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OPINION

Tower trouble

Tower trouble
January 19, 2012
Tower trouble

For those not in the know, the theory goes that the construction of the world’s tallest buildings has tended to coincide with financial crises. The implication is that they can make canny contrarian sell signals.

This theory has the great virtue of transparency and simplicity – you don’t need any fancy analytical tools to spot the world’s tallest building going up. The reasoning behind it is also very intuitive: the cost of breaking records is a sure indicator of financial excess, which tends to be followed by a correction.

But perhaps the main reason the skyscraper index is so attractive is its track record. The record holders for most of the past hundred years have all been conceived in infamous periods of financial speculation.

The Empire State Building was completed in 1931, shortly after the Wall Street crash, and held the record until the completion of the first tower of the World Trade Centre in 1972, at the very end of the long post-war boom.

The Sears Tower in Chicago was also built in the early 1970s and held the world record until the Petronas Towers were built in Kuala Lumpur in 1998, just after the Asian financial crisis. The next tower to take the crown was Taipei 101 in tech-centric Taiwan in 2004, which was seeded in the dotcom bubble. Finally, the 830m-high Burj Khalifa in Dubai was opened in early 2010, a matter of months after the emirate’s investment vehicle Dubai World shocked the world by calling a moratorium on its debts.

So does the indicator actually work? It can’t have escaped readers that the above list raises more questions than it answers.

For a start, when precisely should you sell? Although most record-breaking towers can be traced back to a period of speculative fever, the completion tends to lag the crash – which makes it a useless sell signal. The construction date isn’t much better, as big skyscrapers towers usually take about 5 years to build – in which case you’ll probably be selling very early.

Then there’s the problem that the indicator looks unlikely to throw up another sell signal for decades. The Burj Khalifa was 63 per cent taller than Taipei 101 – a jump far higher than anything in history. None of the skyscrapers currently under construction in China come anywhere close to topping it - though there is a mad plan underway in Saudi Arabia to outdo its neighbour.

So perhaps we should water down our criteria and look at skyscraper construction in general. This doesn’t have the blissful transparency of looking at record-busters alone, but it follows the same logic – major skyscrapers are an end-of-cycle phenomenon. This is the approach Barclays takes, identifying two areas of the world in which a thicket of skyscrapers are under construction – China and India.

China in particular stands out. Of 124 buildings over 240m currently under construction, over half are in the Middle Kingdom. But the Chinese property market has already entered a downturn, so Barclays’ warning comes a little late. The question is now not whether Chinese property will fall, but whether it will crash.

What about local sky-scraping records - are they any more useful an indicator? At Investors Chronicle, we work in the shadow of the Shard at London Bridge, which will become the tallest building in the European Union on completion. And across the river in the City, the insurance district just east of Bishopsgate is bristling with cranes on three major construction sites.

The Shard is the most advanced of these projects as well as the most ambitious, and should be finished this year. It would never have got off the drawing board but for a consortium of Qatari investors that bought 80 per cent of the project in January 2008. Amazingly, construction started in March 2009, at the very nadir of the banking crisis. They appear to have been guided by considerations that are not purely economic.

The three City projects are different. They were also seeded in the cheap-debt era, but only recently restarted in anticipation of a “pinch-point” in City office supply in 2014-15. The narrative – which is now viewed much more sceptically than it was six months ago – is that a number of big 25-year leases signed in the late 1980s property boom will expire, suddenly flooding the market with tenant interest and pushing rents up. Not everyone agrees - Hammerson last week pulled the plug on its project at Principal Place, just north of Liverpool Street station, when its prospective tenants CMS Cameron McKenna pulled out, citing economic uncertainty.

Of the three towers already under construction, the tallest will be the so-called Pinnacle, or Bishopsgate Tower. It is being privately funded by Arab Investments, a vehicle controlled by investors from Saudi Arabia and Kuwait, so there’s no public disclosure of the construction schedule or strategy. Construction restarted last summer, just in time for City sentiment to sour. It has reportedly halted again.

The other two are at 122 Leadenhall Street (the “Cheese Grater”) and 20 Fenchurch St (the “Walkie Talkie”), which are being developed by British Land and Land Securities respectively, both with JV partners. These are pretty likely to be finished. British Land has already secured a tenant (US insurer Aon) for about a third of the Cheese Grater. Land Securities hasn’t got a major tenant – the tower is designed for a lot of smaller firms rather than a few financial giants. But management would lose all credibility if it back-tracked, having already started the construction process and pinned all its growth hopes on development.

These towers will be remembered as a legacy of the long Blair-era property boom. They are tiny by comparison with the Burj Khalifa – which is more than two and a half times higher than the 310m-high Shard will be. But the Shard will break the local records. Significantly, the previous UK record holder – One Canada Square in Canary Wharf – was started in 1988 and completed in 1991, after the Thatcher-era property boom had turned to bust, with disastrous repercussions for its developer.

The only conclusion I can draw from these examples of tower-building past and present is that it’s a late-cycle business that tends to begin in the good times and end in the bad. This means record-busting towers aren’t a useful sell signal – if you’d waited for the Shard even to begin construction, you’d have sold at the very bottom of the market. But these follies of capitalism do offer a permanent and very visible reminder of the way market cycles can so easily catch investors out – of the so-called "lessons of history". That can only serve the cause of good investment.