Reuters logo
Fitch: Brexit, Rates are Key Risks for London Offices
October 20, 2017 / 8:07 AM / a month ago

Fitch: Brexit, Rates are Key Risks for London Offices

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) The core London office market has cooled since the UK's EU referendum but remains highly overvalued, Fitch Ratings says. Tight office supply has supported prices to some extent, while sterling's weakness has caused a recent boost in overseas demand for trophy assets, allowing City office yields to fall back slightly in 2017. But uncertainty associated with Brexit is likely to see the cyclical correction resume during 2018. Longer term, the potential for rising interest rates presents considerable downside risk. Office values began to fall just before the June 2016 EU referendum. The continued fall after the referendum meant that overvaluation in the City submarket, measured as the market value decline needed to bring values into line with Fitch's cyclically-neutral metric, dipped from almost 40% in spring 2016 to below 30% a year later, before bouncing back slightly in 2Q17. CHART: <iframe src="https://e.infogram.com/86fe4431-7c49-4e03-8c38-3fb34d402eb5?src=embed " title="London City Office MVD to Cyclically-Neutral Metric" width="550" height="618" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> Property transaction volumes have risen this year on the back of the record-breaking overseas acquisitions of 20 Fenchurch Street (GBP1.3 billion) and The Leadenhall Building (GBP1.2 billion). Purchases are being funded by significant foreign equity, rather than debt, partly in response to the post-referendum fall in sterling. The so-called "wall of equity" has been one driver of reduced UK CRE lending volumes in 1H17, but we think weaker sentiment among domestic investors is another. One reason price falls haven't been steeper may be that property developers have taken a more cautious and flexible approach to new developments than in previous cycles. Development plans that are either uncommitted or funded on-balance sheet can decelerate, while low interest rates also give indebted developers flexibility over construction speeds. The responsiveness of new office supply to lower demand may cushion one likely Brexit impact, namely the loss of financial sector jobs as global occupiers reduce their UK presence. Bloomberg reported last month that up to 13,000 London banking jobs were slated to move to the EU after Brexit. A Reuters survey released on 18 September suggested around 10,000 finance jobs would leave the UK or be created overseas if the UK left the Single Market. The ultimate impact on UK financial sector employment is hard to assess while terms of the UK's EU departure are unknown. Oliver Wyman estimated that 31,000-35,000 jobs could be lost if the UK acquired third country status without regulatory equivalence or new access arrangements, with 40,000 more dependent on knock-on effects. Even if the number is at the high end and concentrated in central London, the immediate direct impact will be limited. Our initial estimates indicate that 70,000 central London office job losses (or around 3%-4% of office workers in the major central London submarkets by some estimates) would result in a modest reduction in aggregate rents, although the impact would be unevenly spread. Long-let offices (which dominate City and Canary Wharf office exposure for UK CMBS) would be much less affected than newly vacant offices having to offer large incentives. Some could convert into flexible workspaces to appeal to firms waiting to see the full impact of Brexit. In this initial phase the overall market shock should be contained, with value declines in the low or mid-single digits. Brexit creates longer term uncertainty over the UK's macro-economic performance. In a scenario where it significantly weakens, the spill-over into property would go well beyond office headcount losses. A recession causing a relatively even reduction in corporate earnings would broaden and deepen the fall in rental value, and could cause a reversal in capital flows and a freeze in bank lending. This could see 10%-20% rapidly written off market values across central London offices. A scenario that saw faster-than-expected interest rate rises and a rise in unemployment across service sectors would weaken London office values further. In previous downturns, values overcorrected, and in the medium term if weaker occupational demand led banks to conduct fire-sales, or if higher rates forced debt-backed construction plans to accelerate, then we could see over 40% cut from London office values, taking them below our cyclically-neutral metric for the first time since mid-2010. <a href="(here">Disruptive Technology: UK Shared Workspaces <a href="https://www.fitchratings.com/site/re/894667">UK CRE: Countercyclical Lending Boosts Loan Returns Contact: Euan Gatfield Managing Director, Structured Finance Fitch Ratings Ltd +44 20 3530 1157 30 North Colonnade London E14 5GN Daniel York Senior Director, Structured Finance +44 20 3530 1034 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below