The United Kingdom has decided to leave the European Union after a referendum which took place on Thursday 23rd June 2016. The implications of this vote are seismic for every industry in the UK, and none more so than the commercial property industry. The uncertainty on whether or not the UK will be allowed access to The European Single Market has left many companies, small and large, facing difficult business decisions.
The immediate economic consequences of the UK leaving the EU, along with the political instability, will fuel volatility which is likely to last for at least 2-years from the date upon which the UK government activates Article 50. This volatility means that companies face difficult business decisions; and those that were planning to sign a 5, or more, year lease of commercial office space would now benefit from shorter-term flexibility in serviced office space instead.
The shock waves from Brexit are being felt in the commercial property industry. The pound dropped to a 31-year low in the aftermath, and one of Singapore’s largest lenders, UOB, has suspended its loan program for commercial property in London. This is the first sign of foreign investors cooling their interest as uncertainty and lack of direction affects decision making. The reverberations are being felt domestically also as The Aberdeen Property Trust, with a £3.4bn portfolio of commercial property, has cut 3.75pc from the value of its holdings – this equates to £128m. Another warning sign of the jittery commercial property market is the news that Standard Life has suspended a £2.9bn commercial property fund – meaning investors cannot withdraw their money as confidence falls.
Should the UK’s re-negotiations with the EU see the country unable to access the single market, it is likely that occupier demand for large commercial office space will continue to decrease. Investors will begin to shelve deals whilst they reconsider the amount of space they need outside the single market. This means the rental prices for commercial office space will change to meet demand over time.
During previous downturns in the office market, there has been a recurring pattern of a time lag between demand falling for commercial property and an associated drop in rental prices. This trend demonstrates that price elasticity is delayed. In a nutshell, business decision makers could find themselves being locked into a long term 5 year lease for commercial office space at a price, which is heavily above the average market rate, after the price correction. This would be a extensive loss of capital for businesses. We strongly believe that companies will benefit from having a lease break, and getting a 1 or 2 year lease at serviced office space while the leased market undergoes a price correction and cheaper rates filter into the market place.
By adopting this approach, companies can then re-enter the office market and benefit from fully adjusted rental prices once the volatile forces from Brexit begin to settle.
Serviced office offer flexibility for companies by providing the option of rolling monthly rental payments, which can cancelled at anytime.
Historically, companies have benefited from serviced flexible office spaces during times of ambiguity in the economy. Do not risk investing in long term 5 year leases when the exact nature of the future is uncertain, instead opt for a short term 1 to 2 years at a serviced office space.