London skyline

22

June

2016

London Office Sector Strong despite Market Uncertainty

With the EU Referendum Looming, Will London´s Office Sector Continue To Thrive

Commercial property rental values grew by 0.1% across the UK in May, slightly down on 0.2% per month for the last three months, according to the latest index.

Although some parts of London demonstrated flat or slightly negative performance, parts of the capital performed well, such as the City, where office rental values grew by 0.6% last month, compared to just 0.1% in both March and April.

‘Commercial rents and capital values continue to grow in a period of great uncertainty. The London office market has seen some volatility, but the fundamentals of the market are strong,’ said Miles Gibson, head of UK research at CBRE UK.

‘This time next month, we’ll have a clearer idea of the direction capital values and rents will go in the second half of the year, and a flavour of the pace at which they will get there,’ he added.

Meanwhile, 2015 saw a marked increase in banking and finance leasing activity in Central London according to another report from CBRE which says that a relentless drive to cut costs has forced financial services occupiers to focus on reducing real estate costs and adopting strategies to occupy their space more efficiently.

Using a combination of offshoring and nearshoring, there has been an ongoing move by big banks to relocate non-core functions outside of Central London, as seen in HSBC’s decision to move 1,000 head office staff from London to Birmingham, the report points out.

Indeed, financial services firms are also turning to outsourcing. Areas such as risk management, trade reporting, compliance and IT are increasingly being outsourced. Last year alone, Bank of America Merrill Lynch, Citigroup, Commerzbank, JPMorgan, Société Générale and Standard Chartered joined forces last year with Swift to develop and use a centralised due-diligence system.

However despite the inherent challenges, banks continue to cite client needs, recruitment, profile and presence as key reasons to keep office space in London. This is reflected in last year’s leasing figures with banking and finance occupiers leasing 3.2 million square feet, some 4.9% above the 10 year average.

Tower of London skyline
Tower of London skyline

There are a variety of compromises companies may make as part of rationalisation strategies to maintain their position in London, the report suggests, adding that consolidation is an ongoing trend. But it is not a one size fits all approach. Some occupiers are taking the decision to move to lower cost locations within Central London, while others will compromise on space to remain in a more expensive market.

For example, Deutsche Bank is moving certain operations from the City to Canary Wharf, at the same time as moving their Wealth Management business to a new office in Victoria. Société Générale also plans to consolidate its London offices in a new Canary Wharf HQ, although their Hambro business will remain in St James’s Square.

‘As part of the consolidation process, financial occupiers are seeking to change desk utilisation from its current rate to as high as 85%,’ said Katherine Bain, director at CBRE London.

‘Achieving this could make a significant difference to the bottom line, but to do so would require various intensification initiatives, including different people using the same desk at different points in the day. As well as cost saving this also promotes better collaboration which is as important to occupiers,’ she added.

The report highlights the numerous challenges the sector faces in maintaining its status with regulation and economic uncertainty topping the list. With Brexit looming, a key concern of potential occupiers lies in the loss of passporting, which currently makes London an attractive location for businesses to establish European or global headquarters.

‘In the UK, the upcoming EU referendum is a key source of economic uncertainty and potential regulatory tightening. A vote to stay means EU regulations will also stay, including the AIFMD and EU Bonus Caps which have been unpopular in the City. On the other hand, those favouring a stay vote warn that an exit would erode London’s position as a gateway to continental Europe,’ Bain explained.

‘London’s ability to position itself as a leader in some of the growth areas of the future, including FinTech and specialist banking are a key element of the city’s resilience. However, the rapid growth of FinTech is increasingly threatening incumbent banks,’ she said.

‘In addition, the success of these companies has led to an increase in office demand and cost escalation in fringe City office markets, including the Old Street/ Shoreditch office market and Canary Wharf which is recognised as the largest FinTech cluster in Europe,’ she added.

A total of 3.18 million square feet of office space was let to banking and finance firms in 2015.

Despite various sources of uncertainty over the year, the increase has been driven by the gradual recovery of the sector.

According to James Nicholson, senior director at CBRE London, offshoring, outsourcing and consolidation continue to be widely used by banks. ‘However as well as cost, the culture of the firm and the types of services offered are integral to any decisions. The future challenges the City must face will have numerous and wide ranging implications for the London property market,’ he pointed out.