When even the ultra-conservative Bank of England owns up to a “Michael Fish moment” you know that predicting the impact of the Brexit is turning out to be as easy as selecting the winning numbers for the national lottery. And so it is with forecasting what’s in store for the UK commercial property market.
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Contrasting views and lack of hard evidence means it is difficult to call whether and by how much new development looks set to be curtailed, leaving emptier order books for contractors and consultants specialising in commercial offices and mixed-use schemes.
Richard Threlfall, UK head of infrastructure, building and construction at KPMG, is unequivocal in his take on it all: “2017 will be a year of feast and famine for the construction industry. Infrastructure contractors will be getting fatter as HS2 and a further raft of road schemes get underway; commercial contractors will be going on a diet as corporate demand plays the Brexit Blues.”
Towards the end of last year three of the biggest players – British Land, Land Securities and Great Portland Estates – all reported hefty losses and a gloomy prognosis on the back of Brexit. As one developer from the brakes-on camp put it: “Market conditions are unlikely to be supportive in the next year – costs are going up. To develop or not to develop is all around the debate on what immigration will be permissible post-Brexit.”
But against this there has also been more positive news: Apple and Google are going ahead with huge new office headquarters in London, and on the speculative development side Malaysian developer AlloyMtd Group has appointed Mace to start its £500m mixed-use suite of buildings for One Crown Place in the City of London. And there were gasps of surprise when the developers of £1bn skyscraper 22 Bishopsgate finally gave the scheme the green light after months of “will it go or won’t it”.
So certainly it’s by no means all doom and gloom.
Mat Oakley, head of Savills European Commercial Research, says: “Most people thought that 22 Bishopsgate would be cancelled in the wake of the Brexit vote, but it wasn’t and though a number of schemes were stalled initially after the decision in June, the number of actual projects delayed is very small.”
Research by Oakley shows that there is 7.6m sq ft of speculative office development underway in the City of London and the West End and during 2017-18 there will be the best part of 5.5m sq ft. “Currently there’s 4m sq ft of developments planned to start in 2019 –that’s in the City alone,” he adds.
“The balance is on a knife edge. If we have a soft Brexit, 15-20% of the projects in the pipeline for 2018-19 will be delayed. If it’s hard Brexit then this is more likely to be 40-50% as banks and corporations move jobs out of London. But at the moment there is little evidence to back up either scenario. And we’re unlikely to get much clarity until at least the middle of the year.
“Anecdotally, a lot of developers are looking back and seeing the success of Land Securities, which built the Walkie Talkie, and Canary Wharf Group. Both carried on developing during the recession, so at the end of it the Walkie Talkie [20 Fenchurch Street] was one of the few new Grade A buildings coming on stream and achieved record rents.
“In some ways developers are hoping that the competition will pull out, so they can be in that position.”
Outside of London, Oakley says development will continue in the big regional cities – Manchester, Birmingham, Leeds, Bristol and Edinburgh – 7m sq ft in 2017 and 1m sq ft in 2018 with a slowdown after that.
Foreign investment
One of the factors determining whether speculative development is going ahead or not is foreign investment. Certainly attracting foreign investment into the London market doesn’t appear to be a problem. “Of the 20 projects completing in 2018 – 15 are non-domestic backed,” says Oakley. One of those backing London is HB Reavis with hugely ambitious plans for the capital. It says the impact of Brexit will be “minor and temporary”.
There are several reasons why foreign investors have more confidence in the market. The fall in the pound has lowered the cost of the initial investment, but they still have to get their money out at the other end, so that is not the only driver.
As one UK funded developer says: “Maybe people from other parts of the world don’t see Brexit as the big deal we do, or they come from parts of the world with huge uncertainty and by comparison London is still a safe bet.”
But as well as a downturn in the economy, clients are also worried about costs rising from a reduction in migrant labour and a rise in materials costs from the weaker pound, which will challenge developer margins and make schemes unviable.
The rise of refurbishment
One trend we’re likely to see more of is a shift away from new build to refurbishment, where the scale and length of projects is shorter and therefore less risky. The Deloitte Crane Survey released in November, which covers seven major office markets in the capital, reported that the amount of all types of office construction in central London had hit 14.8m sq ft – the highest since 2008.
The survey, which runs for the six months to the end of September, said 40 new starts had been made during the period. But refurbishment work accounted for 28 — almost three-quarters – of these projects with the survey reporting the amount of new construction activity is down 42% on the previous figure. Resolution Property is adopting this approach.
Chris Lewis, head of occupier advisory at Deloitte Real Estate, says: “Refurbishments… highlight the opportunity that developers can deliver into a market that still has low levels of available office space.”
But as well as the uncertainty, Brexit is ensuring that those developers that do go ahead are looking to minimise risks through procurement. The glory days of construction management certainly show little sign of returning with two-stage tender and D&B very much the name of the game. And while creating wellbeing is the biggest buzzword in town in terms of design, in terms of the construction process itself, developers don’t seem to be taking any pages from the government’s book and mandating BIM.
In terms of the overall market more optimism seems to be returning to commercial development after the big shock in June, though don’t expect anything like clarity to return soon.
