Brexit and the City: The real estate agent’s view

london2LONDON: A booming financial services industry has reshaped London’s skyline over the past 20 years, with gleaming towers dubbed the “Cheesegrater” and the “Walkie Talkie” testament to its impact.

But Britain’s impending European Union exit has raised fears of an exodus of thousands of financial sector jobs, with an immediate impact on its property market.

Reuters has created a Brexit tracker that monitors six indicators to help assess the economic fortunes of “the City” as Brexit talks progress.

In the first edition of the tracker, the indicators largely show signs of a slowdown rather than any transformative decline.

One of the indicators – commercial property prices – show prices have dropped more since the Brexit vote in 2016 than at any point since the global financial crisis between 2007 and 2009, according to property firm Savills.

Vacancy rates have edged up, but not by much.

However, Mat Oakley, head of European commercial research at Savills, says London’s broader real estate story is “surprisingly positive”, despite some selling soon after the Brexit vote in 2016.

Oakley points to leasing activity in the City of London being up 17% in the first three quarters of this year over the long term average.

Q: Since the vote, what changes have you seen?

A: I think there was an immediate overreaction. The quarter immediately after the vote, there was a bit of panic selling out of the UK retail property funds – those that private investors can invest into. A couple of people got some fabulous bargains as a result of that.

And then I think reality set in. And the longer that this process is drawn out … the easier it is for businesses in the property sector to make plans around it.

… We’re already talking to tenants that are committing to London for the early 2020s, and the most notable deal … is Deutsche Bank committing to their new headquarters in the City, which they won’t move into until 2023.

Q: Has the mood changed?

A: It’s volatile, I think. There is definitely a divide down the middle between the bulls and the bears. I would say domestic investors in particular are more pessimistic about the future than non-domestic investors. But non-domestic investors have ruled the roost in the London market – more than 80 percent of investment so far this year has been from non-domestic buyers.

I think they just view this as a murky little domestic political problem, and maybe we’re over-worrying, maybe the Brits are over-worrying about our problems close to home.

Q: Do you think anyone’s holding back at all, until a few years down the line?

A: No, what we’re actually hearing from businesses is that they’ve got to carry on making decisions, keeping their staff happy, making sure their workplaces are up to standard.

They’ve spent a lot of money on contingency plans with high-paid consultants, and then they’re going to get them out of the cupboard we suspect around or just after the date of real Brexit and say ‘Has our operating margin really changed in London – do we need to move?’

Q: Are you optimistic?

A: I‘m optimistic for the short term – I think it would be very odd to say ‘Everything’s going to be fine’. I think the down-side risks in terms of talk of 100-200,000 jobs lost in London as a result of (Brexit) are completely unjustifiable. We think there will be some modest job losses over a 5-10 year period.

Q: We’re standing in Canary Wharf now, which seems to have fared incredibly well. Why do you think that is?

A: Again I think it is just a reflection of, you know, businesses have to plan for the long (term) – the typical property lease in the commercial property market is 10 years and you can’t really make snap decisions.

And I think nobody wants to be perhaps the person that pushes the button on a big move to Frankfurt or elsewhere and then discovers they didn’t need to.

So I think there’s a lot of planning going on, and also the occupier base down here has diversified – it’s no longer just about finance…

But also actually the finance and banking sector, for the first time since the global financial crisis is out there looking for new office space – there’s 5 million square feet of requirements active in the market from banks and financial services companies.

And, you know, this is the first time since 2007 that we’ve seen that market picking up.

And the final reason is, kind of, Canary Wharf is cheap in rental terms. You know, typical office rents down here are 45-50 pounds per square foot. If you wanted the same quality of space in the City of London, it’s going to cost you 70-80.

And in times of uncertainty, cheap is not necessarily a bad thing.