While Brexit has continued to hit the UK property market, several underlying trends are starting to paint a different picture, particularly in the central London office market where its expanding skyline is proving more resilient than expected.
Even so, 2019 has seen a dramatic drop in new deals with small and medium-sized businesses in the capital city particularly hard hit. In terms of volumes, Savills recently said that the first half of the year could end up being the slowest since 2011.
Indeed, one of the biggest impacts of Brexit has been the reticence to commit to property development – Colliers International recently estimated that overall availability of office space in London is at least 15 per cent below the 10-year average. However, while fewer completions have been coming off the ground, the record-low level of new supply is somewhat surprisingly being met with stable occupier demand as well as sustained investor demand - from long-term investors both home and abroad. This also has resulted in stable pricing rather than the ‘Brexit discounts’ that many had imagined.
Some recent landmark deals do stand out. For example, Citigroup’s acquisition of its regional headquarters at 25 Canada Square in Canary Wharf earlier this year for £1.2bn marked the fourth consecutive quarter that a London office asset has been sold to a foreign buyer for at least $500m. This string of large-scale acquisitions by banks or multinational companies suggests interested global investors are taking a long-term view and, despite the current political uncertainty, believe London still has a robust occupier base and unrivalled talent pool. This is especially true for technology companies which want to have a presence in Europe but also because of EU regulation veer towards London.
In addition, we are seeing new foreign investors, not only more from the US, but ironically some from Europe, that are keen to access the unique central London office market and take advantage of foreign exchange opportunities against a depreciating sterling. Slovakian developer JTRE is an interesting example. It recently announced a 10-year plan to grow its presence in London because of the city’s “attractive internal rate of return and vast base of occupiers” stating that it is looking to invest £350m over the next three years. This was soon after acquiring 185 Park Street, SE1, which is the site for its £400m mixed-use development with London-based developer Sons & Co.
In 2018, 79 per cent of all London real estate acquisitions were made by international investors, according to a report by JLL, the global commercial real estate services firm. This includes Apple’s new London campus at the Battersea Power Station, which has received a lot of fanfare for its sizable investment and spectacular building plans overlooking the Thames. All the same, there has been a steady rise in the proportion of domestic investor deals as well this year, some also focused on the regeneration of old landmark sites.
London calling 
Fundamental market drivers in London’s office space have remained relatively strong in spite of Brexit deadlock and this mainly boils down to the capital city’s diverse base of occupiers and highly professional workforce. The other attraction of London from a real estate point of view is that it is polycentric. There is not just one central business district or West End, but instead lots of different sub-markets with their own individual stories and personalities. The same goes for the occupiers in them. The City, for example, has been traditionally known for hosting financial services, but its tenants have become more varied since the Global Financial Crisis in 2008. Given digitalisation and high-quality standards of workspace fit-outs, an increasing number of tech firms and other creative, media-like businesses have been moving into the array of conceptual buildings across the Square Mile. WeWork, the co-working/flex space operator which is now the largest occupier in central London, has attracted more technology, media & telecommunications companies, especially within the still-thriving FinTech (financial technology) scene in London.
Stunning plans for the Canada Water Masterplan to regenerate 53 acres in Southwark, south-east London serve as a good reminder of how London is also home to many world-renowned consultants and architects designing state-of-the-art mixed-use and people-orientated buildings. With tighter supply levels and ever-changing employment trends, large multinational corporations also spend a lot of time and money designing their spaces to make employees excited to come to work and feel like they are part of a ‘smart’ community. A prosperous property development is now more about how the space delivers for the end-users and their experience, so factors such as environmental, social & governance, well-being and higher tech are paramount. Facebook’s ultra-modern HQ development in Rathbone Square is a prime example of a big state-of-the-art project in central London. The 2.3 acre site was the Royal Mail’s former West End Delivery Office, but the new building (costing Facebook £17.8m a year to rent on a 15-year lease) has a rooftop park and claims to have the largest open floor plan in the world.
Another large development worth mentioning is St James’s Market, the massive mixed-use revitalisation project in old, unused commercial spaces near Piccadilly Circus. Designed by London-based Make Architects, well-known for placemaking and urban design, the development is a joint venture between the UK Crown Estate and Oxford Properties Group. When recently announcing the second phase of the project, Chris Carter-Keall, managing director and head of UK real estate at Oxford Properties said in a press release that the focus is “to connect people to exceptional places” and added: “Our partnership with The Crown Estate has delivered a transformative development with the completion and letting of phase one of St James’s Market. This joint venture is now focused on working together to deliver a truly connected environment that will welcome forward-looking companies that wish to attract and retain the best staff investing in placemaking, sustainability and excellent customer service.”
Along with this is the increasing focus on eco-friendliness and a prime example is Bloomberg’s new European HQ in the City, which is considered by many to be the world’s most sustainable office building. Set between the Bank of England and St. Paul’s Cathedral, it received the highest-ever Building Research Establishment Environmental Assessment Method score in 2018 after seven long years of planning and construction. The New York-based news and financial tech giant partnered with architect firm Foster+ Partners for the new building, which has a collection system on the roof for recycling water as well as vacuum-drainage toilets (similar to those found on aeroplanes) to help reduce water usage.
Despite the negative impacts of Brexit, industry market surveys and forecasts continue to reflect a more positive long-term view of London office space, pointing out the sound legal structure and business standards too. CBRE’s Global Investor Survey for 2018 revealed that the UK remains one of the most attractive markets in the world for making investment purchases – it ranked number two behind the US. (The UK also still has a much higher share of cross-border deals than both the US and Canada.) JLL’s latest Global Transparency Index survey states that London has managed to maintain its reputation as the world’s most transparent real estate market as well.
Joanna Turner is head of property research at Canada Life Investments. The views expressed above are her own and should not be taken as investment advice.