Canary Wharf debt downgrade is latest sign of real estate woes

MOODY’S has downgraded the debt issued by owner of London’s Canary Wharf neighbourhood, in the latest sign of the difficulties facing real estate globally.

The financial district in the east of the capital, owned by Brookfield Asset Management and Qatar’s sovereign wealth fund, has more than £1.4 billion (S$2.34 billion) of debt coming due in 2024 and 2025. The company would probably be highly reliant on asset sales, and potentially shareholder support, to help it de-leverage and refinance, Moody’s said.

The ratings firm downgraded Canary Wharf Group Investment Holdings to Ba3 from Ba1 previously, said Tuesday’s statement, citing the “difficult operating and funding environment for real estate companies” that it expects to persist for at least the next year.

The landlord did not immediately reply to a request for comment. Its £300 million bond due for repayment in 2028 is currently being quoted at 68.7 pence in the pound. 

UK commercial property has been hit hard by the rapid rise in interest rates that have forced up landlords’ cost of borrowing and crimped valuations. At the same time, a pull-back by lenders is increasing a funding gap for landlords with maturing loans. That combination is forcing some to contemplate asset sales, equity injections or alternative and expensive sources of debt. 

The correction has also led to a standstill in investment markets as sellers cling to prices that have yet to reflect the new monetary policy environment. This is creating a narrow tightrope for landlords that need to sell assets to reduce debt, with the risk that selling some properties at a discount will hit the valuation of their remaining portfolio. 

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“Cautious investor appetite” is “leading to low transaction volumes and making it difficult to sell assets without offering substantial discounts,” the ratings agency said. Recent banking turbulence has put “further downward pressure on values”.

Canary Wharf Group is attempting to reinvent a district originally developed for investment banks that wanted large office towers. The company is building apartments and attempting to lure life-science companies in an effort to inject new life into the area, which has seen several major tenants shrink their office footprints or leave the neighbourhood. BLOOMBERG