Canary Wharf
Valuing Developable Land at Canary Wharf
In valuing the developable land at Canary Wharf, there are several factors to take into account. Namely, it is crucial to decide on an appropriate rate at which to discount the projected cash flows for the property. The developable properties of Canary Wharf come with considerable risk. For example, the London office market downturn, as well as significant market hits for the large financial services tenants of Canary Wharf, presents serious tenant lease up and lease covenant negotiation risks. How long will it take to attract quality tenants to the buildings, especially as financial services tenants are currently stressed? Additionally, the requirement for further planning consent on the buildings indicates that construction on three of the sites can not commence for a number of years. How can one accurately predict the market in the future? Will the London Office market significantly improve or continue to decline? What will interest rates look like? Songbird must consider the risk of valuing such sites several years into the future. Further, Songbird must consider the weighty transportation risk. If the Crossrail project does not come to fruition in a timely manner with necessary approvals, development will not proceed as planned, causing cost overruns and heavy construction delays. Assuming that Canary Wharf is able to get the necessary transportation approvals, Canary Wharf 's projected cash flows should be discounted at 12.5% in order to mitigate risks to be faced. Given this discount rate, as well as considering all taxes, debt obligations, rents and rent-free periods, and all construction costs, an appropriate bid on the developable sites at Canary Wharf is ₤809,000 (the Net Present Value of the cash flows, discounted at 12.5%). Please see Exhibit 1 for a detailed pro forma of all projected cash flows.
It is important to clarify some key assumptions that were made in valuing
In valuing the developable land at Canary Wharf, there are several factors to take into account. Namely, it is crucial to decide on an appropriate rate at which to discount the projected cash flows for the property. The developable properties of Canary Wharf come with considerable risk. For example, the London office market downturn, as well as significant market hits for the large financial services tenants of Canary Wharf, presents serious tenant lease up and lease covenant negotiation risks. How long will it take to attract quality tenants to the buildings, especially as financial services tenants are currently stressed? Additionally, the requirement for further planning consent on the buildings indicates that construction on three of the sites can not commence for a number of years. How can one accurately predict the market in the future? Will the London Office market significantly improve or continue to decline? What will interest rates look like? Songbird must consider the risk of valuing such sites several years into the future. Further, Songbird must consider the weighty transportation risk. If the Crossrail project does not come to fruition in a timely manner with necessary approvals, development will not proceed as planned, causing cost overruns and heavy construction delays. Assuming that Canary Wharf is able to get the necessary transportation approvals, Canary Wharf 's projected cash flows should be discounted at 12.5% in order to mitigate risks to be faced. Given this discount rate, as well as considering all taxes, debt obligations, rents and rent-free periods, and all construction costs, an appropriate bid on the developable sites at Canary Wharf is ₤809,000 (the Net Present Value of the cash flows, discounted at 12.5%). Please see Exhibit 1 for a detailed pro forma of all projected cash flows.
It is important to clarify some key assumptions that were made in valuing