set up a construction training scheme with the Canary Wharf Development Company, designed to create employment for local people. Some companies based in

Canary Wharf have been involved in community projects.

Amenities

A private health club panders to executive whims. The number of shops and

restaurants has doubled over the past year. Restaurants and bars sprout overnight: a Japanese noodle bar is

eagerly awaited. Shops range from the

prosaic - Boots, dry cleaners, newsagents - to the posh - Jaeger Man, Lords Formal Wear. Recent openings

suggest business is booming.

Docklands Light Railway

Thatcher's baby has grown up to be a problem child. Additions to the railway, which opened in 1987, have been expensive and it is not designed to carry the numbers of people who use it. Extension of the Jubilee Line might make the railway redundant.

Canary Wharf

Ships once unloaded imports from the Canaries here. Now trains disgorge

thousands of commuters a day. 13,000 people work in 10 office buildings. A third of the complex - 4.5 million sq ft of office space - has been constructed. First

tenants arrived in 1991 and 75 per cent of space has been leased. Quoted rents from pounds 16-pounds 25 per sq ft, although the top 10 floors of the tower, which aren't being leased yet, will be more expensive.

Service charge and rates add pounds 9 to

the price.

The Tower

An 800-ft, 50-floor monolith, it is the tallest building in Britain and Europe's highest office block. It is designed to sway 133/4" in strong winds. No expense was spared on plush decor: 90,000 sq ft of Italian and Guatemalan marble line the 36-ft high lobby.

Future development

Eight million sq ft of office, retail and

residential buildings planned.