How will Brexit impact the commercial building market?

The uncertainty surrounding Brexit and the ongoing negotiations has led to questions over the future of every sector of business. And commercial property is no different.

Following the vote in June 2016, investment in commercial property did fall somewhat. Hotels, office space and retail properties took the biggest hit. However, there is still plenty of demand from tenants and, while initial numbers suggested tentative behavior, it could be a market correction, not a crash.

Occupancy rates stable

Richard Carr BrexitWhen Article 50 was triggered on 29 March 2017, there was no immediate impact on occupancy rates. This is, in part, due to the length of commercial leases.

And, helped by the consistently weak pound, commercial property has recovered to the extent that it appears to be defying the previous expectation of a crash after Brexit. This is particularly the case for commercial property in London.

More than £2.3 billion was invested in commercial property in the city in July this year, according to a recent report from Savills. Savills also showed that total turnover for commercial property in London as at the end of July 2017, stood at £11.5 billion.

Increased overseas investment     

Cushman Wakeman have shown that there has been an increase of £1.38 billion spent on commercial property in the first six months of this year (up to £8.83 billion), when compared with the same first six months of 2016 (just £7.45 billion).

In particular, the consultancy remarked on the increase in Asia Pacific investment, which reached £4.07 billion in the first half of 2017. This equates to a massive 46% of the market in central London.

Interesting acquisition deals that were completed include the ‘Cheesegrater’ (Leadenhall Building) and One Kingdom Street, which have both gone to CC Land, based in Hong Kong.

And while the Chinese government announced restrictions on mainland investment last month (August), experts predict that Hong Kong investors will continue to actively seek new deals. Stephen Down, head of the central London investment team at Savills adds that, despite this continuation of interest, “their buying criteria had become increasingly selective.”

Increased European investment

The increase in interest isn’t limited to Asia Pacific investors, according to Cushman Wakeman. They have also cited European investment as on the up, particularly German investment.

Of the seven £200 million plus deals completed in the City in the first half of this year, four were European investment acquisitions. Three of these four were German, including 2 and 3 Bankside going to Deutsche Asset Management for £310 million.

Outside of London

Across the rest of the country, the market seems to be doing pretty well too. With no real sign of a lull in the traditionally slower months of summer, £4.1 billion worth of deals were sealed across the country in August alone.

Particularly of interest is the deal Warrington Borough Council has made for Birchwood Park from Oaktree Capital Management. The council secured the site for £200 million, showing that local authorities are still willing and able to do large commercial deals, in the face of political criticism.

Can momentum continue?

This is all very encouraging for a market that has been on alert for bad news since the Brexit vote. However, as the negotiations rumble on, we’re all still uncertain as to the ultimate effect of leaving the EU, and specifically whether the UK will retain its access to the single market.

Until more clarity is forthcoming on these issues, it’s difficult to predict whether the UK’s commercial property market will continue to keep its head.

Weak pound and low interest rates

The weak pound will continue to attract overseas investment and low interest rates are continuing to encourage demand for long lease property lets. However, according to commercial investment company CBRE, office rents in the West End of London have fallen for three quarters in a row. Rents have also dropped in the City.

Lower rents and Brexit uncertainty could mean trouble ahead for the investment market, especially if Hong Kong-based investments turn their attention instead to European property. It’s likely to be a case of caution in the face of uncertainty for many investors, as we wait to see what comes next.