What could tip the scales for London commercial property?

With two deadlines for Britain leaving the EU behind us, there is more confusion than ever about what Brexit will look like. Amidst this heightened uncertainty, few would expect there to be a positive outlook for commercial property in London. Indeed, when the UK first voted to leave, the Bank of England warned a disorderly exit from the EU could cause commercial property prices to fall to levels not seen since the financial crisis. Yet despite the political chaos, this reality has not emerged. Although there was an immediate fall in values after the vote, arising from redemption calls on retail funds, since then London commercial property has bucked the Brexit trend. The outlook, for now, is fairly positive. Businesses continue to be attracted to the capital, and London commercial property values have held up. A new report published by the City of London Corporation and the City Property Association proves just this, as London remains the best city globally to locate teams of employees. Brexit might hang in the balance, but so far this has not tipped the scales for London commercial property. Why has commercial property in the capital remained so resilient? Supply-demand dynamics. This delicate balance has remained supportive for commercial property values. As long as this balance upholds, values in the city will uphold in tandem. With Brexit uncertainty causing concern among investors, it is important to consider what, if anything, could tip this balance? Supply Supply dynamics are less likely to change than demand. A significant increase in the supply of offices to the London market could drag values downwards, if we see more space than tenants looking for new homes. But supply is constrained in the capital and this simply cannot change overnight. For us to be faced with over-supply would take years of development. Supply won’t tip the scales for now. Demand Demand dynamics on the other hand have tipping potential. If demand for office space in London falls, we’ll see a dip in values. Brexit is not the only factor that could weaken demand from employers to set up camp in the city. A few factors should be watched. First, the long-awaited Brexit exodus could come to fruition. Though it would be more difficult for companies to up sticks and move to the continent, in the event of no-deal it could still prove appealing for businesses looking for certainty. Second, the move to flexible working is affecting the size of space that employers are willing to take on. Serviced office and flexible working providers offer shorter leases than most landlords and provide flexibility in the size and type of space companies can take. Demand is locked in for a shorter time period. This has the potential to alter the demand dynamics as tenants sideline traditional lease structures in favour of more flexible options, as they have the option to take on less physical space. Lastly, a global economic slowdown would cause employers to consider their rents and office locations carefully. A messy Brexit could affect the global economy and encourage businesses to be more cautious about the office space they are taking on. For the time being, continuing demand for office space in the central London commercial property market should help dispel pessimism about the future of London post-Brexit. The London real estate market remains the most liquid in the world and long-term fundamentals for commercial property in the City will be difficult to shift. For now, London commercial property is bucking the Brexit trend. Manish Chande is a senior partner at Clearbell