BREXIT — Passports Please
Written by Nils Kok & Teun Van Den Dries
Early 2016, about 3 months before the Brexit vote, GeoPhy conducted research looking into how international companies could reposition themselves post-Brexit, focusing on US and Asian banks and financial services companies who with offices in the capital of England. We believed that predicting the likelihood of Brexit would be a futile exercise, but that it would be possible to assess its potential impact on the commercial real estate market. We designed a dynamic stress test that combined our deep, data-driven knowledge of the London office market with two primary value drivers:
Yield (a simple measure of a building’s NOI divided by its value) — As a global financial hub, both office users and investors have always looked at the London market. This ensures high rent levels combined with a low risk profile, leading to highly priced assets.
Footprint (measured in square feet) — The hub function for the London market is, for many non-European institutions, a very easy and convenient primary location for access to the wider European market. This is facilitated by a legal framework known as a Banking Passport, an element which is quite likely to change or disappear following the full Brexit process. The direct impact here is on financial institutions, which would have an additional ripple effect on consultants, auditors, law firms and other support services.
Impact on the City
Impact on Canary Wharf
We documented that up to 18 million square feet of commercial property could come back onto the rental market, which would mean price corrections of more than 35 percent in some areas of the City of London. We are now about 9 months after the vote and just after the formal trigger of Article 50 to leave, and divorce proceedings are well on their way, with announcements of companies moving part of their workforce to the mainland now the rule rather than the exception. With data on actual shifting footprints, we can now better assess what areas and what building owners will be impacted most. Most of the major banks and other financial institutions have communicated their plans, which we have gathered and mapped. These new data insights allow us to provide a fresh overview of the impact of Brexit on the London office market, including some of the feedback that we received on last year’s findings.
Using the same drivers as before, we are able to create an overview of London that includes the detailed footprint of all current locations for all financial institutions. We also include EU institutions which would have to leave due to EU treaty constraints, to assess the potential direct impact on physical footprint in London. The footprint shift setting can range from 0% (nothing changes/status quo) to 100% (everyone leaves). We added another dynamic setting for yield to model yield spread between London and other major markets across the EU, as risk profiles and investment allocations shift.
Market absorption rates
One thing we have heard quite often in the UK, if not elsewhere, is that the direct impact will be many years down the line, as leases expire not all at once, but only gradually. What we observe now is a direction towards subletting, which will ensure that not all vacated space is empty immediately, but rather that the process will disrupt the normal absorption of the market for the 5–10 years to come, these years are needed to reflect the various break clauses in existing contracts. Looking at net absorption (new contracts signed per year) for the entire city, the amount of space that would come on the market for subletting over the next decade is equivalent to 5 years of take-up.
(originally posted on March 31, 2017 on geophy.com)