Lehman Brothers collapse...A worker holding a box, leaves the Lehman Brothers headquarters at Canary Wharf in London. Lehman Brothers, a top US investment bank, has filed for bankruptcy.
A worker leaves the Lehman Brothers headquarters at Canary Wharf

In 2008, the Lehman Brothers building in London’s Canary Wharf became a symbol of the credit crunch as box-carrying, jobless staff streamed from its doors after the bank’s demise.

A decade later that tower, now home to JPMorgan Chase, and others like it will be equally important bellwethers of how the UK is faring after Brexit. But this time it is suitcases rather than boxes that will be packed for Frankfurt, Paris and Dublin. This week, the Financial Times reported that US banks were warning that slow Brexit progress may force them to start moving thousands of jobs out of the UK in the near future.

Brian Kingston, chief executive of Brookfield Property Partners, a US developer heavily invested in London offices, told analysts last week that leasing activity was “probably the lowest it’s been in over a decade”. Jefferies estimates that 6m-7m sq ft of office demand will be sucked out of the UK office market by Brexit relocations — the equivalent of 10 skyscrapers the size of London’s iconic “Gherkin”.

Companies are already rushing to secure space elsewhere. European rental markets are booming. Vacancy rates for offices are at record lows — just 3 per cent in Paris and 2.5 per cent in Berlin, according to agents Savills. Office take-up in Frankfurt in 2017 will be a third higher than last year.

In London, the effect has been less visible. But the property market has always had ways of smudging numbers. Take-up figures are actually robust for offices — expected at 9 per cent higher this year than 2016, says Savills — but agents say these are mostly deals struck for relocations. Many businesses are swapping older for newer, bigger for smaller.

Central London rents have dropped a relatively modest 4.6 per cent since January — and are now at levels last seen in 2014, says property agents GVA — but this hides the rise in use of incentives. For example, many landlords prefer to give away long “rent free” periods to avoid taking an embarrassing cut in “headline” rates. Taking these into account, GVA estimates the net effect is to make London rents 13 per cent cheaper than this time last year.

Vacancy levels only tell part of the story. Many current tenants have long leases, which means they would need to find other willing occupants to take over should they relinquish space. “Grey space” is the term used for a sort of shadow office stock that appears to be fully let, but which may actually be only semi-occupied or available for sub-letting. It was a problem in the last crash and is making a comeback. GVA says there is a large supply of grey spaces in Canary Wharf, with tenants “quite flexible on how much space they have readily available”. Some banks are explicit about these options: Goldman Sachs has designed its new 10-storey London building in a way that makes subletting easy. The bank has already found a Frankfurt home in a 37-storey tower that could hold up to 1,000 staff.

This is not a normal property crash caused by economic or financial distress and much depends on the Brexit talks. Grey days are ahead for London property — but just how dark they become will depend on how many employees move.

British property investors should not take too much heart just yet in so far muted signs of an emptying London — look instead at the frenetic efforts of counterparts across the channel to build new homes for displaced UK financiers.


dan.thomas@ft.com

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