Valuation of building land in Canary WharfWhen valuing building land in Canary Wharf, there are several factors to take into account. That is, it is crucial to decide on an appropriate rate at which to discount the expected cash flows for the property. Canary Wharf development properties carry considerable risks. For example, the downturn in London's office market, as well as significant market hits for Canary Wharf's large financial services tenants, present serious tenant leasing and lease negotiation risks. How long will it take to attract quality tenants to buildings, especially given that financial services tenants are currently under pressure? Furthermore, the need for further planning permission for buildings means construction on three of the sites cannot begin for a number of years. How can you accurately predict the future market? Will the London office market improve significantly or continue to decline? What will the interest rates be like? Songbird must consider the risk of valuing such sites several years into the future. In addition, Songbird must consider the heavy transportation risk. If the Crossrail project is not delivered in a timely manner with the necessary approvals, the development will not proceed as planned, causing cost overruns and major construction delays. Assuming Canary Wharf is able to obtain the necessary transport approvals, Canary Wharf's projected cash flows should be discounted to 12.5% ​​in order to mitigate the risks it faces. Given this discount rate, plus considering all taxes, debt obligations, rents and rent-free periods and all construction costs, an appropriate offer for building sites in Canary Wharf is ₤809,000 (current value net of 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 have been made in evaluating properties against this NPV. First, the project produces a high IRR of 73%, largely due to the sale of each building at the time of leasing. Cash flow projections assumed that all buildings were sold 18 months after construction was completed. Therefore, with the exception of the last building to be sold, Heron Quay, buildings are sold towards the end of their rent free periods and no rent is collected.