It will come as no surprise to learn that the London office market is currently in limbo awaiting firm news on Brexit. There has been a softening of capital appreciation and rental yields but perhaps not to the extent many might have expected. We know that some of the U.K.’s largest office developers/landlords such as Land Securities, British Land and Great Portland Estates are sitting on the sidelines. So what can we expect in the short to medium term?
Minimal speculative investment
It goes without saying that speculative office developments have been few and far between since the Brexit referendum back in 2016. There have been some developments which were pre-let but the vast majority of property developers are reluctant to take on significant debt ahead of the Brexit finale. Instead, developers are tightening their belts, squeezing maximum income out of existing developments and awaiting the end result from Brexit talks.
Obviously, if the UK was to drop out of the European Union with a no deal Brexit this would have a seriously detrimental impact upon the London office market. However, so far the performance of office developments across the capital has been mixed, not the collapse many expected, although a reduced number of new projects have seen demand focused on existing office developments.
Large organisations relocating
Over the last few months we have seen confirmation that HMRC and Channel 4 are moving their head offices to northern powerhouse Leeds. There has also been additional interest from companies looking to reduce their relatively high London costs with Birmingham also attracting numerous organisations looking to relocate. There is no doubt that the long-awaited emergence of the northern powerhouses is well underway and gaining good traction.
If we look at the likes of Birmingham, there is a growing economy, expanding financial sector and very strong demand for private accommodation from the student community. There has also been massive inward investment by property developers and the local authorities with the city set to host the forthcoming Commonwealth Games.
Has Brexit prompted a rethink on London exposure?
While there is no doubt that many prominent institutions have considered their London cost base and compared this with the likes of Leeds and Birmingham, London is not dead. The capital may well be going through a transitional period as markets continue to hold out for news on Brexit but London has been through worse. It seems inevitable there will be some form of transitional period in relation to the financial markets. We have seen growing concerns of turmoil as many European companies look to renew their financial borrowings through the London markets.
While the ongoing threat to London financial markets is no doubt more dangerous than any threat in recent times, London always manages to adapt.
Summary
Experts predict a softening of London office values and rental yields in the short term. The fact that leading property developers took a conscious decision not to get involved in speculative office investment has to a certain extent offered support to the market. Inadvertently, those financial institutions leaving the London market may well require purpose developed properties across the water in the likes of the Republic of Ireland and other European cities. While markets have perhaps performed better than many had expected there is still astonishing uncertainty surrounding Brexit. It has been two years since the referendum and is just four months before the UK is scheduled to leave the European Union – what is actually happening?