In the days following the EU referendum, I found myself looking back to one of the seminal moments of 2008: images showing hundreds of Woolworths shops closing their doors for the final time.
At that point, no other event seemed to better illustrate the effects of the global financial crisis on the UK high street. With hindsight, we now see the crisis as a catalyst for underlying forces such as internet shopping and the rise of discounters which were always going to undermine an outdated business model.
The Brexit vote has been another pivotal moment causing concern. And this time it was commercial property, particularly in the City, that many thought would take the biggest hit, as was shown by the immediate gating of several open-ended funds.
While many of those funds have been reopened, the Brexit vote has certainly brought the bull run in commercial property to a premature end. A few months on, overall activity on both the investment and occupational fronts has slowed, with CBRE reporting that offices in the City of London shed 6.1 per cent of their capital value in the first full month after the referendum.
So how worried should we be about the fate of commercial property in the City of London? In my opinion, the situation is not as bleak as it first looks – and certainly not of the same magnitude as the financial crisis.
Despite repeated warnings that foreign banks would not commit to new space after a vote to Brexit and possibly desert the City altogether in favour of Frankfurt, the market has transacted a reasonable volume of deals. In fact, far from there being a “Woolies moment” in the City, there have been multiple high profile deals from overseas buyers and banks taking advantage of the drop in sterling, most notably Wells Fargo’s £300m purchase of a new headquarters building.
That being said, the picture has been mixed with regard to financial institutions. We have seen high profile cutbacks prior to the referendum from banks facing structural issues like Nomura and RBS. And with the government’s negotiating position hardening, it would be naive to suggest that Brexit won’t impact City real estate. Most institutions insist that it’s still early days, but UBS has said that up to 1,500 jobs could move. At the moment, brokers are expecting prices to fall between 10 and 15 per cent depending on income security; a notable drop, albeit hardly “distressed” pricing.
At these levels, we ought to see non-financial businesses start to consider moving their operations into the City. In today’s competitive and increasingly disruptive economy, large corporations are working hard to create productive and flexible working environments. But well-located national and international headquarters are also important for meeting with clients, partners and investors. So the City could be returning to its historic roots as a broader-based centre for commerce.
Brexit may not act as a catalyst for an immediate and dramatic transformation in the make-up of the City, but it does look to be a driver of incremental change. The City is already home to fintech companies like RateSetter, and we will surely see more encroachment from Silicon Roundabout as the tech industry matures. In a few years, perhaps we will even see some of the Square Mile’s walls adorned with graffiti.
I have also long been an advocate of the “ripple effect” out of London and think that the regions continue to look attractive for many tenants on a relative basis. Indeed, last month it was announced that Freshfields exchanged contracts on an 80,000 square foot office in Salford to house much of its back office operations. This sort of option is surely most pressing for institutions that are battling with low interest rates, regulatory issues and technological challenges.
What seems certain, however, is that the City’s location, assets and heritage will safeguard its status as a global centre for business, even if the nature of that commercial activity evolves and the tenant base becomes more eclectic. Real estate investors may well look back on the next couple of years as a historic buying opportunity in the City as well as the regions.