City of London Commercial Property Market Strength Defies Brexit Fears

The City of London’s commercial property market appears to have missed the memo that tenants are set to flee in the face of Brexit, leaving an expensive ghost town of high-rise glass and steel in their wake. Investment properties at the heart of the UK capital’s financial and business district shouldn’t, on the basis of news coming out of the Brexit machine that companies are set to relocate en-masse to new European HQs, be a hugely attractive prospect under present conditions. Especially if it is already known that a new tenant will have to found in a few years. However, recent evidence suggests that the market is actually strong.

Last month an auction took place for BT’s current HQ, a 1980s building located in the heart of the city at 81 Newgate Street. The asking price was £200 million. There were reportedly more than 10 bidders, many of whom were not UK-based, and several offers well above the reserve asking price were tabled. A big, reliable tenant such as BT might be expected to make the building a more attractive investment property despite the shadow of Brexit looming over the City. However, perhaps the most surprising element of the level of competition apparent in the auction was that the company will not actually still be the tenant in three years, having already announced that it will move to a new building when its current lease ends.

Despite the fact that in a few years, when Brexit’s negative influence on the UK economy could reasonably be expected to be at or near its lowest point, a new tenant or tenants will have to be found and the building refurbished, the building is still clearly considered an attractive commercial property. And it’s not an isolated case. Last year was the strongest in five for commercial property deals involving prime City of London real estate. And over the first three quarters of 2018, CBRE data suggests that the £12 billion worth of transaction completed matched the same period a year earlier.

And it’s not just the acquisition of commercial investment properties in prime City of London locations that is a market defying Brexit fears. That could be put down to a long term strategy hoping to take advantage of slightly lower prices offered by Brexit uncertainty. There is also still plenty of demand for these properties from tenants. Knight Frank data suggests the 10.8 million sq. ft. let over the first 9 months of 2018, to tenants from the Chinese government to Facebook and Deutsche Bank, is also a 5-year high. Vacancy rates are currently comfortably below the 20-year average.

One factor that is helping to keep demand from both commercial property investors and tenants robust within the context of the market is that supply is relatively tight. Since even before the financial crisis a decade ago developers have been cautious when it comes to new construction. Rather than investing in the huge expense of building new commercial properties in London’s prime business districts and accepting the risk around how quickly new property can be tenanted, developers have sat on land and started to build only when a lease contract with an anchor tenant is already in place.

This, and the success of new flexible workspace models such as that of co-working giant WeWork which have been taking on building vacated by big corporate tenants moving to a new building, has kept the prime commercial property market in London buoyant. Savills’ figure of an average rent of £80 per sq. ft. in prime London commercial properties published at the end of the current year’s third quarter, is the highest on record.