London Markets - Summer 2020

This edition of Gerald Eve’s London Markets report takes a different form than usual. In the H1 2020 report, we take a view on what we expect to be the upcoming themes that will dictate the shape the London office market as it responds to Covid-19. Also, we conducted a survey in June with data provided from our London based office clients to capture their views on the market, and these findings feature throughout the report.

The Central London overview takes an aggregated view on our customary tracked submarkets, giving a complete view of the occupier market. Occupier activity started off well in Q1, with 3.2 million sq ft of lettings completed, however, in Q2 take-up reached a decade low of 1.4 million sq ft, while availability rose across almost all our submarkets. Supply has been disrupted as developments have been postponed, and completion dates pushed back, following the closure of construction sites at the end of March. Moreover, tenant-controlled space reported a marked increase as tenants consider business strategies to consolidate floor space and sub-let the remaining space to free up restricted cash flows.

Investment activity was dampened by the application of RICS’ material uncertainty clause on valuations, alongside investor’s – particularly overseas – inability to physically view assets following the ban on non-essential and international travel. Buyers and sellers’ pricing expectations have differed throughout the pandemic further limiting acquisitions in the office sector.

In response to evolving business strategies, we have outlined building characteristics that we anticipate will be important for current and prospective tenants to consider in a post-Covid environment. We expect older unrefurbished stock will be less desirable for occupation, while prime, and newer refurbished buildings, will become more in demand as their adaptability will be paramount in securing tenants. We anticipate that Covid-19 might further the divergence in rental profiles between prime and secondary stock.

The ONS reported 57.2% of London’s employees were working from home as of April 2020, the highest of all the UK regions. A potential structural shift in employee behaviour has cast some doubt on the future and viability of the office. However, we believe the office still has value to add in terms of relationship building and as a collaborative environment.

As some employees anticipate returning to the office soon, we explore how reduced travel capacity and revised travel arrangements, focused on individual safety, may contribute to “commuter-friendly” locations, and how these may affect demand, supply and pricing of offices in London in the near and medium-term.

With Covid-19 taking most, if not all, the political and socioeconomic bandwidth this year, Brexit negotiations have flown somewhat under the radar. However, the risk of a no deal Brexit has risen with the UK nearing the end of the transition period set for 11pm on the 31st of December 2020. Negotiations on trade of goods and services have slowed considerably, compounding uncertainty for UK companies.

One of the UK’s largest sectors, financial services, is at high risk of losing passporting and equivalency rights after the June deadline for a cross review of UK and EU financial regimes was missed. Thus, we explore what a no deal Brexit may mean for London, focusing on London’s importance as a global financial centre, the consequent impact on the financial service sector and the implications for the occupier market from 2021 onwards.