Brexit/City property: no Joker
If the real Gotham City turns troublesome, Prudential cannot call in Batman
Like sunlight breaking through Gotham City darkness, a shaft of optimism lifts the City of London. Insurer Prudential’s investment arm has defied the Brexit Joker, announcing a £875m investment in a City office development. A tiered complex at 40 Leadenhall, with one tower reaching 34 storeys, is already informally named after the sinister-comic fictional city. It may yet vanquish swirling dark forces.
Brexit has cast grey uncertainty over the City. Who will occupy its steel and glass offices of the future? Trade barriers with the EU will diminish its status as Europe’s financial centre. The global finance cycle is anyway teetering. UK-headquartered HSBC is slashing jobs globally. Companies shun London listings. Kazakh fintech group Kaspi.kz on Monday became the latest to shelve flotation plans.
Spending on real estate has slumped. Investment in central London commercial property dropped 50 per cent in the first nine months of 2019, according to property agents CBRE. Broader effects are harder to disentangle. Rents have risen but WeWork’s aggressive expansion has distorted market prices. Almost 7 per cent of London office space is “flexible,” compared with less than 4 per cent in New York, reckons Jones Lang LaSalle. A WeWork slowdown will leave a big hangover.
M&G Prudential is taking a longer-term bet, however. Scaled-back construction plans will squeeze office supply by 2023 when the Leadenhall project is completed. WeWork, by then, will be either WeWon or WeWent. Brexit might not be catastrophic; an exodus of bankers has not materialised so far.
Meanwhile, price weakness could boost returns. M&G Prudential believes prime London offices generate yields at least one percentage point higher than in rival financial centres. But latest CBRE estimates put them at less than 4 per cent, near a cyclical low and below New York — although higher than Paris and Berlin. The risk is that WeWork — or Brexit — results in over supply. If the real Gotham City turns troublesome, Prudential cannot call in Batman.