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Can Life Sciences Spark The Next Incarnation Of Canary Wharf?

Canary Wharf has a perception problem,” Shobi Khan said as he strode across a square in the east London district, around which were dotted food trucks doing decent business, and above which the gleaming glass and steel skyscrapers for which the area is known towered.

The chief executive of Canary Wharf Group, the £8.3B company that owns a big chunk of the docklands estate, is working on changing that perception, beating the drum for a company and a district that has been written off in some quarters as an inevitable victim of changing working patterns and declining office demand. 

Canary Wharf Group's Shobi Khan

The company has been building new rented residential schemes for the past few years, which over the past 12 months have begun to open, and is broadening its leisure offering, planning to add attractions like electric go-karts and boats, theatres, art galleries and more restaurants to draw in consumers as well as office workers. And its newest move is an attempt to tap into one of the fastest-growing areas of UK commercial real estate and the economy more broadly: life sciences.

Bisnow is holding a digital summit dedicated to the booming UK life sciences market on Tuesday 22 June. Sign up here!

Canary Wharf has submitted an outline planning application for a site called North Quay, on which Tower Hamlets council is expected to decide this summer. Planning consent would allow it to build up to 2.5M SF of commercial space and 1.6M SF of residential space, across two towers and another lower building. 

When Canary Wharf was conceived in 2019, the expectation was that the commercial space would comprise offices, with some retail and hotels. But even before the coronavirus pandemic, it was becoming clear that life sciences was a major focus of the UK government’s investment programme, and the sector showed all the signs of flourishing. Demand from life sciences companies was growing, but there was not enough space to meet their needs, especially in London. 

“The NHS is moving offices here to 20 Cabot Square, the NHS property division is moving to 10 Cabot Square,” Khan said when asked whether it was possible to create a major life sciences cluster from scratch. “The kind of organisations that companies want to be near are already moving in. We want to partner with those kind of academic, research and governmental organisations that companies want to be near.”

Renderings of North Quay

Bloomberg reported last month that Canary Wharf had a deal in place for St Bartholomew’s hospital to take space at North Quay. The planning application submitted by Canary Wharf would not allow for a new hospital, but it would allow for a significantly sized diagnostics and research centre.

The way outline planning applications work, within the application Canary Wharf could toggle up or down the amount of space it allocated to life sciences, but it is likely to be significant because of the need to create an ecosystem of a large number of businesses in order to attract tenants, one company source said on condition of anonymity. To put that in context, once Canary Wharf's development pipeline is built out, it could total more than 15M SF, which would make life sciences about 17% of that portfolio. 

Canary Wharf’s chairman, Sir George Iacobescu, has plenty of experience in creating clusters of businesses from scratch. He was part of the original team from Canadian company Olympia & York that built Canary Wharf in London’s largely abandoned former docklands in the late 1980s and early 1990s, when the area was something of a post-industrial wasteland. He sees parallels between that time and the company’s move into life sciences today.

“Canary Wharf was the response of private enterprise to the stimulus or a change that the government wanted to bring about,” he said. In the wake of the Big Bang relaxation of London’s financial regulations in the mid-1980s, large banks wanted bigger buildings with large floorplates where they could house trading floors, something not possible in the tightknit, heavily planned City of London. Margaret Thatcher and Michael Heseltine created an enterprise zone in the docklands, Olympia & York built Canary Wharf and (eventually) the big banks came.

Canary Wharf has been diversifying over the past decade or more, trying to attract more professional services firms, tech firms (Apple is leasing two floors of a new building at One Bank Street) and, more recently, making that move into rented residential. The estate will eventually house up to 7,000 build-to-rent apartments. 

But on top of this, Iacobescu said, “the future is life sciences.” 

A CGI of some of the buildings and public space that will make up the North Quay site, where Canary Wharf could build up to 2.5M SF of life sciences space.

“I honestly don’t know if it was before or during Covid, but we realised that this is a direction where the UK can shine in the world, so we said, let’s do it,” Iacobescu said.

He makes the point that, post-Brexit, London and the UK are going to need to work harder than ever before to keep their economies competitive, and can do so in life sciences. But rather than just profiting from this, real estate has to play its part in making it happen.

“Life sciences is an area where the UK can compete with the best in the world. We have all the geniuses at the Crick Institute, Oxford, Cambridge. But in terms of lab space, in London, if you need lab space, you can’t get more than 100K SF. But look at Boston, where there is millions of square feet of space. We need to do something to allow us to compete with the best in the world, and we want to create that ecosystem.”

Khan told Bisnow that as it stands, discounting the impact of the pandemic, about 85% of Canary Wharf Group’s income comes from its office portfolio, with the rest coming from retail. Over time he expects income from rented residential to eclipse that of retail to provide more diversification. He said that the two BTR buildings that opened during the pandemic are leasing slower than would have been the case before the pandemic, but that viewings are picking up as lockdowns have eased.

The company’s financial results for 2020 give an indication of how the company fared during the first nine months of the pandemic. The value of the company’s portfolio dropped by 6% to £8.3B, with £320M of that £530M drop coming from its 1M SF of retail and restaurant properties, now worth £848M; £111M attributable to its office portfolio, valued at £5.7B; and the rest attributed to its development assets. 

Canary Wharf Group's Sir George Iacobescu at a Bisnow event in 2017.

The occupancy of its office portfolio dropped from 97% to 95% in 2020. The weighted average lease length is 10.4 years if break clauses are exercised. It collected 99% of its office rent, in spite of the fact that occupancy in its buildings dropped below 20% as workers were told to stay at home. Less than 50% of its overall income comes from financial tenants, Khan said. 

Retail understandably fared less well, with 55% of rent collected last year and 48% collected in the first three months of 2021. Canary Wharf used the proceeds of a bond issue to repay entirely a £700M loan secured against its retail assets on which covenants had previously been waived, the accounts showed.

While he is continuing the process of moving Canary Wharf away from a reliance on office tenants, Khan is, unsurprisingly, bullish on the question of whether the pandemic will cause more people to work from home, and thus reduce demand for space. And he has an interesting analogy for it. 

“It’s like in Hamilton, when he says, I want to be in the room where it happens,” Khan said. “When people are taking decisions, making pitches, people want to be in the room where it is happening. If you’re not there, you’re not involved, and its hard to have spontaneous video calls to be involved in those decisions.”

When asked whether the company has a plan for what it would do if one of the big occupiers in one of its existing buildings decided to vacate — would it look for new office tenants or consider converting space to other uses — Khan said he expects Canary Wharf to be one of the winners in any bifurcation of the market.

“I think you’ll see the consolidation and flight to quality that has been going on for several years continuing,” he said. “If five years ago I had 10 buildings now I might have four or five, or if I had four or five I might have one. They might be 20 years old, but our buildings have great light, great air, are wellness certified, are well located and we have great infrastructure here. There will be a flight to quality, and the good buildings will see tenants renew.”

It is not a building owned by Canary Wharf Group itself, but a litmus test will come as law firm Clifford Chance, one of the largest occupiers on the estate, weighs what to do with the 600K SF it occupies at the 1M SF 10 Upper Bank Street. It has appointed Cushman & Wakefield to advise on its options ahead of a lease expiry in 2028. 

“It’s been written off previously,” Iacobescu said of the district and the company that built it.

It went bust in the early 1990s under the weight of its debts, flirted with disaster in the wake of the financial crisis when it needed an emergency refinancing and was widely predicted to suffer heavily as a result of Brexit.

“But anyone who has written off Canary Wharf hasn’t analysed its strengths. It is illogical.”

The company is hoping that most logical of disciplines, science, can provide the next stage of the evolution. 

Bisnow is holding a digital summit dedicated to the booming UK life sciences market on Tuesday 22 June. Sign up here!