Prime Minister Theresa May will officially notify the European Union next Wednesday (29 March) that the UK is leaving by triggering Article 50. The property industry has welcomed the certainty the announcement brings while Knight Frank has released a bullish report on the likely impact of a "Brexit" on the City of London and the financial services sector.
Melanie Leech, chief executive, British Property Federation, said: “Triggering Article 50 means that negotiations can get underway as quickly as possible, which will give businesses much needed certainty and impetus to continued investment in the UK.
“We need certainty to maintain confidence in the UK as a great place to invest, which is particularly important for the real estate sector because we attract global investment and those investors commit for the long-term. Our sector supports most, if not all, UK economic activity and so decisions need to be taken now if we are to have the physical infrastructure to support a thriving post-Brexit UK economy.
“As the Prime Minister embarks on the unprecedented task of negotiating an exit from the EU, it’s vital that she and the government both understand the real estate industry’s contribution to the UK’s success, and what it will take to ensure that it can continue to deliver growth and productivity. Our manifesto identifies these to be: work with us to maintain investor confidence in the UK and drive growth; provide fair, competitive and stable tax, regulatory and planning systems; invest in infrastructure and free up public sector land; help us to address the ensure access to global talent and skilled workers; and support more housing supply across all tenures.
“Our industry is a willing partner for government through this period as it delivers its industrial strategy; and will be critical to the UK’s long-term economic health through its provision of the places where we will all live, work and spend our leisure time. Last week, the UK government was at MIPIM – the global real estate conference – in association with the BPF to showcase the UK real estate sector and ensure it continues to be a leading choice for investors worldwide. This was the UK government’s first ever pavilion at MIPIM, which clearly signalled support for the sector and its role in building a positive future for the UK economy. Our vision is for a long-term strategic partnership with UK national and local governments to deliver economic growth, essential infrastructure and great places.”
In a report published today, Knight Frank said that fears that London is set to lose swathes of bank jobs look increasingly "overblown" and it argues that any impact will be balanced by the fact that finance has been shrinking in importance for the capital’s economy and property market for some time.
In its Proponomics report KF argues: “Since the vote to leave the EU, uncertainty has surrounded the outlook for London’s financial sector, with the risk that banks and insurers may relocate functions to continue serving their European clients. However, recent weeks have seen a number of statements by policymakers in the EU that suggest the impact of Brexit on London’s financial hub may not be as great as initially feared. An air of compromise appears to be emerging.
“Yet, we also need to be mindful of longterm changes in London, where finance has been reducing in importance for nearly a decade now. Back office jobs have been leaving the capital, but this evolution away from finance is ultimately leaving the London economy stronger.”
KF highlighted comments from Germany’s finance minister, Wolfgang Schäuble, in a newspaper interview in early February in which he said: “London offers a quality of financial services that are not to be found on the continent. That would change a bit after a separation, but we have to find reasonable rules here with Britain.”
Similarly, Bundesbank executive board member, Dr Andreas Dombret, called for pragmatism in the future financial relationship between the UK and the EU, in a recent interview with the BBC.
KF said: “This supports our view that some finance jobs will leave London, but probably thousands not tens of thousands of posts. We also need to consider the nature of the jobs London will probably lose. The moment stockbroking firms installed telephones in their offices, decision makers no longer needed to be located in the city whose markets they traded.
“The people who need to be on the ground in the European single market are the back office staff – or increasingly, the computers that are playing an ever greater role in this process. Job relocations due to Brexit will accelerate a long established trend of London migrating towards being a front office location. Those in the London office will be senior executives and rainmakers, plus the teams that support them. Yes, London loses the back office finance jobs, but headcount growth in technology and creative industries will fill the void.”
KF said that focussing on fewer financial jobs is to miss the big picture: that total office demand in London is evolving. KF added: “Central London will in our opinion lose a few thousand jobs to other European cities over the next three to five years. The losses will be made up from 2019 onwards, as the City institutions find new ways to make money outside the European Union.
“However, the finance jobs that remain in London will be the most productive and profitable ones, which will have implications for office demand. The financial sector, far from disappearing from the radar screen, will in the future drive demand for high quality c-suites in London.”
Many at last week’s MIPIM conference in Cannes were predicting that the triggering of Article 50 will not have a dramatic impact on the UK’s real estate markets in the near term as the industry has begun to adjust to the idea of life outside of the EU.
Mark Garnier, Parliamentary Under Secretary of State at the Department for International Trade, told CoStar News: “Up until Christmas the Brexit vote was causing uncertainty for the commercial market but that seems to have settled down so that we can construct a really positive business case for investing in the UK. We are embarking on an exciting journey. We are going to be much more international and it is now about getting out to the rest of the world. What we want to see from the real estate sector and would like to help with is how it can meet this demand from overseas investors into building and infrastructure.”
Gavin Barwell said that the under-supply in UK housing represents a significant opportunity for overseas institutions and funds seeking to invest in Britain. He said: “There’s huge potential to bring in investment from outside the UK. There is real demand for housing all over the country and for institutions there are investment opportunities. There’s a clear commitment from government, backed up by increased spending. We have a clear ambition to increase the supply.”
Jules Pipe, Deputy Mayor of London predicted that the UK capital will continue to be the dominant European hub for global investors. Pipe said that if real estate investors seek alternative destinations to London, they are likely to look at New York, Singapore or Hong Kong rather than European capitals.
The UK property industry was also keen to discuss the realities of a post Brexit UK.
Colliers International was reporting that while it would be interesting to track the immediate response of the markets to the triggering of Article 50 as well as the impact on household expenditure there remained greater risks to the performance of UK property markets.
At its annual MIPIM market update on Europe as the conference gets underway the theme was that the greatest risk to the stability in the UK commercial property market is not a ‘Brexit’, but the policies that Donald Tusk, President of the European Council and Donald Trump, President of the United States, may introduce in the coming year.
In “In the Balance: United Kingdom 2017” Colliers identified EU fragmentation and US economic policy as the biggest risks to the future of the UK commercial property sector which, despite entering a normal cyclical slowdown, is otherwise being buoyed by powerful macro factors such as the sheer weight of global capital seeking yield, global demographics adding more to savings and pension pots, low interest rates and low bond yields.
Richard Divall, Head of Cross Border Capital Markets, EMEA at Colliers International, said: “The remarkable feature of Brexit has been its limited impact on UK occupier markets. Net absorption data for London suggests that occupier markets have only marginally weakened, and much of this can be linked to the banking and finance sectors who were already in the process of downsizing expensive Central London exposures by ‘north shoring’ back office functions.”
Despite the substantial forces supporting global real estate and UK real estate in particular, there are numerous risks that shape the views of even long term property investors added Walter Boettcher, Chief Economist at Colliers International:
“In the UK, media attention has been centred primarily on ‘Brexit’, but this risk to investors is a small part of a much larger risk of wider EU fragmentation and new Eurozone instabilities. Growing nationalism in key countries such as France, Italy, and the Netherlands, among others, poses large risks to Donald Tusk’s mission to push forward EU political unity. Many EU members are wishing to re-claim national sovereignty in many areas, including re-establishing national currencies. In fact, the UK’s notification to leave is looking increasingly as confirmation of EU political mismanagement.”