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Brexit fallout slowing London office market in 2017 but recovery is on horizon

The official start of the UK leaving the European Union has now begun but the latest analysis suggests that while the London office market may be subdued in the medium term there will be a recovery from 2020.

The Brexit fall out is likely to mean that the medium term performance of the London office market will be driven by property market fundamentals and as a result values are expected to fall in the City, West End, Mid Town and Central Fringe during 2017.

The five year outlook analysis from Fidelity International suggests, however, that notwithstanding that Brexit related sentiment could cause some volatility in pricing in the coming months, this as a function of 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 and the firm says Brexit could be seen as a useful way to explain other factors affecting the markets but it is not the cause of the slowdown.

Similarly, rental values are expected to fall in 2017 in the face of weaker occupier demand and increased supply, especially in the City office market. However, once again Fidelity believes that this is primarily driven by property fundamentals rather than structural long term shift in occupier demand driven by Brexit.

The analysis also suggests that the City is particularly vulnerable to short term over supply of new space being released on to the market over the next 18 months.

Over the next five years, Fidelity predicts that most of the central London office market will behave broadly in line with the UK a whole, while the West End and Mid Town should significantly outperform the all UK office average.

‘The spectre of Brexit has been a convenient and useful explanation for the slowdown in the London office investment market but we believe that this argument overstates the impact of the referendum result,’ said Matthew Richardson, head of real estate research at Fidelity International.

‘Investment activity in the London real estate market peaked back in 2015 and has been slowing since that time as the property cycle moved into late phase. While we wait to see the impact of Brexit, it is wise not to lose sight of the fact that it is these underlying fundamentals that have been the real drivers in the market over the past two years,’ he explained.

‘Brexit has undoubtedly accelerated this trend and introduced additional subsector volatility in City of London office market having a negative impact on values, and West End retail where there has been a positive impact on demand. However, it was not the cause of the slowdown,’ he pointed out.

‘While we expect the Brexit negotiations to have an impact on the market in 2017 and beyond, it would be too hasty to judge what those impacts might be, whether positive or negative. We believe that property market fundamentals will have a greater impact on overall performance as the UK moves into a new phase of the property cycle,’ he added.