_How will Brexit affect London occupier demand?

We have provided extensive commentary in the past around the tightening of the development pipeline, and how that might affect the choices available to tenants. As we progress through the Brexit negotiations, we have now focused our attention on the outlook for occupier demand. 

There is little doubt that the uncertainty surrounding Brexit will have a negative impact on occupier demand. Some estimates put potential job losses in the financial sector at 232,000 positions, although some suggest as ‘few’ as 9,000 positions.  

Assuming the higher number, there is the risk of the Central London market losing almost two years’ worth of take-up, with the release of up to 10% of the capital’s office stock to the market. In reality though, the number of positions lost to the continent looks set to be lower, particularly as a softer Brexit looks increasingly likely.

Looking forward, London cannot rely on financial sector growth to drive rents upwards, as it has in previous cycles. However, the composition of occupier demand in Central London has been changing, even before the referendum.

So, where might demand come from as we move through Brexit? Our analysis of lease events over the next five years points to opportunities through potential structural demand from 2019 onwards. This will be driven by a high volume of lease events in 2020 and 2021, particularly in the sub-50,000 sq ft size bracket. Also, we believe that the following sectors will be major contributors to occupier demand over the next five years: 

Financial

Ironically, the restructuring of the financial sector is likely to generate occupational requirements, even if they are through downsizing or off-shoring. Additionally, the Brexit uncertainty could boost hedge fund returns, while increasing M&A activity is likely to generate growth in the private equity sector.

Technology

Venture capital investment and M&A activity into London’s tech sector reached record levels in 2016. Despite many of the global tech brands having already committed to London, demand over the next five years will be driven by corporate activity as firms use synergies to find business advantage. Fintech and insurtech, which have attracted considerable capital investment over the last 12 months, will be particularly active. 

Professional

Once the nature of the Brexit agreement is clearer in 2019, many businesses will push the button on decisions that they had previously shelved. This potential increase in corporate activity will prove a boon to the management consultancies, accountants and lawyers, who will all need to be involved in any new agreements put in place. Activity should also have been picking up as these firms are retained by the government to help plan for life after the EU. 

Insurance

While this sector faces downside risks from technology, the ageing population will present significant opportunities in the life, annuities and retirement sectors. Insurers may well step into the management of retirement portfolios, and profits might also be maximised as the analysis of medical and behavioural data enables providers to adjust premiums according to risk.

Occupier demand is unlikely to be buoyant as the Brexit negotiations progress; however, we believe that there will be opportunities for landlords through structural demand, and that there are sectors that will grow both because of, and despite, Brexit.

Read more in the latest Central London Quarterly Report Q2 2017