The Impact Of Brexit On London Property Has Been Overplayed

Estimates of job losses are being revised down, investors are still keen to buy and supply and demand are in a decent balance: All told, Central London office property looks set to continue to perform well.

That is the conclusion of the latest Central London Office Update from Green Street Advisors, which argued that while rents and capital values had decreased slightly, the impact of Brexit on London property has been overplayed. Even if the UK does leave the European Union without a deal, the impact will be muted.

“Brexitaggedon is a red herring, and three years after the referendum, London endures,” Green Street said. “Prior irrational exuberance exacerbated market cycles, but Brexit has ensued a slow puncture.”

Green Street has revised its estimate of total job financial losses due to Brexit down from 25,000 over a seven-year period to 20,000. That is the equivalent of 2.5M SF of office take-up, it said. And this number is small, especially in the context of growth in the tech and creative sectors in London, which now account for about half of all office take-up. 

“A broad range of reasons explain London's popularity with growing industries: English law, cultural depth and diversity, strong infrastructure, business-friendly environment, supply rich in amenity and a deep pool of talent,” Green Street said.

“Technology and creative firms have taken the baton from the financials, becoming the more pronounced building occupiers. London's life sciences ecosystem and infrastructure is unrivalled in Europe and will likely spur increased demand from the sector.”

Green Street pointed to data from JLL which showed that there is about 8.9M SF of demand from occupiers for London offices, which is in line with the long-term average. At the same time, availability of new space is at its lowest since 2001.

It said this balance between supply and demand meant that City office rents would be flat until the end of 2020 and then start rising. The West End would see bigger rises than the City because of the constraints on supply.

One dark cloud is for the owners of second-hand office space, where Green Street said demand was at a low ebb, and supply at its highest since 2010.

A no-deal Brexit would not be positive for London offices, but would not be calamitous either, Green Street said. It said that it would cause mid-single-digit rental declines and a circa 25 basis point rise in yields for the City by the end of 2020.

In terms of the investment market, Green Street pointed to the slowdown in transactions so far in 2019, but said in the medium to long term, the factors that made London attractive for office occupiers would also continue to draw in investors.

“Assets with strong covenants and long unexpired leases have multiple bidders and pricing remains strong,” Green Street said. “Despite occupational trends for secondary assets, the investment market remains robust, primarily as there are few forced sellers.”