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SCMP Reporter

CANARY Wharf, the struggling east London development built by the Reichmann brothers of Canada, is slowly luring tenants from the heart of European finance.

  Enticed by cheap rents and glittering new premises, two leading investment banks plan to open or expand offices in the development, which skirts the River Thames three kilometres east of the City of London, Britain's financial district.

  Leading the charge, Barclays de Zoete Wedd (BZW) plans to let as much as 500,000 sq ft in Canary Wharf for a new home for half its 3,500 City employees. Executives said the move, announced to BZW employees last week, would mark the largest office rental deal in London history.

  'Negotiations with Barclays are at a very advanced stage,' said Peter Levene, chief executive of Canary Wharf. Canary Wharf spent a year in bankruptcy following the collapse of the Reichmanns' real estate giant, Olympia and York, in 1992.

  'We hope to have a signing before the end of the year,' said Mr Levene.

  In another boon for the development, Morgan Stanley Group said it would expand its custom-built offices in the development's Cabot Square.

  With Morgan Stanley renting an additional 350,000 sq ft and BZW moving in, about half of Canary Wharf's 4.4 million sq ft of office space would be let, executives said.

  The development is also home to Bear Stearns International, located at One Canada Square, and C S First Boston and Credit Suisse Financial Products, at One Cabot Square.

  For these firms, the incentive to abandon the City boils down to cost.

  J P Morgan, for example, just leased office space in the City at 100 New Bridge Street. The cost: GBP28 (about HK$350) per square foot per year.

  People familiar with Canary Wharf said space in the development - reached by a railway that snakes past the housing estates and dockyards of London's East End - cost about a third less.

  But in a memorandum to senior executives, BZW chief executive David Ban said the firm had decided not to abandon the City entirely.

  'However, the attractive working conditions, availability of suitable dealing space and competitive cost terms have led us to the view that it might be appropriate to locate the markets divisions, debt capital markets and most support operations to Canary Wharf,' he said.

   Peter Baillie, a spokesman for BZW, said the terms of the lease and other moving plans were still being negotiated. 'This isn't a done deal,' he said.

  Cheap office space is important for Morgan Stanley, which has boosted its European staff by 19 per cent this year, to about 2,300. The firm has had its European operations headquarters in Canary Wharf since November 1991.

  Stephen Waters, the European co-chief executive of Morgan Stanley, recently said he expected the firm to expand in Europe further, even if other City firms scaled back hiring.

  'We're not in the City,' Mr Waters said.

  Mr Levene said BZW's lease was likely to include a rent-free period. He and BZW officials declined to comment further on the terms.

  While details of the move have not been announced, BZW employees said the firm's corporate finance and equity departments were likely to remain in the City at Mint Court, the 18th century building that houses Barclays' senior management. The asset management division is likely to move to 54 Lombard Street, Barclays' traditional headquarters.

  For BZW, another incentive looms large: Barclays is part of an 11-bank team that lent GBP600 million to Canary Wharf.

  With the new letting, Canary Wharf will take a step closer towards selling shares, enabling its banks to recoup their investment. The development by Olympia and York, whose former head, Paul Reichmann, was hailed as a visionary who reshaped skylines, helped sink the Canadian company and is still regarded as one of the greatest real-estate fiascos of all time.

  'It makes a flotation or listing more viable, more feasible, if that's what the shareholders want,' Mr Levene said of the tenants.

  For many employees in BZW's bond, currency and money market departments - those most likely to move - the new offices will mean longer commuting and fewer trips to the City's watering-holes. Compared to the City, where a traditional pub is always around the corner, Canary Wharf is downright anti-septic.

  Plagued by delays on the Docklands Light Railway, Morgan Stanley initially offered employees a free bus ride to work to keep them from grousing. The firm still buses some employees from central London for a fee.

  'Nobody wants to leave the City,' said Kevin Adams, a bond strategist at BZW who expects to move to Canary Wharf from BZW's Ebbgate House in the City. 'But we're bursting at the seams here.' 



The nightmare ends