London Real Estate Projects on the Rocks

Property developers worldwide - from Toronto to Tokyo to New York - have seen values fall and vacancies rise

LONDON'S huge Docklands development - a symbol of 1980s economic expansion - has been thrown into jeopardy by the cash crisis affecting the Toronto-based real estate company Olympia & York.

The new Canary Wharf office complex on its 70-acre site includes Europe's tallest building, the focal point of an attempt to create a new financial district in London's East End. That goal would be threatened, however, should Olympia & York's huge debt force cancellation of a $2.25 billion subway extension linking it to central London three miles away. Without the link, which Olympia & York was to have partly paid for, Canary Wharf would be isolated from the rest of the capital.

Even before the Reichmann brothers of Canada, Olympia & York's directors, admitted in March to debt between $10 billion and $20 billion, Canary Wharf and other parts of the sprawling Docklands project were in trouble.

Only a little more than half the 50 floors in the newly built 800-foot tower have been leased. Despite a reduction by one-half of rents from the $100 to $110 per square foot asking price when space first became available two years ago, tenants have been hard to find. Rents closer to the center of London have been falling rapidly. Estate agents say that about 40 million square feet of office space is vacant in the center of London. Empty office buildings

According to property consultants Jones Lang Wootton, nearly 20 percent of office space in London's old financial district is also vacant.

One estate agent said that prospective Canary Wharf tenants were being offered rent-free accommodation for the first three or four years. The threat to the subway link, the agent says, has "made an already bad situation terrible."

Olympia & York was to have paid $700 million to help finance the rail link. Last week a government-imposed deadline for Olympia & York to come up with a cash deposit passed without a payment.

The problems besetting the Toronto developer are far from unique in the London property market. Speyhawk, builder of a huge development within sight of St Paul's Cathedral, is currently trying to reschedule $510 million in debt. Meanwhile some 200,000 square feet of its Cannon Bridge office project is standing vacant, according to London property agents.

"The market is so thin, it is hard to ascertain what the real market value of property is," said Steven Mansell, an economist at Midland Bank.

Shares of leading property companies have fallen by one-half in the last three years, and unless there is an early upturn in the British economy, the problem may worsen, Mr. Mansell said. Politics raises concerns

John Prescott, Labour's transport spokesman, said that if elected, his party would reexamine plans for a subway link to the Docklands. "The project does not seem to have ever been properly assessed, and we have to find out what the true cost will be," Mr. Prescott said.

Like party leader, Neil Kinnock, Prescott is harshly critical of the Thatcher-era plans that inspired development of London Docklands on a grand scale.

Apart from Canary Wharf, Docklands is a venue for many high-tech buildings. Parts of the site are served by a monorail light railway, but a full-scale subway link to central London is essential to meet the needs of businesses locating there.

Labour has promised to relieve traffic congestion in London as a whole, and some party officials say the money earmarked for a link to Canary Wharf would be better spent upgrading the British capital's dilapidated subway system.

A Labour source said: "In the 1980s it was believed that extortionate rents could be charged for new buildings like Canary Wharf. But the stock market crash of 1987 undermined the entire theory. The Conservatives were stupid to think the boom would last."

Olympia & York's commitment to Canary Wharf was made in July 1987, one year after major deregulation of London's financial services market, and only three months before the stock market crash.

According to City of London estimates, British property developers have bank debts totaling some $68 billion. Most banks lend up to two-thirds of development costs. The value of a property can fall by one-third without the banks' investments being put at risk, property analysts say. If it falls further than that, the banks' security is threatened.