George Iacobescu, Canary Wharf: “The mankind was not prepared for such a crisis”

He’s probably the wealthiest man I have ever interviewed. He runs Canary Wharf, the renowned London business district, which is part of the world economic centre outshined only by New York. One can as well say he’s the one who designed and built Canary Wharf, contributing to Margaret Thatcher’s plan of exporting financial services worldwide. Canary Wharf’s president is a Romanian: George Iacobescu.

He often utters the word practically, giving away, without intent, the secret that brought him success. Mr. Iacobescu greets me at his 30th floor office, among the replicas of the region he has developed, while he’s explaining the area’s progress over the last 20 years. A second room and there’s another replica of the urbanite innovation, where the HSBC skyscraper is just a few inches taller than us. He points to the Crossrail, a project that will link East London with Heathrow airport, stating that his company made a better budget offer to the Government than the Government’s own figures. In Romania, the Government would have probably won the project. He smiles: “It’s a different world”.

Crina Boros:There are still issues to be discussed about the economic crisis.

George Iacobescu: They cut down forests to write about it. I believe that such an economic crisis had never happened before. The entire mankind lives in the fear and surprise of this economic crisis. Practically, it will last for at least three or four years. It is only in 2011 that the values will begin to look familiar with their 2008 siblings.

CB: Why so late?

George Iacobescu: Because the system is experiencing a powerful blow. The mankind was not prepared for such a crisis and, practically, the financial institutions and systems need a year and a half to discover this crisis and to acknowledge what was happening. It has come a few days ago that the world’s biggest bank, or shall I say ex-biggest bank, City Group, was on the edge of bankruptcy.

„There isn’t as much money in the world as the banks lend”

CB:Why did the crisis happen?

George Iacobescu: The subprime lending system is one of the causes. It started in the USA and Gordon Brown is at pains to make sure everyone knows that. It spread within the financial system, which blocked. It was a tremendous mistake to allow Lehman Brothers, ex-Canary Wharf tenants, to go bust. The Feds (the Americans) believed that this breakdown was containable, but it seized up the whole financial system, and it works like a mincing meat machine that took over the entire banking system. Banks are like mincing meat machines, where meat enters from one side and the product comes out on the other. They are left with enormous loan figures on their balance sheet.

CB:In simple terms

George Iacobescu: Practically, the banks do not profit from loans, but from fees. They loan, then sell the loan immediately to an insurance agency or a pensions’ fund, or to another company willing to buy the loan’s profits. The banks don’t keep the loans because there isn’t as much money in the world as the banks lend. Because the banks have allowed so numerous and so consistent loans to such a small profit rate, these loans became impossible to sell. The banks have miscalculated the risk, meaning they did not impose a sufficient profit rate. And they allowed massive loans, pressured by the competition and the low rates. The Feds, the Bank of England and the European Central Bank can be hold responsible to a large extent for keeping the rates low. Because of the unattractive benefit rates, when the crisis kicked in, the banks were stuck with all these loans.

For example, the US government had to take over 306 billion dollars in loans from City Group and to back them up. The loans should have been imposed a profit rate of 8% or 9%, but for fear that people or companies would not be able to pay their share, banks continued to demand only half of these values. These were all loans that City Group has given away at such low profit rates, on such a long term, that nobody was interested to buy them anymore, because they assumed that if the banks took the risk of lending at 3%, 4% or 5% to people or companies that could not afford to pay them back, it wasn’t their duty to buy off the banks’ problems.

The banks were left with these loans, with the expectation to keep lending, and with loans on their balance sheets, seizing up the entire system. When Lehman went bust, the banks lost the courage to lend to people or companies, could not sell their loans and would not lend each other for fear that the counterpart would crash overnight and so they could lose millions, if not billions.

CB:And that was when the governments intervened

George Iacobescu: Indeed, and they recapitalized the banks, as it happened both here and in the US. But the system is still blocked, because the banks took the money from the governments, without transforming it into loans. It’s very simple. For example, a bank has, say, a capital of one million bucks. For each million, they gave away 20 million in loans. Obviously, these loans are not guaranteed by the bank’s money, so they sell these 20 millions. But being unable to sell them this time, the bank remains stuck with them. Therefore, the bank owes, for each million of capital, 20 million in promised loans. The government decides to give the bank another three or four millions. Still, the loans’ figure is still too large for the bank’s capital. So the bank uses the money from the government, but stops the lending.

The real estate domino

CB:Why did the economic crisis make such a powerful wave in the real estate waters?

George Iacobescu: The greatest building transaction happened here, in Canary Wharf, when HSBC, the third most important world bank, sold its headquarters. We had constructed the building and sold it to HSBC about seven – eight years before. About a year ago, HSBC sold it to a Spanish company, namely to Metrovacesa, at a 3,8% yield. It was the worldwide highest price paid for a building ever. Metrovacesa made a 250 million pounds deposit, and it was to pay later the rest of the 800 millions. In the meantime, the real estate market collapsed and the company could not come up with their debt. They lost 250 millions.

The real estate market is a good reflection of what happened in the banking system. It followed it into the fall down due to the increase in interest rates; the banks stopped lending; because of the economic crisis, the companies do not require additional space; and the prices in the construction market have gone up during the last several years.

CB:Which is the explanation for the soaring construction-related fees?

George Iacobescu: It goes on the account of the growth of a few countries: India, China and Russia. The workforce, the raw materials and the equipment have become very expensive. And during the last four years, the costs have doubled, the demands are now less, the money have become expensive, which make up the perfect storm. Thus the fall in real estate markets: their values have dropped to 50% of what they were worth two years ago.

CB:How did the economic crisis affect Canary Wharf?

George Iacobescu: We were not that much affected since all the leasing contracts in Great Britain are long term, usually for 20 – 25 years. The medium renting period in Canary Wharf is 18 years. The companies are still paying their rents.

CB:What if you want to sell?

George Iacobescu: The buildings’ value will decrease up to 50% or 60%. But we don’t need to sell.

The rents will never drop

CB:Were you forced to modify the rents?

George Iacobescu: In Great Britain, the rents are settled for 5 years. Then we renegotiate, according to the market value. But the British system is particular: if the market value has raised, the rent will follow the same path; if the market value has decreased, the rent remains unchanged. It’s an upwards only system.

CB:How can this system be justified?

George Iacobescu: Traditionally, until 30 – 40 years ago, most of the office buildings were owned by the pensions insurance companies. Such a company had to make sure it will be able to pay the pensions to their clients. Therefore, they could never accept a drop in the rent fees. I don’t believe this system exists outside the UK. When I used to work in the States, the rents were closed on a five or ten-year long period. They will probably start to increase now. You need lengthy renting to be able to finance the rents, because no financial institution will lend you money knowing that you might run out of tenants in five years.

CB:Speaking of rents, the British press criticised the fact that you impose some of the lengthiest leasing contracts.

George Iacobescu: The leasing contracts are the same. On one hand, this is the merit of British tradition. In the transactions’ registrar there are contracts closed over 25, 30, 35 and even 60 years! You have to look at it from different perspectives. A company like City Group is renting 140,000 square meters in Canary Wharf. We construct the building, but all the fit-out is supported by City Group. The costs of the technology and the fit-out of a building are high-ceilinged, often topping its building price. And when an expansive tenant, such as City Group, or Swiss Group, or Barclay’s, decides to invest in a large building, they will want to make sure they will be there for the next 20 – 25 years. If you offered them a five or ten year contract, they would not consider it. And to leave and repeat the investment after 10 years is too costly.

Simultaneously, no English bank will lend money for a building rented only for five or ten years. The minimum is 15 to 20 years. And the bigger the building, the more expensive the rent has to be.

Best-before-100-years services

CB:What is special about Canary Wharf?

George Iacobescu: We’ve invested one and a half billion pounds in infrastructure: setting aside the investment made for the transport – namely the Jubilee line and the DLR – the parks and the streets, the money budgeted the under-street services, which we designed to be functional for the next 100 years. In 1987, when we started designing Canary Wharf, we thought of the services that our future tenants would need. We built a power supply only for Canary Wharf.

Then we built another one, far away, also connected to the business centre. Canary Wharf is the only project in London to offer double-secured services. Each building receives power both from East and West, from independent power stations. It’s the same for telecommunications. If it were for a street to explode on the left side, the building would not notice, as all the services continue to come from the right side.

It is a huge investment that the resident banks and companies need. It is vital for a company that trades oil not to loose one minute, or even ten seconds, otherwise this loss can be translated into tens of millions of pounds.

The biggest real estate transaction in Europe

CB:Were you forced to fire staff at Canary Wharf?

George Iacobescu: Not yet, but it is very likely. There are practically one thousand people who work for the company, and we have 1% space vacancy. We are currently constructing four buildings. One of them is the KPMG international headquarters, an accounting company. Another is for Fitch, one of the three biggest rating agencies. One building is for GP Morgan, and another one is for State Street, Boston Bank. We have plenty of work. Two weeks ago, we have announced probably the biggest transaction in Europe, for GP Morgan, which presently is the biggest bank in the US. The company bought 1.9 million square feet, meaning a little town. We are up to constructing the four biggest buildings in Europe.

CB:How much will the costs of such a building amount to?

George Iacobescu: Upon completion, it will be 1.5 billion pounds. It will take four years of building and it will require bank loans.

CB:Did the economic crisis interfere with the agenda you scheduled before it started?

George Iacobescu: Not for the moment. Canary Wharf presently counts one million and a half square meters. We still have one million square meters to develop, which we’ll achieve during the coming ten years.

Construction by committee doesn’t work

CB:East London will grow in anticipating 2012. Are you going to the Olympics?

George Iacobescu: I don’t think so. We were too busy to try to offer our services for the Olympics. The event is a fantastic opportunity for London, but generally this type of project is no stranger to problems.

CB:What do you mean?

George Iacobescu: The advantage that Canary Wharf has is the single management. It is a company run by one board and, practically, by one person. If you get involved in the Olympics, one must remember that the projects are run by 10 – 15 entities: government, local authorities, Olympic authorities. Everybody means well, but design or construction by committee doesn’t work: too many ideas, too many authorities. Everybody thinks that they are in charge. And the budget is never accurate. When it started, the Olympic budget was 2.5 billion and now it’s 9. Either you are in control, or you don’t do it. The problem is too many cooks.

CB:Should we understand that you don’t usually cook in partnerships?

George Iacobescu: Not much. Generally, when you take a project of that size, you need a master plan. And that should be a single entity. I’m not saying necessarily a single person, but a single entity that says that’s the way I want to do it and that’s the plan for the next X years. Here are too many partners on a project, it doesn’t work.

Post-crisis predictions

CB:As a developer, you’ve created numerous jobs. You did state one year ago that the number of jobs will rise until 2026, from 300,000 to 400,000. Is this prediction still viable bearing the present economic crisis?

George Iacobescu: There are two answers to this question. The prediction I made referred to the financial jobs in The City, not only to the traditional Square Mile, but also to West End and Canary Wharf. Canary Wharf counts 100,000 people and The City has 300,000, The West End gathers another 60-70,000. There will probably be a drop in this sector.

My prediction is that this financial crisis will last at least for another two years. Starting with 2011, the global economy will rise, because the world has not come to an end yet. It is a terrible crisis. But the world trembles, it doesn’t collapse. The situation will improve because of the population’s growth. The brick countries – Brazil, India, China and Russia – will continue their development.

London continues to be a centre that goes through a shake-up, but once the shake-up is over, in three or four years, all London’s fundamentals will remain. Great Britain’s main city has the best infrastructure of lawyers, accountants and financial experts in the world.

CB:Does the second response regard the construction workers?

George Iacobescu: Most of Romanians leaving the UK are from a building background. Unfortunately, they are the first victims: when the economy slows down, the first department to follow is the constructions market. The prices for buildings have fallen by 20% and will continue to do so for another 15%. Also, from a political point of view, the easiest reaction is against the immigrants. The East-Europeans are good workers. But the local government supports the reduction of the number of workers coming from East.

CB:If Canary Wharf was a state in state, what policy would it adopt towards immigrants?

George Iacobescu: There is not one single day that I visit a site and I don’t hear Romanian. As long as they work legally, we have zero restrictions. The negative aspect is that qualified labour is missing from Romania.

CB:How would you translate in jobs your future projects?

George Iacobescu: About 2,000-3,000 in constructions and 14,000-15,000 jobs in buildings.

Infrastructure: the most profitable and critical investment in Romania

CB:A British newspaper wrote that you spent the last 20 years convincing governments to invest in constructions and infrastructure. In Romania, not one single kilometre of motorway has been built during the last year. Who would have your influence in Romania?

George Iacobescu: No clue. I had this discussion with my friend, Mircea Geoana, and I have to admit that I’m stupefied. Romania is a country with very good perspectives. But despite the fact that they believe the country lives in isolation, the crisis is already present in Romania and it will make itself felt like it did in Hungary, Poland and so on.

But once the economy recovers, Romania stands attractive chances because it is a young economy, of massive consumption owed to the communism years. People wish and are all in a hurry to gain, to gather, to build. The mature generation started now to have a say in the economy. Hopes are up for Romania. But in the meantime, they don’t build.

Allow me to restate that Canary Wharf’s loss and success over time has been infrastructure: roads, services, transport, streets. The British Government was no perfect manager either. But it’s just a mind-blowing difference from that to not building 1 kilometre of highway. And I believe that, especially in these times, infrastructure is what Romania needs. It is absolutely critical: it creates not only jobs, factories, houses, but the money invested by the Government or by international organisations will return ten-folded. By building roads, one helps the economy. Taxes from everything created will reward. It is probably the most profitable investment.

CB:Do you have any perspective of a partnership in Romania?

George Iacobescu: Not at the moment. Never say never, but I have a full time job at present. There are loads to do and I am pleased if I can have one weekend day when I don’t have to work. I did take a look at two projects in Romania, but solely from the shoes of a friend, offering a few ideas, without doing any business in the country.

CB:Will you tell us which those projects are?

George Iacobescu: The only project I can tell you about is Smart City. It is interesting, designed by very smart people. It will stretch North of the ex-Casa Scanteii. It caught my attention because it is well-thought, I believe it will be successful and it is a good thing for Bucharest.

When real estate agents undermine their own cradle

CB:Romania is presently bursting out of the properties’ cocoon. Once the financial crisis will come to an end, how do you think the prices for properties will amend?

George Iacobescu: Difficult to say, but I believe it will be a serious revision. The quality properties will keep their prices. Speaking of old apartments, I believe there will still be demand for them on the market, because they offer a solution, by being cheaper than the new apartments. Most of the Romanians live in old flats. As for the new flats and land, I believe there will have to be a drop in their prices, because this speculation can’t continue forever. It is creating its own collapse.

The construction prices have started to build up in Romania as well. But the people cannot afford to pay such costs. There are two aspects that can record a fee drop: the land’s value and the profit amount. And it may as well happen that the profits recorded in this field on the Romanian market could become equal with the profits the real estate agents make in the UK or France, meaning more upright scores.

Great Britain – on economic steroids

CB:At the Conference for British Industries, officials stated that the British government had depended for too long on some sectors, like the real estate and the financial services, pointing out that this privilege should never be allowed to such a reduced figure of markets. They proposed other areas for future investments.

George Iacobescu: UK needs to invest in infrastructure as well. The most basic British product at present is the financial services. But they are on a thin red line and not able to pay the taxes. The financial workers were gaining so well, that they were the ones to support a significant part of the taxes.

An important part of the manufacturing system disappeared from Great Britain. To make it spring, there is a need for growing efficiency. Rover and Jaguar have become expensive and inefficient: the companies spend twice as many hours for building one of these cars than for building a BMW. Great Britain is able to produce items of exceptional quality, but the costs have to be reduced, and this is only possible through efficiency. The British government has to put the country on steroids.

CB:There is a proposal for green cities. Are they real and profitable?

George Iacobescu: They are profitable in the long run, and it is an aspect the humanity has to be preoccupied and concerned with. Maybe one of the effects of the financial crisis will be the reduction of the carbon footprint. Most of our buildings are environmentally conscious. We probably spend 5% of each construction costs on environmentally friendly products and for reducing the CO2 generation. In the case of the JP Morgan building, we will use six turbines and produce the electrical power ourselves by using natural gas. It represents a technical revolution because the world uses either petrol or gasoline.

About „Mr. Developer”

CB:Which were the most difficult moments in your career and what were the sacrifices you had to make to get where you are today?

George Iacobescu: In approximately 20 years, we’ve created in Canary Wharf what in The Square Mile required 500 years. This did not happen by accident. Twenty years of working 14 to 16 hours per day. One has two families: one at the office and one at home. Dan Franc is the chief constructor from Canary Wharf. Together with our team, we might not have been as drastic as master Manole [a Romanian folk character], but we were not far either.

CB: Which was the best advice you received?

George Iacobescu: The best advice came from my grandfather. He used to say that one should keep his dignity and character from birth to death.

CB:If tomorrow you were to go bankrupt, how would you start all over?

George Iacobescu: It is a way too theoretical question for me to answer. I don’t know. But going bankrupt does not mean one’s life is lost. Painful as that might be, the life’s core values remain untouched. There is a joke about a rich man. He walks along the strand and sees a beggar resting in the sun, a bottle of beer in his hand, asking for petty cash. The rich man tells the beggar: “Why won’t you do like me? I bought a boat and I worked for five years, saved and bought a ship. After other 5 years of toil, I bought another ship. Since then, I have worked for every day of my life. I have 50 ships now, loads of money and I can walk the beach without having to do anything. The beggar replies: “I can do just the same.” If a rich man goes bankrupt, he will live like the other two billion people.

CB:One last question, from an English friend: Creating an utopia for business, living and pleasure, all in the one complex, how does that differentiate from Ceausescu’s vision of creating a communist utopia with the same broad principals?

George Iacobescu:(laughs) Canary Wharf is not a utopia. Indeed, it was built on virgin territory and it is a combination of new aspects. Obviously, your friend is not American. If one goes in New York’s financial centre, or in Paris, you’ll see the same thing. In an utopia, everything would have been accomplished overnight. Here, we’ve built one building, and then another one and all constructions are the results of banks or companies’ requests, like, for example, British Petroleum. What occurred during the last 25 years is the problem of terrorism. This is something that we cannot fix during our lifetime. The moment we found the escort services’ card in the phone cabins we knew we were part of London and that here was no utopia.

By Crina Boroş