EDITOR'S CHOICE Japanese bank hedges Brexit bet

MUFG’s decision to hedge its bets on Brexit with a dual European headquarters strategy comes in a week when the High Court in London ruled that the government cannot bring the UK out of the EU without parliamentary permission.

This has heightened the uncertainty surrounding Brexit regarding terms and timeframe, and may prompt more London-based financial institutions to consider relocating part or all of their operations to other European capitals. So far, however, there has been little evidence of this. Besides MUFG, other Japanese banks have stressed they will stay in London, although Mizuho Financial is also beefing up its Amsterdam office. And Russian state-owned VTB Bank said in October that the bank plans to scale down its London operations and 'build them up elsewhere'.

The major concern for financial groups is whether the UK will retain 'passporting rights' to allow them to export products into EU markets. This will depend largely on whether the UK government manages to negotiate an amicable withdrawal from the EU or insists on a 'hard' Brexit by abandoning the freedom of movement principle under which EU nationals can live and work in Britain and vice versa.

Rising take-up
So far dire warnings of a mass exodus have come to nothing. BNP Paribas Real Estate has reported that the City of London financial district saw the most leasing activity of any London submarket in the third quarter. Take-up in the City reached 109,000 m2, an increase of 31% on the previous quarter.

Twelve pre-lets accounted for 46,000 m2, the highest number of pre-lets recorded in a single quarter.  US bank Wells Fargo even went so far as to acquire the 21,100 m2 office building at 33 King Street, EC4 for €307 mln.

At the same time landlords, property advisers and municipalities in European cities such as Frankfurt, Paris and Amsterdam have been happily lending a friendly ear to banks and other businesses keen to discuss their options.

But one does not simply...leave
That said, relocating hundreds or thousands of expert staff across the Channel would be a very costly logistical challenge. Taking the property side alone, could Paris or Frankfurt really provide enough suitable office and residential space for a flood of financial refugees?

More fundamentally, nobody can say at this stage how soft or hard Brexit will be. Negotiations with the EU will run for two years after the British government formally begins the process by sending an Article 50 document to Brussels.

The process will remain uncertain until the end, and banks, like all businesses, hate uncertainty.

The High Court ruling on 3 November is sure to give prime minister Theresa May a big political headache, given that she has said her government will trigger the Article 50 process in March 2017. That announcement was in part an attempt to inject some certainty into a very uncertain situation.  

There are at least two ways in which to interpret the implications for real estate of the High Court ruling, according to Walter Boettcher, chief economist at Colliers International.

'The first is that the decision is further complicating and prolonging the period of uncertainty in the UK economy which is not good for any market, certainly not UK property. The second, and perhaps more complex view, is that the judgement raises the possibility of amendments to any Brexit bill, giving rise to an increased likelihood of a softer Brexit.'

Boettcher suggests that the London occupier markets may feel a boost as a result, given all the worries about passporting. 'Likewise, certain groups of domestic and foreign investors may also be reassured that Brexit could be softer.'

In any event, there are more uncertainties in the world than Brexit, hard or soft, Boettcher notes. 'We must not forget that international capital flows are likely to be impacted even more by the American election next week.'

Cormac Mac Ruairi
Senior Editor