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Canary Wharf was in the midst of the banking boom that turned London into the most powerful financial centre in the world - but it could now become one of the most high-profile victims of the bust. Its majority owner Songbird Estates is perilously close to breaching a debt agreement that could lead to its collapse, and subsequently a new owner for Docklands.
It would not be the first time the owner of Canary Wharf has gone bust - its previous parent Olympia & York crashed into administration in 1992 during the last recession.
Analysis by London-based property agent BNP Paribas Real Estate shows more than £60 billion of debt is outstanding against property in the capital. That is a quarter of the £240 billion debt wrapped up in property in the whole of the UK.
As property values plummet in the recession, that debt becomes ever more of a burden, leaving many borrowers on the brink. Debt may have driven the property boom, but it is now fuelling the bust. Commercial property has lost 40% of its value during the slump and while there are signs the rate of decline is slowing, the general trend remains down despite talk of "green shoots".
There are cash-rich investors out there snapping up bargains but there will be no sustained recovery until the credit markets thaw and big business starts looking for new office space, to buy or rent. With the recession still raging, even if the worst has passed, this looks unlikely any time soon.
Like Songbird, landlords, developers and investors all over the country hope they will be able to renegotiate agreements with their banks, and in particular relax loan covenants, and there are reasons to be optimistic, as Keith Steventon, head of research at BNP Paribas Real Estate UK, explains.
"The banks are less concerned about the money they are owed than one might think. My understanding is that while the debt is being serviced, then it looks as if they are reluctant to force the issue over values," he says.
But the borrowing binge has already claimed a number of victims, including Spain's Metrovacesa, which bought the HSBC Tower for £1.1 billion in April 2007 but forced to sell it back to HSBC for £250 million less than it paid a little more than 18 months later.
All eyes are now on Songbird and the future of London's second financial hub. The big question is: Will history repeat itself, with ownership of Canary Wharf changing hands once again?
The value of the Wharf estate has crashed since the peak in June 2007 and, as if to prove that timing is everything, Songbird agreed its now potentially fatal £880 million loan with Citigroup in early 2007, just before the onset of the credit crunch. The collapse in property values since then has left it on the verge of breaching the terms on that loan. There are two loan-to-value covenants on the loan. One relates to the value of the property portfolio and has a threshold of 87.5% while the other is based on Songbird's share of the net asset value of Canary Wharf, where the limit is set at 70%.
On the latest valuations, the loan-to-value ratio on the 87.5% covenant was 86.1%, and on the 70% covenant was 66.6%. That was up from 78.3% and 49.6% on last June's valuations.
It meant Songbird passed last month's test but it faces two more this year, in August and November. The board admits there is "a material risk" it will breach the agreement, and is now in talks with Citi to find a solution.
Songbird could follow the lead of rivals such as British Land, Land Securities and Hammerson by raising funds from shareholders to bolster its balance sheet. Analysts believe Citi may ask Songbird shareholders - including Morgan Stanley, British Land, Arab state Qatar, and private investor Simon Glick - to pay down some of the loan.
But Songbird may be forced to give up its stake in Canary Wharf to Citi or succumb to a takeover, either from current shareholders such as Glick or Paul Reichmann, who was behind Olympia & York, or from an outside predator.
It has happened before - as Songbird knows only too well. Such an outcome will certainly make headlines, but is just one example of the crisis facing the industry during the recession.
