Is the outlook for London’s office-based businesses as negative as many predict?

Following the referendum, commentators were suggesting that the loss of financial services passports could lead to hundreds of thousands of jobs being put at risk in the city. However, 2017 has seen a degree of calm emerging in the London office market. Major employers are thinking that the exit from the EU may not be as cataclysmic as first imagined. More importantly, it’s going to take a lot longer than was expected in July 2016.

But won’t many jobs have to move because of EU banking licences?

Finance organisations need an EU banking licence, but there are few businesses among the global players that do not already have one. The European Central Bank will not accept this licence to just be ‘brass-plated’ in terms of sitting in an empty representative office somewhere in the EU. So, some jobs will be moved from London or new ones created within the EU. One or two regulatory organisations will also leave London for operational reasons. However, the main reason we do not expect to see large numbers of jobs relocating is the simple matter of cost.

Even though some EU countries are making encouraging offers to attract business?

Eurostat’s own data shows that average employers’ costs in Germany are 25% higher than in the UK. In France, they are 37% higher. Given that the global finance industry has been in a sustained period of cost control since the global financial crisis (GFC), it is a challenge to imagine that large-scale job moves from London to the EU are credible, unless operating costs in London rise dramatically in a post-Brexit world.

But the impact of Brexit on London’s jobs will not be confined just to the finance sector, will it?

No, but this is where the biggest regulatory push is likely to occur.

So, what are the concerns for other key industries for London jobs?

Any mishandling of the freedom to hire skilled and unskilled workers could impact rapidly growing industries, such as the technology and media sectors. Indeed, these sectors are more important to London’s employment structure than finance. Even in the City of London and Tower Hamlets, finance and insurance are no longer the largest employer of office workers. Information and communication, and professional and tech sectors now employ more people in what used to be relative monocultures.

Is there anything we can learn from previous events, such as the GFC?

What may surprise people is just how resilient London’s employment levels have been, with none of the last three economic shocks leading to a fall in office-based employment of more than 70,000 jobs. This resilience shapes our scenarios for the London office market in the run-up to and aftermath of Brexit. These scenarios have more to do with how long the process takes than whether the exit is hard or soft.

In that case, when do you expect businesses to decide whether they will move or not?

We see the point of peak uncertainty being a year or so after we exit. Businesses will then have the data to assess whether their operating costs in London have gone up sufficiently to consider downsizing in London or moving to the EU.

Is there evidence in the property market that reflects this longer view?

The volume of leasing activity in the City and West End of London is up 19% and 33% respectively year on year. Across central London, the first six months of 2017 has seen a rise in the proportion of leases being signed of 15 years or more compared with either 2015 or 2016 – another sign that an immediate exodus is unlikely.

So, you expect businesses to play more of a waiting game than react in the short term?

Without doubt, Brexit will result in some structural change for all business types in London. However, we believe that the downside risks are being overplayed dramatically. Generally, we do not expect to see any major corporate decisions being taken until the early 2020s. When those decisions are made, even in our worst-case scenario, the downside for London’s employment numbers are not as bad as the correction that was seen during the GFC, and it will be spread over a longer period. Whether it’s demand for housing or office space in London, the impact will be comparatively small.