London property remains in demand even as bankers head for exit

Appetite for prime commercial property in London from Gulf investors remains strong despite concerns about Brexit and the potential relocation of thousands of banking jobs to other European cities.

Since the UK’s prime minister Theresa May announced on January 17 that the UK would leave Europe’s single market, two major banks have said that they will relocate large numbers of staff. HSBC said that it could relocate up to 1,000 jobs to Paris, while Swiss bank UBS has said that about 1,000 of its 5,000 UK jobs could be affected by Brexit. Meanwhile, the German newspaper Handelsblatt reported that Goldman Sachs is considering halving its 3,000-strong workforce and relocating jobs to Frankfurt and New York.

Mat Oakley, the head of commercial research at Savills, said that Britain had entered a period of uncertainty as a result of Brexit.

He said investors like UK commercial property because “it’s a quasi bond-type investment”, with long leases and generally upwards rental trends because demand for space has been high.

“We think the biggest risks to London property – and London offices in particular – are on the occupational side,” he added.

“They aren’t just about financial services. If there is lack of clarity on trade for a sustained period, that will just as easily affect a property brokerage company or a tech company.”

Despite this, he said that so far occupier demand has held up well, and that financial services plays a much smaller part in terms of tenant mix in London than it did 10 years ago.

“If you look at the City of London, which used to be a monoculture, only 9 per cent of the leasing activity since the global financial crisis has been to banks. Which is about the same as you’ve seen to tech companies.”

Ed Bradley, a senior director for investment properties in CBRE’s London capital markets team, said that Brexit had actually been a spur for more investment into the London commercial sector from the Middle East.

In 2016, he said that of the £12.8 billion (Dh55.3bn) invested into London’s commercial property market, £1.8bn came from Middle Eastern investors. Only £600 million was invested before the referendum at the end of June, and £1.2bn afterwards.

The amount invested by buyers from the UAE increased to £300m, compared to £100m in 2015.

“In the last two months, there have been two deals from new, private families that hadn’t invested in London before – one on Fetter Lane and one on King William Street,” said Mr Bradley. “Those two deals were worth £200m.”

Alistair Meadows, the head of capital markets at JLL in London, said that Middle East buyers invested about £2.5bn across the UK last year.

“We’ve seen strong levels of activity from Middle East investors who are hungry for income-generating commercial investments,” he said.

However, London’s ability to offer income growth in the immediate future looks limited. CBRE’s Mr Bradley said that “rents are under pressure” in London.

“Over a five-year period, the City and West End markets are broadly going to be flatlining,” he said.

Anthony Duggan, a partner in Knight Frank’s capital markets research team, said that rents had been flat during 2016, with some softening at the top of the market in places like Mayfair and St James’s.

“We expect 2017 to show more of the same. Rents should remain relatively robust, although selected locations might see some softening,” he said.

“Yields will be supported by the continued strong investor demand in combination with a limited amount of assets being brought forward for sale.”

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