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London: what are the structural influences on the current property market cycle?

by | Mar 21, 2018

To summarise London First’s annual lunch at MIPIM, where I spoke about three particular issues which mark the current London property cycle out from the last one.

Firstly, Brexit. The EU referendum result crystallised a moderating of the market that many think was due anyway; with some London developers, as well as occupiers, shelving their plans. Brexit looks likely to continue to have that mildly dampening effect on demand and supply for the next year or so, though it’s not obvious to us that occupiers who feel concerned by Brexit are in a mad stampede to leave. We don’t know what kind of Brexit agreement we’ll get. But one big area where London should brace itself for some change is in the availability of lower skill migrant labour from the EU. That seems almost certain to tighten, and since London has a higher proportion of EU workers than other parts of the UK, it looks likely to be disproportionately affected.

Secondly, international capital. Even if we can’t have the world’s workers, we seem to be able to get hold of the world’s money. CBRE’s new global investor intentions survey, also released at MIPIM, shows that, despite Brexit, London remains the top choice for non-EU real estate investors. 81% (£13bn) of investment was from overseas in 2017, and 44% was from Asia. So while there will be cyclical pressure pushing property prices down as interest rates rise and rental growth weakens, there is also structural investor demand pushing them back up again.

Finally, changing occupier types. Three sectors are very prominent:

  • Even after Brexit, London seems likely to remain a leading global financial centre. But the character of financial services businesses may well change. A lot of column inches are wasted speculating on possible relocations away from London, but much less on what new types of financial service business might fill the gap. Insurance and fintech look like interesting sub-sectors to us.
  • London has also become a global tech hub over the past decade. Since the referendum, we have seen 4.1m sq ft of take-up by the tech giants in both core and up-and-coming locations.
  • Life sciences. Amongst other things, soaring healthcare spending, and a tech-based lowering of barriers to entry for smaller firms, make this a sector to watch in London. The out-of-town big pharma business park, for example, may be at threat from collaborative life sciences clusters in the city centre.

London’s property market faces a complex mix of cyclical and structural forces. Sometimes those forces will compound each other; sometimes they will work in opposite directions. So, we should be thinking about what kind of cycle we are in, as much as where we are within it.

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