Even London's Tech Sector Set To Suffer From Election Fallout
The tech sector has been the most resilient part of the London office leasing market. But even it will not be able to withstand the uncertainty created by last week’s surprise General Election result.
“The recent election was yet another blow for the U.K. tech startup community and the business community as a whole,” KPMG Tech Growth Co-Head Patrick Imbach said.
KPMG writes the definitive report on venture capital funding for tech startups — the funding which is the lifeblood of this key sector for real estate.
Its Venture Pulse report shows that VC funding in the U.K. fell around 40% to $525M in the second half of last year following the Brexit vote compared to the same period in 2015, and remained around 25% down on the previous year in the first quarter of 2017. The election could further subdue things, Imbach said.
“One may think that Brexit will be softer, however no one can currently tell or foresee what that really means,” he said.
The government has repeatedly recognised the importance of the tech industry as a growth engine in the U.K. economy since the Brexit vote. But startups are concerned about the availability of funding as well as easy access to the European market and tech talent from abroad, Imbach said. Isolating Britain from the rest of the world could dampen the industry.
It is a view shared by Russ Shaw, founder of Tech London Advocates and Global Tech Advocates, which represent the interests of tech firms in London.
“Fast-growth tech companies desperately need a political and economic landscape that allows them to attract investment and talent,” he told Tech City News. “Our message to government remains the same. Give tech companies access to world-class talent, maintain close relationships with international partners and facilitate the conditions for growth.”
The importance to London of the tech sector has continued to grow as the picture for banks has grown murkier. While leasing to financial services firms has slowed due to the uncertainty surrounding the U.K’s access to the Single Market post-Brexit, the technology, media and telecoms sectors have remained relatively robust. Tech and creative firms took almost three times as much space as finance in London in Q1 '17, according to Knight Frank.
Rents in the city fringe areas that tech firms tend to call home have risen sharply in recent years, and have remained relatively stable in the past 12 months, staying flat in Shoreditch and Aldgate and dropping just 1.5% in Farringdon, according to Colliers International.
But these rents are likely to come under pressure as growth in the tech sector starts to chill. At the very least, landlords will have to start extending significant concessions to tenants.
“The uncertainty surrounding the current market and political situation will impact headline rents, which may come under modest downward pressure during 2017 and into 2018,” Colliers Director of Research and Forecasting Guy Grantham said.
It is not all doom and gloom, and the areas that tech firms favour still have a decent balance between supply and demand.
“Sub-trend low vacancy and incentives will help to protect headline rents from any significant price corrections,” Grantham said. “We expect the City Fringe market to continue to outperform other Central London submarkets throughout 2017-2018, both in terms of rental profile and demand for office space.”
Large tech firms also continue to be true pioneers willing to open up entire new markets for greater office development, such as Apple with its deal to lease 500K SF at the new development of Battersea Power Station. The move is prompting the developer, a division of the Malaysian government, to increase the amount of office space at the scheme.
But to expand the sector needs funding, and as KPMG’s report and the views of those in the sector show, while there is uncertainty about the U.K’s immigration policy, regulatory framework and economic growth, VC firms will keep their powder dry. And London real estate will suffer accordingly.
Imbach remains optimistic about the tech industry's fingerprint on U.K. property and economy. “I am confident that the government remains committed to create a favourable environment that allowed tech startups in the U.K. to thrive,” he said.
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