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
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
“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