Has Canary Wharf tried to fly too high?

"I DO THINK that at last Canary Wharf has got its act together," a leading property analyst remarked last week. With the 4.5 million square feet of development 99.9 per cent let, three buildings under construction and several investment banks rumoured to be moving to London Docklands, prospects look encouraging.

Stories about a new one million square foot office block, a twin-tower headquarters building, and suggestions that Dresdner Kleinwort Benson is about to relocate from the City to Canary Wharf have all fuelled the rumour mill in recent weeks - despite being denied.

But in Canary Wharf's success lie the seeds of possible problems. Having fallen into administration in 1992 because of overdevelopment in London, some analysts worry that the same may happen again. With the global financial crisis hitting investment banks, are Canary Wharf and the City together building too much office space?

This suggestion may seem churlish given the strides Canary Wharf has made since being dismissed as an "Eighties white elephant" in the last recession. The new consortium that owns the complex is adamant - things are different this time. Speculative building has been kept to a minimum, with just one block, at Westferry Circus, under construction and yet to find a tenant.

Elsewhere Citibank is close to completing its new head office, designed by Norman Foster, which it will own outright. Opposite it, and next to the nearly completed Jubilee Line extension station, HSBC is about to start building its own pounds 500m head office next spring.

CSFB, one of the earliest converts to Canary Wharf, is completing a 275,000 square foot extension which will contain the largest dealing floors in the UK, at 80,000 square feet.

This is what Canary Wharf offers - cheap rents and big floor plans. This is also what riles the City of London, which has seen a steady stream of its most rewarding residents - Morgan Stanley, CSFB, Citicorp, even the Financial Services Authority (FSA) - moving downriver. A lot of this was due to the massive tax breaks bequeathed by Margaret Thatcher's government to kick-start the development in the 1980s.

As Stuart Fraser, chairman of Planning and Transportation at the Corporation of London, put it: "The offer of pounds 235m to HSBC to move two miles downstream does seem to be a generous use of taxpayers' money."

Mr Fraser confirms there is still rivalry between the City and Canary Wharf, if not as bitter. In the 1980s the City fathers hit back by relaxing planning restrictions, prompting an orgy of speculative development that contributed to the oversupply which sent Canary Wharf Mark One into administration.

City analysts point out that the amount of speculative space being built now is far less. Also, the orgy of bank lending which went into property in the 1980s has been followed by far greater caution by the banks.

In 1989 there was 11.5 million square foot of office space under construction in London, over nine million of which was speculative. This year there is 5.3 million square foot being built, only two million of it speculative.

William Beardmore-Grey of Knight Frank says vacancy in the City neared 20 per cent in the early 1990s. Now it is 1.5 per cent. "The [commercial property] market in London is very strong. People are playing a `wait and see' game because of the volatility in financial markets," he says. "Canary Wharf has been massively successful. There must be room for at least some speculative building there."

Does this mean Canary Wharf's formula of low rents, tax breaks and big floor plates will continue to haul in investment banks from points west? Will Salomon Smith Barney desert Victoria, followed by Warburg Dillon Read, Merrill Lynch and Dresdner from the Square Mile?

Not necessarily. Canary Wharf's advantages work best in a raging bull market, when banks look for "greenfield sites" where they can buy a building practically "off the shelf".

But with the financial turmoil of the past few months hitting investment banks, demand and therefore rents will probably ease in the Square Mile. One analyst says: "Do you want cheap space in the City or cheap space in Canary Wharf? The only difference will be in the size of the floor plates available."

Such suggestions do not worry the developers at Canary Wharf. The working population is forecast to rise from 25,000 today to 43,500 in 2002. An entire shopping centre is being built under a landscaped park, along with 900 underground car parking spaces, to service this new army of office workers.

The outcome largely depends on whether London remains the financial capital of Europe. If it does, there are likely to be enough investment bank tenants for both the Square Mile and Canary Wharf. And if not, we're all in trouble.