Over the last three years, growth in commercial offices has remained on an upward trajectory. Strong growth rates were associated with high levels of demand, which, in turn, saw activity reach record high levels in regional markets alongside the capital. But how is the Brexit vote beginning to have an impact on the sector? Construction Products Association economist Amandeep Bahra outlines what we know so far.
In 2015, reflecting the fortunes of the offices sector, total construction work reached a value of £8.5 billion, the highest since 2008. However, as they say, nothing lasts forever. Following the UK’s vote to leave the EU, the country is deemed to have entered into an economic and political minefield. So, what does this mean for the commercial offices sector? Are we likely to see the growth rates of the past years sustained?
It would be wrong to say that activity in offices will remain unaffected. This is not purely down to the impacts of the Brexit vote, but also domestic and global economic conditions, which were already losing steam before the referendum. Business investment, a key macroeconomic driver of offices growth, declined for a second consecutive quarter in 2016 Q1, falling 0.6 per cent on a quarterly basis. Similarly, on an annual basis, business investment fell 0.8 per cent, the first decline in six years. Whether this reflects the impacts of uncertainty created in the run-up to the EU referendum or the start of a longer downtrend remains unclear.
Data from Markit/CIPS can shed some light on this. Its latest Purchasing Managers’ Index (PMI) was consistent in reporting that the commercial sector experienced firms postponing investment decisions and placing projects on hold, adopting a ‘wait and see’ approach until the dust settles. Following a vote for Brexit, the post-referendum environment is no different, with many firms’ caution fuelled by further economic and political uncertainty.
In spite of all this, there are some notable projects in the pipeline, particularly outside London, that have remained on course. Birmingham, which is home to some of the biggest projects outside of the capital, has seen construction start at One Chamberlain Square, which forms the first phase of the £500 million Paradise redevelopment scheme. The seven-storey building that will provide 9,000m2 of office space is projected to be ready for occupation by PwC in 2019. Also, construction on the £200 million Three Snowhill scheme, part of Birmingham’s Snowhill masterplan, is expected to go ahead despite post-Brexit funding fears. The 14-storey building that will include 38,000m2 of office space is the largest speculative office project away from London and is expected to reach completion by 2018.
Following suit is Manchester, which has more than 60,000m2 of new office space under construction, including No. 1 Spinningfields – the city’s highest specified commercial building that will provide 36,000m2 of office space once completed in 2017 Q4.
Moving further north, Glasgow stood out the most in the first quarter for its highest take-up levels, according to Knight Frank. The key driver of this take-up was the 15,000m2 pre-let to Morgan Stanley at Bothwell Exchange, which is currently under construction and is expected to reach completion at the end of 2017. The region will also see fit-out work, including transformation of the top three floors at St Vincent Plaza development to create offices for KPMG. Once completed, it is expected to deliver 4,000m2 of open plan and cellular office space.
A similar scheme in Bristol for the professional services firm is expected to contribute to activity. This will see fit-out of 5,000m2 of commercial office space across four floors to high standards at Grade II-listed 66 Queen Square. In addition to this, construction work on the £17.5 million Aurora speculative development scheme is expected to go ahead. The seven-storey building that will provide 9,000m2 of Grade A office space on the Floating Harbour will include a glass atrium, and overall the project is set to achieve a BREEAM Outstanding rating.
Although the spotlight remains on regional markets, London has continued to attract interest. Recently, a £500 million ‘Toblerone Towers’ scheme in South London received a green light and, once approved by the London Mayor, will open up 50,000m2 of office space.
This may all sound rosy until you factor in the implications of Brexit. The UK has yet to invoke Article 50, which, once triggered, will open a two-year window for negotiating withdrawal terms – though some say that it could take longer. Indeed, a prolonged period of uncertainty cannot be ruled out.
Larger projects could be delayed and according to a recent survey by RICS, the weakness in demand for commercial property was already visible in investment enquiries, which fell to a net balance of -16 per cent in Q2, from +25 per cent in the first quarter. In addition to highlighting the “drop-off in investor interest”, it also suggested that London will bear the brunt. This doesn’t come as a surprise given the large exposure it has to foreign investors. Several planned high-profile developments, including the 62-storey skyscraper at 22 Bishopsgate and two developments by Crown Estate, are under review to assess the impact of Brexit. This doesn’t mean, however, that the impact will be skewed towards the capital – recent years have seen increased interest from these investors towards regional markets. The go-ahead on projects not currently underway will ultimately depend on pre-letting – the largest indicator of effective demand.
Despite these challenges, the handful of projects mentioned earlier are an indication that some developers are shrugging off any fears. Another upside, one could argue, is that the recent depreciation in the value of sterling may attract foreign investors. But again, will this be enough to offset other headwinds faced by the sector? The extent of uncertainties as well as a lack of precedent on withdrawing from the EU makes it difficult to answer this, as well as other questions, leaving us with an unclear vision of what’s to come.