Brexit: ‘no deal’ still unlikely as UK occupational markets and liquidity trend downwards

The UK on balance is still expected to avoid a ‘no deal’ Brexit, with either Theresa May’s deal or the Common Market 2.0 deal, tipped as most probable by Instinctif Partners.

“We do not see the numbers in the House of Commons to get a Second Referendum, but maybe as a dark horse there could be a referendum on the deal once the deal is done, a confirmatory referendum,” explains Warwick Smith, managing partner at Instinctif Partners.

Back to sedate world of property. Why have things held up as well as they have in commercial real estate markets?

Elizabeth Troni, head of EMEA research and insight at Cushman & Wakefield, explains:

“Labour market resilience has been remarkable. Unemployment rate in the UK is currently below 4% for the first time since 1975. To be honest this chart (see below) is genuinely hard to explain. In my view, when you look into the components of GDP, the impact on GDP and the decline in the trend growth rate has largely been driven by a decline in business investment. When businesses does that, it hampers productivity but not spending on plants and equipment, they become less efficient. And that means we likely have to hire more workers… we do that because it is cheaper and more flexible. Businesses who are concerned about the outlook can hold onto employees as a cheaper, more flexible way of maintaining operations. And of course, bums on seats is a key driver of occupational demand in commercial real estate.”

There continues to be much chatter in respect of Brexit challenger cities. Anecdotally, the impact remains very little in terms of Brexit being the deciding factor in company relocating away from the UK, argues Cushman’s Elizabeth Troni. Since the EU referendum in June 2016, office take-up in London has been broadly flat – at -1.2%, compared to Frankfurt which has increased by 65.1% over the same period, according to Cushman & Wakefield data. Frankfurt is followed by Amsterdam, up 28.7%, and Dublin and Paris, up 19.4% and 9.3%, respectively.

Troni explains:

“It is quite hard to clear-through and understand if this leasing performance are in fact broader recovery stories in those office markets post the financial crisis or whether they are attributed to some notional Brexit activity. From our brokers on the ground, we have not heard of specific Brexit conversations happening around those office moves.

“On the statistics, Frankfurt clearly stands out the most in terms of the alleged Brexit star performer. If you go to Frankfurt, they will tell you ‘London’s financial sector is flooding to Frankfurt’ and if you ask people in London, they will tell you ‘we are al still here and nobody has left for Frankfurt’. The reality is that at the time of the EU referendum in the UK, the Frankfurt office market was going through a going through a general recovery from a pretty low base and so while Brexit may have helped in some notional searches and inquiries into office space, the market is more generally getting back on track rather than any specific Brexit impact in our view.”

“This slow-motion train wreck is starting to build up some speedbumps, which is starting to have an impact on confidence in the UK, we can see this in sentiment indicators. Businesses in the UK service sector are feeling particularly downbeat in terms of confidence in terms of confidence falling to its second lowest point since the GFC.”

Net absorption weakened considerably in the final quarter of last year, as the chart below shows. This is a harbinger of weakened demand overall, which could impact values in future. Investment volumes were slow in December, and low volumes have been recorded in January and February 2019.

Troni concludes:

“We have potential signs of weakening in the occupational market, with net absorption figures trending lower and we have some weakening in investment markets, with liquidity also trending lower. Behind the scenes there are also the retail property funds. We have evidence coming from those retail funds that they have seen hundreds of millions of pounds in outflows in the months leading to year end and into the new year.”

james.wallace@realassetmedia.com