Andy jalil –
Britain’s vote in June 2015 to exit the EU, had caused much concern in the London office market that investors and tenants would leave the city. But the market is proving to be surprisingly resilient.
In 2017, investors purchased 77.1bn euros worth of commercial property in the UK, up from 63.9bn euros in 2016, according to Real Capital Analytics.
Values of prime office buildings have mostly rebounded from the fall they took after the Brexit vote.
The central London office vacancy rate in the first quarter of 2018 was 5.97 per cent compared with the 10-year average of 7.04 per cent and still below the post-2008 crash high of nearly 9 per cent, according to BNP Paribas real Estate.
“The London office market is holding up much better than most market participants might have thought in the aftermath of the Brexit vote,” said Andrew Angeli, head of UK research at CBRE Global Investors.
Even more reassuring, big financial services firms have renewed their commitment to the city.
In the largest lease of 2017, Deutsche Bank took 500,000 square feet at 21 Moorfields in the ‘City’ (financial district).This year SMBC, a subsidiary of Sumitomo Mitsui Banking, the second-largest bank in Japan by assets, took 161,000 square feet at 100 Liverpool Street.
“Inactions speak louder than words,” wrote Real Estate Consultants Green Street in a March report on London office market entitled Brushing off Brexit.
Certainly, some concerns remain.
The office leasing and sales market got off to a slow start this year. Prices of second-tier buildings that need capital infusions have not recovered from their post-Brexit correction, a sign that investors remain wary about taking on leasing risk. Moreover, UK officials are still negotiating with the EU over what kind of trade deal the country will have with the EU after leaving the bloc.
It remains unclear whether or not financial institutions will lose their so-called passporting rights, which allows them to sell financial services products without needing authorisation in each EU country.
If that happens, financial institutions will be forced to move some jobs to continental Europe, leaving a gap in the demand for central London office space.
The UK managed to agree on a transition period with the EU until the end of 2020, which gives it more time to negotiate a trade deal.
Also, a key issue, the Irish border, remains unresolved.
Chairman of City of London Corporation’s, Policy and Resources Committee, Catherine McGuinness said: “This is going to play out over time.
If we reach a bad deal with the EU or no deal at all, inevitably more business will be carried out in the EU that we currently have in London.”
Still, analysts and investors have a cheerier outlook than they did two years ago. Green Street, for example, has revised its forecast for job relocations by the financial services sector to between 20,000 and 25,000 from 40,000.
There probably will not be over 5,000 relocations by March 2019, Green Street has said.
Their analyst Hemant Kotak said his firm has had a number of “informal discussions with market participants” that a number of financial institutions are looking for space in London.
“When you look at the opening or expanding of satellite operations in the EU, it appears to be driven by banks hedging their bets, rather than indication of wholesale moves so far,” Kotak said.
He added: “The fragmented nature of these moves also gives us reason to be more optimistic that no one market can really be a challenger to London’s dominance in the near or even medium-term.”
At the same time, the demand for office space in London remains strong from media and technology firms that are attracted to the city’s business-friendly climate and young creative workforce.
The demand from these businesses, which are taking a bigger bite of the London office leasing market, has fuelled the rise of co-working spaces.
WeWork, the leader in the serviced office market, was behind six of the 18 key central London letting deals in the past 12 months, according to real estate adviser Savills.
But there is also possible downside to the strong demand for co-working firms for space, market participants say.
It could be indication that tenants are hedging their bets until the Brexit impact becomes clearer.