Brexit: business as usual for London offices

1st September 2016

Some predicted that occupiers would desert the capital and office prices would fall off a cliff following the UK’s vote to leave the EU on 23 June, but so far there has been no evidence that the central London office market is about to tank.

After a short period of turmoil - when retail funds including Aberdeen Asset Management were forced into selling prime assets to pay redemption costs after a flurry of applications from investors - a sentiment of ‘business as usual’ has prevailed.

All eyes have been on the prime end of the market to see whether values had been pushed out and by how much. The deals to have landed so far suggest that well-let, prime assets are holding their value at no more than 5% down on pre-vote pricing.

Whether this is a natural correction in what was an overly hot market is up for debate, but what we do know is that development is on hold. Almost immediately after the result of the referendum was announced, developers with planned speculative schemes in the capital reconsidered their plans.

Putting on the brakes

​ AXA Investment Managers - Real Assets was one of the first to react, announcing that its plans to develop the 1.4m sq ft 22 Bishopsgate scheme were being reviewed.

The Crown Estate swiftly followed, putting the brakes on the 36,000 sq ft Duke’s Court.

The City of London market had been facing the prospects of a supply glut with a number of schemes due to come on stream in 2019, so most commentators are sanguine about the newfound caution, especially in light of uncertainty in the occupational market.

Vacancy levels in the City remain at record lows of 6.2% and are as low as 2.3% in other areas of the capital. With supply tight, rents are likely to hold up and have yet to drop in any of the London markets.

Most of the letting deals that had a Brexit clause in them have been renegotiated with extra incentives such as longer rent-free periods or break clauses.

Trophy buying spree

Of course, all this could change once it becomes clear what deal David Davis and the rest of the Brexit negotiators can get for the country. If financial passporting is not agreed, for example, a raft of financial services firms and banks could transfer thousands of jobs to eurozone cities.

But for now, overseas investors, buoyed further by advantageous exchange rates, continue their buying spree for trophy assets in the capital.

Post-referendum deals include 5 King William Street - home to Japanese investment bank Daiwa Capital Markets - which was bought by a private Middle Eastern investor for £90m; and 12 Arthur Street, Prudential’s headquarters, which was bought by CIT Group on behalf of an Oman fund.

Well-located on long leases

These deals demonstrate two things: first, that well-located buildings let to strong covenants on long leases are holding their value; and second, that overseas buyers are very much at the table for office investments, although finding a bargain may prove to be difficult.

“Most investors are not highly leveraged so there is little pressure [to sell],” says Tony McCurley, founder of GM Real Estate, the City specialist agency.

There is no panic and little distress out there - Tony McCurley, GM Real Estate

It has been a different story for development opportunities and assets in need of some capital expenditure. Values of these types of buildings are thought to have fallen by as much as 15% since the vote.

But one man’s loss is another’s gain. Long-term developers such as HB Reavis see the adjustment in pricing as the perfect opportunity to up their investment programmes.

Since entering the UK market four years ago, the Slovakian developer has acquired three sites. In July it sold its first development, 33 Central, to Wells Fargo for £300m.

It also has schemes in Farringdon and Southwark. Now development opportunities have slipped in price, HB Reavis UK managing director Tomas Jurdak says it will increase its exposure.

“Our long-term strategy has not been affected,” he says. “We are looking to invest more in central London and in the next two years we want to have an additional two to six projects. I think there will be a correction in the market, but this is a benefit to us.”

So although there are many Brexit-related questions that need answers before we can gauge how the London office market will be affected in the long term, for now at least it appears to be business as usual.

If you are in need of central London commercial property advice please call Gryphon Property Partners on 0203 440 9800 or click on the following - Gryphon