Warning signals from the commercial market

Tony Ward

May 22, 2017

Tony Ward is chief executive of Clayton Euro Risk

Two weeks ago, I voiced my concerns about the treatment of financial institutions in our Brexit negotiations. I mentioned how we needed to protect the City from the worst of Brexit while stemming the exodus of bank personnel from London.

It cannot come as a surprise that cities such as Dublin, Frankfurt and Luxembourg have launched charm offensives to woo our financial institutions. There can be little doubt that jobs losses from the capital will become a reality as bosses plan for a scenario in which there is no longer a UK-EU passporting deal.

The latest to come clean is Investec, which is eyeing Dublin for its European base following Brexit – although, in all fairness, chief executive Stephen Koseff said the company will wait to implement its contingency plans until the rules governing the UK’s departure become clearer.

“This is the difficult thing about Brexit, the rules are very unclear,” he said. Well, yes. And as we already know, other big financial firms are gearing up for banking licence applications while scouting for office space in European cities. Lloyds Banking Group, for example, plans to submit an application to turn its Berlin branch into a subsidiary by the end of September.

So plans are well under way for a migration of City jobs.

But what of the other consequences of Brexit?

Well, apart from the obvious effect on UK economic output – PwC suggest banks, insurance companies and asset managers produce approximately 12% of this – there are likely to be knock-on effects for the City’s ability to fill its new towers of gleaming glass.

Last week, Britain’s second-largest property company, British Land said that an uncertain commercial market has forced it to reduce the amount of space it is prepared to develop before it secures tenants.

The company, which has a portfolio of office and retail properties worth £13.9bn, said that it expected market nerves to persist as the terms of Brexit are negotiated. It said that this had led to it cutting the amount of space that it would speculatively develop from 5% down to 4%.

Chris Grigg, British Land’s chief executive, said: “Uncertainty will continue. I don’t think that is going to end any time soon. It is going to be a function of doing business in the UK.” He added that this ‘changes the parameters’ for its development plans. “We would be less likely to do speculative development than you might have expected from us two or three years ago,” he concluded.

Nicholas Hyett, analyst at Hargreaves Lansdown, said that the sale of large assets and the revision of speculative developments suggested that British Land was ‘clearly uncomfortable about the future’. The sales, he felt, suggested that the company ‘feels that there could be stormy weather ahead’.

Furthermore, while the latest influential Crane Survey from Deloitte suggested that the number of new office buildings completed in London hit a 13-year high in the last six months, the firm warned that London could face a slowdown in its pipeline of new office buildings as firms reassess their options for staying in the capital.

Work on new developments has slowed for the first time in three years, with the total office space currently under construction across the capital standing at 13.9m sq ft, a 6% decrease from the previous survey. Of the buildings currently under construction, 43% have already been let, but Deloitte warned that vacancy rates could rise as the amount of space increases. In the last six months, the financial services sector has leased the most space, accounting for 46% of take-up, followed by the technology sector at 21%.

Some warning signs, then. Ignore them at our peril. I reiterate my appeal for clear guidance for the City post-election.

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