Medium-term performance of the London office market will be driven by property market fundamentals – rather than fall-out from Brexit, analysis from Fidelity International suggests.
Projecting a five-year outlook, the short-term performance for the central London office market is set to remain subdued, with values expected to fall across the City, West End, midtown and central fringe districts this year.
Fidelity said that, notwithstanding that Brexit-related sentiment could cause some volatility in pricing in the coming months, London will endure a “general economic slowdown, increased development supply and weaker occupier demand”.
Fidelity forecasts a noticeable recovery in capital value growth from 2020 across all London office submarkets.
Rental values are expected to fall this year in the face of weaker occupier demand and increased supply, it said.
This was especially the case in the City office market, driven primarily by property fundamentals rather than a structural long-term shift in occupier demand driven by Brexit.
The City was said to be particularly vulnerable to short-term over supply of new space being released on to the market over the next 18 months.
Sandra Dowling, UK real estate leader at PwC, said the triggering of Article 50 will prompt companies across all industries to think about how Brexit will impact the property they hold or occupy.
“The real estate industry should use Brexit, alongside wider global political and social changes, as a catalyst for much needed innovation in the UK property market.”
“We are living through some very uncertain times from a geopolitical perspective yet, against the backdrop of uncertainty, it is striking how much confidence there is in the real estate market, particularly among global investors.”
Dowling said companies should ensure they view the coming months of negotiations holistically and include Brexit plans in their wider business strategies.
JLL said that depreciation of the UK pound could help sustain the interest of Asia-Pacific investors.
Alistair Meadows, head of UK capital markets, said: “We continue to see the emergence of Chinese capital globally. Chinese investors now rank just behind US as the second largest source of global cross border capital and we expect them to have an increasing influence on the UK market.”
The advisory firm said UK commercial real estate is discounted by 16% on average to overseas capital.
Joe Valente, head of European real estate research and strategy at JP Morgan Asset Management, has previously argued that the EU is more likely to suffer investor “vengeance” in a post-Brexit world than the UK.
However, he said: “One of the major concerns expressed during the Brexit referendum was that overseas investors would shy away from the UK and sit on the side-lines until some of the dust began to clear.
“The reality is not that simple with investment activity accounted for by foreign investors holding up reasonably well. Indeed, as a proportion of all investment activity, overseas investors remain close to an all-time high.”
Cushman & Wakefield’s head of UK and Ireland, Colin Wilson, said: “In the property industry, we know that transactions usually become more complicated the more parties there are at the table.”
The UK, he said, is in effect dealing with 27 member states whose interests do not necessarily align on every issue, while France and Germany have elections which could significantly alter the negotiation process.
“At this stage nothing is certain,” Wilson said. “Caution is likely to remain a prevalent theme among investors and occupiers.”
Wilson, however, said there are “many positive indicators” of global and UK economic activity which are positively impacting UK real estate.
“In many respects we are seeing a bias towards ‘business as usual’, despite the Brexit backdrop, which is encouraging.”