Demand for London office space defies Brexit fears

London

DEMAND for office space in London is holding up even as political uncertainty persists in a nation gripped by its decision to leave the European Union.

Businesses have continued to lease space despite the prospect of a general election that pits the Brexit-backing Conservative party against a Labour opposition that's committed to a radical policy programme that involves higher taxes, nationalisation and handing shares to workers.

The disbelief that the surprisingly good times can continue was evident as London's largest office landlords reported half-year earnings last week.

London developer Great Portland Estates kept its guidance for rents broadly flat for the year despite reporting results for the first half that showed it was leasing space at substantially higher rates than expected.

"If the current multitude of uncertainties get resolved in a fashion that's friendly to UK business, then we expect to outperform that guidance," its chief executive officer Toby Courtauld said in an interview.

"Because of the extent of the uncertainties, we felt it was probably imprudent to revise our forecasts."

Shares in London's largest public landlords continue to trade at wide discounts to the value of their assets as fears persist that the UK's eventual exit could yet trigger a slump.

The Bank of England's worst-case scenario envisaged commercial real estate price declines of as much as 48 per cent in the event of a messy divorce.

Technology companies like Apple and Facebook, that are less impacted by Brexit uncertainty have kept demand for office leasing high since the 2016 Brexit vote, committing to large new London offices.

At the same time, the political nervousness gripping developers and their lenders has limited new supply.

New construction starts on London office developments fell by almost half in the six months through September, according to a report published Monday by Deloitte.

Work began on about 1.8 million square feet (sq ft) of new space in the period, down from about 3.5 million sq ft in the previous six months, the lowest level in five years.

The total volume of space under construction is down 10 per cent from the previous survey.

Still, with about 3 million sq ft of space currently being demolished to make way for new projects, there's potential for a modest increase in activity in the near future, the Deloitte report said.

"London is notably quiet with only one new-build office and three refurbishments commencing construction," said Mike Cracknell, a director at Deloitte Real Estate.

In the West End district where vacancy rates are just 2.9 per cent, only 150,000 square feet of new space that will be ready before the end of next year is still available to lease, according to a Great Portland Estates presentation.

The unexpected resilience of the market has rewarded developers that carried on with projects in the aftermath of the referendum and is increasing competition for buildings that can be redeveloped.

"We were probably more optimistic than others and the market has continued to be stronger than our base case," said British Land chief financial officer Simon Carter.

"We have not seen occupiers slow down decisions because of the Brexit process or the election," he added. BLOOMBERG