
The acquisition of 20 Fenchurch St., also known as the "Walkie Talkie," for £1.28 billion in 2017 broke the record for a single asset property deal in the U.K.
In the run-up to the 2016 referendum on the U.K.'s membership of the European Union, some bleak forecasts were made for the London office market should the country vote to leave. The most extreme estimated that over 200,000 jobs in the financial services sector alone could be relocated to other EU cities.
While the U.K. is yet to leave the EU, the performance of the London office market since the vote has dispelled many of the real estate sector's worst fears. After an initial dip, investment volumes have remained strong, while businesses continue to lease large volumes of space despite the uncertainty hanging over the country's future.
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London's well-established position as a global center for finance, technology and culture has given investors and occupiers confidence that, whatever the outcome of the Brexit negotiations, the city will continue to thrive, according to Daryl Perry, head of research and client engagement at real estate advisers Avison Young.
"London continues to be a significant magnet for talent. It can't really be replicated elsewhere," Perry said in an interview. "That's not to say that the combination of a no-deal Brexit and a slowdown in the global economy would not have a major effect on the market, but London has enough strength to continue to perform, and continue to attract workers and people who want to live here."
Multinational companies with a significant footprint in the city tend to see Brexit as a local issue rather than something that will determine their long-term future in the city, he added.
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Since the referendum, acquisitions at record prices have shown investors’ faith in London’s long-term prospects. Hong Kong-based investors have been among the many international players exploiting the depreciation of sterling since the Brexit vote. C C Land Holdings Ltd. paid £1.15 billion for the The Leadenhall Building, also known as "The Cheesegrater," in March, 2017. Later that year, Lee Kum Ki paid £1.28 billion for 20 Fenchurch Street, also known as the "Walkie Talkie."
Occupiers have made similar long-term commitments to London despite Brexit uncertainty. Household names such as Facebook, Google and Apple have all announced major plans for new office space in the city since 2016. Take-up of office space in the first half of 2019 was almost 5 million square feet, just short of the 10-year average, and close to H1 volumes in each year since the Brexit vote, according to a report by real estate services firm JLL.
Equity investors in London office real estate investment trusts appear similarly assured about the city's prospects. Despite lower earnings per share and valuation performances since the 2016 referendum, the share prices of three of the largest pure-play London office REITs — Derwent London PLC, Great Portland Estates PLC and Workspace Group PLC — have either made strong recoveries or held up after a sharp plunge in the aftermath of the vote.

Still, London's office market should be prepared for some disruption over the long-term as a result of Brexit, particularly in the financial services sector, Jing Teow, economist and consultant at PWC said. U.K.-based banks and financial institutions have spent the past three years relocating parts of their operations to other EU cities to retain access to the bloc's single market. The scale of any relocation will be closely monitored by EU institutions to ensure that companies are not merely establishing small-scale operations known as "letter-box entities."
"The regulators are almost always pretty insistent on knowing how many people a company expects on the ground and how it expects that to change over time," said Teow. "Certainly, there is a lot of emphasis from [the European Securities and Market Authority], the European Banking Authority, the [European Central Bank] on this; they've all been pretty clear that letter-box entities will not fly in terms of getting your authorizations [to trade within the EU]."
There are other concerns about the apparent resilience of the London office market since the Brexit vote, and how that might change if the U.K. leaves the EU without a deal. Tony Key, professor of real estate economics at City, University of London's Cass Business School, said a substantial amount of the capital invested in the London office market since the 2016 vote has been "dumb money" playing the favorable exchange rate offered by sterling's depreciation.
If the U.K. leaves the EU without a deal, the uncertainty that has tempered the market's growth over the past three years will only escalate and likely scare off even investors with a high risk tolerance, he said.
"A no-deal Brexit is just the beginning of the uncertainty, because then the U.K. has a decade or so of sorting out what its trading relationships are going to be," said Key. "If I were sitting in any global boardroom deciding whether to pump £500 million or £1 billion into London, given I don't know what the terms of trade are going to be for the next 10 years, I wouldn't do it. I'm amazed that the market has held up as well as it has."
Whatever the Brexit outcome, London's saving grace might be its relative lack of speculative office development since the 2008 global financial crisis, which has limited supply and kept vacancy levels low, Perry said. But some impact from a no-deal scenario should be expected, he added.
"The limited supply will insulate the rental market, so we don't expect any significant rental erosion. However, there will be a drop off in a scenario where there is a lot of uncertainty, and we would expect to see a drop off in demand [for long-term space] and an increase in the demand for flexible office space."



