What Last Week’s Brexit Roller Coaster Means For London Real Estate

The prospect of a no-deal Brexit was averted for now last week after Theresa May struck a temporary accord over the fate of the Irish border and the EU divorce bill. Now talks are likely to move on to transitional periods and trade agreements in the new year.

But what does the state of play in the Brexit negotiations mean for London real estate?

Everyone seemed pretty stressed last week. What was the big worry for London with last week’s talks?

The day before May struck her eleventh-hour deal, Confederation of British Industry President Paul Drechsler flagged the results of a CBI poll in November which said that if talks did not move on by the end of the year then 60% of businesses that were considering moving jobs out of the U.K. would trigger their plans. A deal was needed to stop jobs leaving London in particular in droves.

So that will not happen now, right?

Well, maybe. It looks more certain that Britain will have a transition deal for at least two years after the March 2019 Brexit deadline, which gives firms a bit more time before they decide whether to move jobs. But they might still have to shift those jobs. Analysts at JP Morgan still put the chance of a no-deal Brexit at 25% due to pressure on May from within her own party.

The CBI points out that 10% of firms have already kick-started their plans to move.

“Concrete assurances will build confidence and help firms across the U.K. and Europe to pause their contingency planning,” Drechsler said.

What are the big occupiers saying?

Given that there is still no certainty on what Britain’s trade deal with the EU would look like, responses from the firms that might undertake big moves has been mixed.

“Removing uncertainty around transition arrangements would serve as a tremendous relief to businesses on both sides of the Continent,” JP Morgan Chief Markets Strategist Karen Ward said. “It may also prevent financial companies in the U.K. enacting contingency plans at this stage.”

But Royal Bank of Scotland Chief Executive Ross McEwan told Bloomberg that in spite of last week’s provisional agreement it would not alter its strategy of moving out of the U.K.

“Businesses like ours have to move forward as though we are not going to get any form of deal that would good for banking,” he said.

RBS is planning to move around 150 staff to a new office in Amsterdam, it said earlier this year. Other banks, including Goldman Sachs and Morgan Stanley, will start moving staff in the first quarter, Bloomberg reports.

What are the numbers saying in terms of firms’ contingency plans?

As 2017 has progressed, more financial services firms have declared their intention to move people, but the total number of jobs they are planning to relocate has dropped.

According to EY’s Brexit Tracker for financial services, the number of firms publicly confirming they will move people out of the the U.K. has risen from 12 to 26 in 2017, but the number of jobs they plan to move has fallen from 12,500 to 10,500.

“Contingency plans have developed significantly over the last year, putting firms in a stronger position to estimate how many U.K. jobs they need to move,” EY’s U.K. Financial Services leader Omar Ali said. “Firms are working hard to find viable solutions that will allow them to continue to serve their customers and satisfy regulators with the minimum disruption.”

What kind of impact would 10,500 jobs leaving have on real estate leasing?

Using the rough rule of thumb that one worker uses about 100 SF, that is 1M SF or more coming back on to the market.

Who is winning the battle to capture new jobs?

Dublin and Frankfurt. Of the firms that have publicly said they are considering moving, 14 have said Dublin is their preferred choice for relocation, 12 picked Frankfurt and eight Luxembourg. The workers of just six firms are facing the prospect of eating at better-quality restaurants with their company looking at Paris to relocate. JP Morgan has already started informing the staff whose jobs will be relocated and it has bought a large new office in Dublin.

What are London office leasing numbers looking like for 2017 in the face of all this uncertainty?

The numbers for the whole of Central London for 2017 are not in yet, but JLL estimates that in the City take up will be 6.25M SF by the end of the year, 5% up on last year. However, 1.2M SF has been taken by flexible workspace companies, meaning that, depending on your point of view, some of it still remains to be leased by the occupants themselves.

“We could see some nervousness return from businesses if the Brexit trade negotiations are protracted although the substantial pipeline of active demand combined with the historically low levels of supply means that we have relatively sound fundamentals going into 2018,” JLL head of City agency Dan Burn said.

What areas other than offices will be affected by last week’s deal?

The CBI pointed out that there has still been no clarity over whether EU citizens already in London will be allowed to stay. The outcome of that debate has a huge impact on sectors that rely heavily on EU labour in London like construction, hotels and restaurants.