Demographics, loyal banks and foreign buyers mean the UK capital city’s property market is still well placed to succeed after Brexit
This is not to say the UK property market will remain unaffected. Outside of London, although rents and prices tend to be more stable, tenant demand is shallower. Buyers are likely to focus only on the very best locations and on buildings let to Brexit-resilient companies.
But London’s longer-term prospects remain compelling, for three reasons.
First, there are long-term market forces that will continue regardless of any oncoming Brexit risks. The market has seen an acceleration in the growth of trendy flexible office space to a point where they represented 20% of all letting activity last year. This positivity is likely to hold true at least in the first half of 2018.
In addition, an urbanising city such as London, which has compelling demographics, is able to maintain land values and residual values in all but the most severe of economic downturns. Even in today’s mature market, there are opportunities in redeveloping low cost, low rise sectors such as retail warehousing or logistics in Greater London. Other property types such as student housing or hotels are also attractive targets.
Second, we do not foresee a mass evacuation of London’s banking staff to the Continent. Banks’ contingency plans are already in place and so a slow drip-feed of some staff and services over several years is a more realistic outcome.
Even this scenario is not catastrophic for London. This global city is far less reliant on financial services than in the past, given the rapid rise of the tech sector and the strength of its broader professional and business services industries. Those who point to the many cranes that permeate the skyline should be aware that the current office construction pipeline is much lower than those that have contributed to London’s volatility in previous decades.
Third, property fund capital raising may be slowing but private and sovereign money, mostly from the Middle and Far East, is not in short supply. There is little reason to expect a sharp withdrawal of capital — particularly foreign money — that is targeting London in 2018. These buyers are cash-rich and keen to secure long-term diversification away from their domestic markets. This goes some way to explaining the considerable sums being paid for some trophy assets, such as the Walkie Talkie and the Cheesegrater.
Much could still cloud this outlook. As we get closer to Brexit in March 2019 we expect uncertainty to manifest itself in a stalling occupier market and a subsequent reduction in rents. And a Brexit deal that excludes passporting rights for financial institutions will surely stifle office letting activity.
The precise terms of the final arrangement will be vital. Buyers cannot be relied on to support the market through a more significant downturn sparked by a hard Brexit, particularly when relative pricing in other global gateway cities will appear more attractive.
However, a price correction of proportions experienced in the great financial crisis is highly unlikely even if the occupier market weakens considerably. Two main reasons underpin this, namely the comparatively low level of debt — and therefore forced sellers — today, and the wall of income-focused institutional capital that is poised to take advantage of even a modest discount to current prices.
The softer the Brexit, the more benign any correction will be. Similarly, a transition arrangement between the UK and the EU which postpones the Brexit date by two years will also significantly soften the near-term impact. Yet, either way, we remain positive about the outlook for London — in spite of some of the Brexit uncertainty that currently abounds.
Julian Agnew is the UK chief investment officer at LaSalle Investment Management
Source: Financial News