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Continental Drift
Occupier edition
The wider economic and property
market implications of Brexit
The European effect
September 2016 | Global Research
THE EUROPEAN EFFECT
Introduction and Summary
This ViewPoint looks at what might happen now that the UK has
voted to leave the EU. It discusses the likely timetable for Brexit,
the possible impact on the UK economy and what alternative trade
structures might be available for the UK to join.
This report goes into further detail on which UK industry sectors might be affected and which European
cities might benefit from Brexit relocation. It concludes by looking at what the wider impact on the rest of
the EU might be — negative as well as positive.
The referendum has happened and there has been a vote to leave the EU. But there is considerable
uncertainty over how long the process will take and over what the eventual relationship between the UK
and EU will be.
We believe that leaving will neither be quick nor dramatic in its effects. Rather, we expect a ‘long goodbye’
stretched out over two years or more. Article 50 of the Lisbon Treaty provides for a two-year exit period
once a member state decides to leave, but the UK looks unlikely to serve a formal decision any time soon.
We think the Article 50 notice is not likely to be served until late 2017 at the earliest.
1
© 2016, CBRE Ltd.
The potential
impact on the UK
of leaving the EU
2
The direct economic
impact of Brexit on
the rest of the EU
3
What will happen
to the EU when the
UK leaves
1
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CONTINENTAL DRIFT
Finance, digital-tech and
business services are most
at risk
Most of the published analysis on the impact of ‘Brexit’
has focused on the economy as a whole or on financial
services. We would add the business services that sell
most to financial services and the tech industries to
the list of sectors at risk. Indeed, if business surveys
are anything to go by, it looks like the tech industries
might be more vulnerable than financial services
post Brexit. The main worry over financial services
concerns regulation and the possibility that UK-based
banks might not be able to operate directly in the
EU unless the existing passporting rights are carried
forward. Continuing passporting rights cannot be taken
for granted.
Many business services (legal, accounting, management
consulting) depend on financial services for a substantial
part of their business and they are often co-located in major
financial centres. If Brexit impacts on financial services it is very
likely to affect other sectors in the supply chain too.
The tech industries, by contrast, are more worried about
limitations on skilled migrant labour.
• Frankfurt and Paris are the most talked about alternative
destinations for banking jobs. Dublin and Amsterdam could
also lay a claim to some of the re-located roles.
• London‘s tech sector could lose jobs and companies to
a number of competing centres in the event of Brexit,
with Berlin being a front runner to gain jobs. Other
cities that stand to gain include Stockholm, Dublin, Paris
and Amsterdam.
• Given the growing importance of the Fintech sector,
cities like Amsterdam and Dublin which show up on both
the list of alternative banking and tech centres might be
well placed. Paris could also do well if it can build on
the advantages of its established banking sector and its
embryonic digital tech sector.
© 2016, CBRE Ltd.
THE EUROPEAN EFFECT
The EU could face further
fragmentation and risks
becoming more inward
looking without the UK
Property implications
All of the above discussion of relocations and alternative cities
is based on the premise that the UK would lose out and the
rest of the EU would gain from Brexit. Such an outcome is by
no means assured. There are scenarios in which the remainder
of the EU could go through a difficult time in the event of
Brexit. This could take the form of further fragmentation or,
because an EU without the UK adopts a less outwards looking,
more regulatory and more anti-competitive stance. This need
not be the outcome, but there is a worry that without the UK
presence, the direction of EU policy making might change
for the worse. Alternatively, Brexit could prompt a much more
fundamental European re-alignment with the EU and the Euroarea merging into a single more politically integrated block
that has a much looser relationship with the rest of Europe.
The leave vote is likely to take the pressure off London rents
and availability in the short-term but a reduced development
pipeline means that the situation could reverse within five
years. If the location of choice has to be London, the next one
or two years will be a good time to secure a new lease.
There is massive uncertainty over the timing of Brexit and
the shape of the eventual settlement. It will be tempting for
occupiers to wait and see before making major leasing
decisions but it could be a long wait.
“The main worry over
financial services concerns
regulation and the
possibility that UK based
banks might not be able to
operate directly in the EU”
There will also be offsetting effects
• At the time of writing, Sterling has fallen by over 11 percent
against the euro since the referendum (over 15 percent
since the end of 2015). The future path of exchange
rates is always uncertain but most forecasters don’t expect
sterling to recover to its previous levels while the period of
uncertainty continues and many think it may take a longterm hit.
• The UK government is likely to announce a number of
measures aimed at offsetting the negative impact of Brexit.
These will range from additional infrastructure spending,
to lower Corporation Tax and possibly other cuts to the
corporate tax bill as well as deregulation — although the
latter could take some time to come through.
• This combination of offsetting factors may actually
make the UK more attractive for occupiers if the UK can
negotiate a beneficial settlement on trade and passporting
rights. And for occupiers, regardless of the settlement,
this could have a positive impact if they’re not particularly
sensitive to the eventual negotiated settlement.
For those companies who feel they have to re-locate some or
all of their functions from London there are some alternatives.
But none have the same mix of scale, skills, infrastructure,
regulatory environment and office stock as London but their
property costs at least, are cheaper and they all have full
access to the Single Market.
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CONTINENTAL DRIFT
1
THE EUROPEAN EFFECT
A summary of the impact
on the UK of leaving the EU
This section briefly reviews what will happen now that the
UK has voted to leave the EU
The UK’s exit will be
a ‘long goodbye’
With the UK decision to leave now official,
its future relationship with the EU could
take many forms. And it’s not in the Prime
Minister’s interest to spell out a detailed
exit plan which would give away her
negotiating strategy.
Some leave campaigners would probably
only be satisfied with the loosest of
relationships with the EU. And indeed
control over migration — a key driver
for the leave campaign — would only be
possible if that relationship was very loose
indeed. Membership of the European Free
Trade Association (EFTA), for example, does
not remove obligations to permit freedom
of movement of people, goods, services
or capital.
Leaving would neither be quick nor dramatic
in its effects. Rather, we expect a ‘long
goodbye’ stretched out over two years or
more. Article 50 of the Lisbon Treaty provides
for a two-year exit period once a member
state decides to leave, but the UK looks
unlikely to announce a formal decision any
time soon. We think the Article 50 notice
is not likely to be served until late 2017 at
the earliest.
Either way, the uncertainty involved over both
the process and the outcome would result in
significant delays in decision-making. But,
other than immediately after the referendum
itself, the property market would not change
comprehensively overnight. There are many
other factors affecting decision-making, and
unwinding the UK’s existing relationship with
the EU will take time.
But, other than immediately after the referendum
itself, the property market would not change
comprehensively overnight.
Options for a
new relationship
between the UK
and the EU
The new UK government will want to carve
out its own relationship with the EU. The UK
economy is both larger and has closer links
than other countries whose relationship with the
EU have been offered up as a potential model
for the UK.
Nonetheless, comparisons will be made and
lessons will be drawn. The main issues for the
UK will be access to the single market — the
preservation of free trade, including trade in
services — and the retention, if possible, of
passporting rights by which a UK-based and
licenced bank can operate freely across the EU.
Below are the three most common types of UK-EU
relationships suggested.
The Norway option
Norway has access to the single market, including passporting rights for financial services but accepts
the free movement of people and makes a contribution to the EU budget (which is about the same as the
UK current net contribution on a per capita basis). While this would be very acceptable to many UK
businesses, as representing EU membership in all but name, it will not be acceptable to the Brexit lobby.
The Swiss option
Switzerland has negotiated a series of bilateral deals with the EU which gives access to the single
market for most goods and services but doesn’t have full passporting rights. In return it accepts freedom of
movement of people and a budget contribution. Consequently, a similar deal will not be acceptable to the
Brexit lobby.
The Canada option
Negotiations were completed in 2014 on a trade deal between Canada and the EU. It fully liberalised
trade in industrial goods and substantially liberalised trade in services. There are also sections of the
temporary movement of company employees and the mutual recognition of qualifications which, if adapted
to a UK context, could go some way towards allaying UK companies’ worries over access to continental
labour. On the downside, Canada doesn’t have passporting rights and there are potentially onerous
‘Rules of Origin’ — for example, Canadian exporters have to prove that goods have a certain Canadian
content. The deal also took seven years to negotiate and it still hasn’t been implemented.
© 2016, CBRE Ltd.
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CONTINENTAL DRIFT
THE EUROPEAN EFFECT
If Brexit means
lower growth,
occupiers will take
less space
Most, but not all, experts feel that the UK will
suffer economically from Brexit, but estimates
of the impact on growth vary substantially. The
view of the majority is that the UK property
market will suffer an adverse ‘demand shock’
arising initially from uncertainty and falls in
business and consumer confidence.
Reductions in labour availability arising from
migration controls will vary substantially
because some sectors are more dependent
on migrant labour than others. The food and
hospitality sectors, for example, could be very
exposed to labour market restrictions and the
technology sectors are also concerned about
any limits to their ability to recruit from other
EU countries. The financial services sector
is also exposed because of the potential
change in the regulatory environment, and in
terms of trade with the EU. In particular, the
UK could lose the advantages conferred by
so-called ‘passporting’ arrangements, which
allow regulated services firms to operate
anywhere in the EU provided they have a base
somewhere within it.
“The view of the
majority is that
the UK property
market will
suffer an adverse
‘demand shock’
arising initially
from uncertainty.”
Figure 1: Recent estimates of the impact on UK long-run GDP of the UK leaving the EU (%)
Property investment
will be reduced by
uncertainty and exit
A poll of CBRE investor clients in February
2016 confirms the findings of earlier surveys;
that property market investors overwhelmingly
feel that the UK would be a less attractive
place to invest if it were to leave the EU.
50
Congdon/UKIP (2013,2014)
Civitas (2004)
2015
2016
40
IoD (2000)
35
Economists for Brexit (2016)
30
Open Europe (2015)
NIESR (2004)
25
20
PwC/CBI (2016)
Oxford Economics (2016)
15
CBI (2013)
10
NIESR (2016)
5
HM Treasury (2016)
0
Makes the UK a much less
attractive location
LSE/CEP (2016)
-15
© 2016, CBRE Ltd.
2014
45
Worst Case
Best Case
Minford & Mehembare (2005)
Source: CBRE, 2016
CBRE has conducted this poll for three years,
and the most recent survey shows a hardening
of opinion. We find a sharp reduction in those
who think exiting the EU would make no
difference to investment from 33 percent in
2014 to 21 percent in 2016. The proportion
of respondents who think the UK would be
a worse place to invest has risen from 32
percent in 2014 to 46 percent now. Foreign
and domestic investors are likely to be affected
by Brexit in different ways.
Figure 2: CBRE Investor Intentions Survey
%
6
-10
-5
0
5
10
15
Source: CBRE, 2016
Makes the UK a slightly less
attractive location
Makes no difference
Makes the UK a slightly more
attractive location
Makes the UK a
much more
attractive location
7
8
CONTINENTAL DRIFT
The impact on
property — a
London office
market case study
What is good for the economy tends to be
good for property and vice-versa. If jobs do
leave the UK, the demand for office space
particularly, but not solely, in London will fall
and rents will be lower than they otherwise
would have been. Pricing reacts more quickly
than rents so yields could be expected to rise
in response to both the uncertainty and the
reduced prospects for rental growth.
THE EUROPEAN EFFECT
One thing that almost all of the economic
studies conclude — whether for or against
EU exit in the long run — is that a leave vote
would usher in a period of uncertainty lasting
at least two years and possibly more. The
consensus is that this will affect economic
activity although there is not that much
evidence of it so far. The London economy is
likely to be at least as vulnerable as the UK as
a whole and this is likely to lead to a period of
falling rents — effective if not headline (which
would happen rather sooner than the supplyinduced fall in rents that many forecasters,
including CBRE, have already factored in
before the referendum).
If the UK successfully negotiates a reasonable
trade deal with the rest of the EU — which
guarantees acceptable access to EU markets
for services as well as goods — econometric
analysis by CBRE shows that central London
office rents might actually be higher after
five years than in our published forecasts.
This is because the initial bout of uncertainty
and depressed economic activity leads to
a considerable proportion of early-stage
development projects being put on hold or
cancelled altogether. This helps to improve
the demand-supply balance in the market
once occupier markets start to recover as
uncertainty dissipates.
Even in a worst case scenario, where
negotiations with the EU do not go well, rental
growth expectations — rather than rental
levels — could soon be higher than in the
base case. This is partly because of the impact
on development and because of the changed
profile of occupier demand which would still
be much weaker in the short-term than in the
longer term.
If yields rise but then gradually return to
CBRE’s base case (or possibly lower, because
of higher rental growth expectations), values
would fall after the referendum but potential
capital value growth prospects (rather than
levels) post Brexit would be immediately better
than in the base case — whether the UK
manages to negotiate a good deal with the
EU or not. That could present some interesting
opportunities for investors who share a similar
view of how the market will evolve.
This analysis is based on the kind of negative
impact scenarios than have come out of
a number of studies. Some of the studies,
however, have a positive view of the economic
impact of Brexit, most notably the Economists
for Brexit report published in April1. Their
analysis argues that Brexit would be beneficial
and that companies and investors would
realise this immediately; so there would be no
period of uncertainty. A period of ‘business
as usual’ would then be followed by a period
of economic improvement as the gains from
Brexit kicked in. This scenario would certainly
not harm the occupier market and the higher
GDP and higher inflation contained in this
scenario should actually push rents up.
1
© 2016, CBRE Ltd.
The Economy after Brexit, April 2016. http://www.economistsforbrexit.co.uk/
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CONTINENTAL DRIFT
2
THE EUROPEAN EFFECT
The direct economic impact on
the rest of the EU
As section 1 has demonstrated, it’s not clear
exactly what the economic effects on the UK
economy Brexit will have. But there’s a broad
consensus of opinion and pre-referendum
economic impact studies, as well as economic
forecasts published since, which also suggest
that there will be a net negative effect.
The following pages look at each of these
sectors in turn and ask which other EU cities
might benefit from a re-location of jobs from
London and the rest of the UK as a result of
Brexit. We cover not just jobs which relocate
as a direct result of the leave vote but also
those which might have been created in the
UK but which will be created somewhere
else because the UK is no longer in the EU.
This could be particularly important for fastgrowing sectors like tech.
This raises the question of what would happen
to the economic output and jobs which might
be lost to the UK. Will the jobs crop up in
other parts of the EU or would they simply
disappear altogether? In summary, the key
questions for section 2 are: ‘What jobs?’
‘Where might they go to and when?’
As for timing, the consensus is that although
economic activity might be depressed more in
the short-term, the full effect on the occupier
market is likely to build over time as leases
expire and are not renewed. This argument
is supported by the lack of evidence of any
advanced planning for jobs migration. It is
also the case that CBRE occupier research
indicates most companies see relatively little
immediate impact or are at worst waiting
for further clarity on the tone and timing of
negotiations rather than acting immediately.
Some sector bodies and industry leaders
were vocal in their support for continued
membership of the EU, with banks probably
making the most noise. Industry organisations
representing sectors as diverse as tech,
hospitality and leisure, agriculture and
construction also made statements in favour of
continued membership.
Most of the economic studies don’t mention
sectoral effects but the treasury study is an
exception2. This makes specific reference to
a number of sectors that it sees as being at
risk. These are: pharmaceuticals, aerospace,
financial services, automotive, professional
services, digital (tech) and agriculture.
Mention is also made of the success of UK
higher education and academic research
institutes in securing EU funding.
While all of the sectors identified by either the
Treasury or by industry bodies are important to
the UK economy, this report focuses on three
key office using sectors: financial services,
professional services and the new (digital) tech
industries. These are important to the country
as a whole and are particularly important to
the central London office market.
2
HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April, 2016.
© 2016, CBRE Ltd.
“Services such as legal, accounting,
management consultancy,
architecture, marketing and
advertising tend to cluster near
major financial centres and
corporate headquarter clusters. If
London’s financial services industry
were to shrink then so would its
professional services sector.”
“Frankfurt and Paris are
the most mentioned likely
destinations if international
financial services jobs
leave London”
Are banking and
financial services —
most at risk?
The threat to financial services jobs has been
at the forefront of the debate over the likely
economic impact of Brexit. This is because
of the importance of passporting rights
as discussed in Section 1. The UK would
keep its passporting rights if it joined the
European Economic Area but this would mean
supporting a number of EU agreements. These
include the freedom of movement of people
and contributing to the EU budget. Given the
prominence given to limiting in-migration by
the UK’s leave camp it’s quite possible that
this won’t be an agreeable solution.
As with all areas of debate there is a lack of
consensus on what the impact of Brexit will
be, although it has been argued that any
negative impact for the UK economy would
be magnified for financial services. Banks
themselves have been quite vocal in warning
about the dangers.
11
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CONTINENTAL DRIFT
THE EUROPEAN EFFECT
“A number of UK based banks have already said
that they have contingency plans to relocate
some of their staff from London in the event of a
leave vote”
Where would the
financial services
industry go?
Frankfurt and Paris are the most mentioned
likely destinations if international financial
services jobs leave London. Milan and Madrid
actually have more financial services jobs than
Frankfurt, but Germany’s financial capital
is seen as more internationally orientated.
Lending and trading are more important in
Frankfurt than in other European cities with
the exception of London. A number of UKbased banks have already said that they have
contingency plans to relocate some of their
staff from London in the event of a leave vote.
One major bank has said that they have
contingency plans to move 1,000 investment
bankers to Paris. And others have also talked
about relocations but have been less specific
about the location. Dublin and Amsterdam
could come into the reckoning too.
Despite the rumoured preference for Paris
amongst some bankers — presumably based
on the perceived quality of life rather than on
international competitiveness — Frankfurt, at
number 18, is the highest ranked EU global
financial centre after London (number one).
Paris only ranks 37, just ahead of Warsaw and
one place behind Amsterdam3.
Despite that, there is something of a sense
of anticipation in Paris with French officials
are going to great lengths to entice Londonbased bankers to Paris. The French economy
minister Emmanuel Macron has teased British
politicians with his promise that Paris will roll
out the red carpet for London bankers (the red
carpet was a reference to David Cameron’s
offer to French tax exiles in 2012).
3
ZYen Global Financial Centres Index 2016, http://www.zyen.com/research/gfci.html
© 2016, CBRE Ltd.
13
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CONTINENTAL DRIFT
Professional services
— will they follow
financial services?
Services such as legal, accounting,
management consultancy, architecture,
marketing and advertising tend to cluster
near major financial centres and corporate
headquarter clusters. If London’s financial
services industry were to shrink then so would
its professional services sector.
There is an argument that Brexit will mean
boom time for lawyers as they strive to
unwind existing contracts based on EU law or
regulations. This may be true but the impact
would be transitory. Long-term, the prospects
of the legal services sector are heavily tied
into the success of financial services and
corporate UK.
UK-based professional services companies are
also major export earners. They benefit directly
from EU membership in two main ways:
1. The EU’s Services Directive allows
professional services firms to establish
subsidiaries in other member states or
trade across borders without facing
discriminatory or unjustified barriers.
2. The Mutual Recognition of Professional
Qualifications system means that a firm’s
employees can have their training and
qualifications recognised throughout
the EU, for example a UK architect is
recognised as qualified in other member
states without the need to set up a
subsidiary or re-qualify4.
And if London were to lose financial services
jobs to Paris or Frankfurt for example, some
professional services jobs could eventually be
expected to go too.
THE EUROPEAN EFFECT
Heading for
a Techxit?
A pre-referendum survey by the Bertelsmann
Foundation found that tech companies were
even more concerned about the possibility of
a leave vote than financial services companies
and they were far more concerned than the
average of all companies sampled.
Business surveys that focus on large
companies, such as the CBI’s, show that an
overwhelming majority of companies (80
percent in the case of the CBI) were in favour
of continued EU membership. Surveys of
small and medium sized companies (SMEs)
however were much more equivocal. Figure 4
shows the results of a number of such surveys.
Most strikingly, a minority of respondents to
the Federation of Small Businesses and the
Zurich SME Survey were in favour of continued
EU membership.
Against this background, the survey of the
TechUK membership which showed 70 percent
of companies in favour of continued EU
membership stands out at the opposite end
of the spectrum. The Tech London Advocates
survey which focused solely on Londonbased tech companies found an even bigger
proportion (81 percent) in favour of staying
in the EU. Tech companies are worried about
Brexit mainly because they rely heavily on
skilled workers from overseas. Brexit would
hinder recruitment and ‘would slow their
ability to move rapidly against rivals and to
bring on talent in a competitive field’5.
Figure 3: Percentage of companies saying that they would either reduce capacity in the
UK or relocate elsewhere in the event of a “leave” vote
“There is an
argument that
Brexit will mean
boom time for
lawyers…”
41%
IT & Tech
5
Finance
Other
Figure 4: Percentage in favour of continued EU membership
87%
70%
60%
60%
49%
47%
SMEs
(Zurich, March)
Federation of Small
Businesses (September)
Nor is the concern limited to small companies.
Research in the Guardian found that five of
the UK’s 14 unicorns (private tech companies)
with a value of more than $1bn are explicitly
pro-EU. The rest have not come out
either way.
HM Treasury 2016; http://ec.europa.eu/growth/single-market/services/free-movement-professionals/index_en.htm
The Register, March 11, 2016
© 2016, CBRE Ltd.
26%
Source: https://www.bertelsmann-stiftung.de/en/press/press-releases/press-release/pid/britische-und-deutsche-unternehmen-sehen-brexit-als-gefahr/
Tech London Advocates
(March)
4
33%
TechUK (March)
SMEs
British Chamber of Commerce
(Moore Stephens, February)
(February)
15
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CONTINENTAL DRIFT
The focus on the availability of migrant
workers puts tech companies alongside
companies in construction and leisure who
are more commonly associated with worries
over labour shortages. The difference is that
technology industries are at the forefront of
economic growth, new technologies and
international competitiveness and they are
talking about attracting highly skilled, highly
sought after people. This is not to diminish the
needs of the construction and leisure industries
or the skills of their workers, but the new tech
industries are of a different level of importance
for the growth of UK PLC.
THE EUROPEAN EFFECT
Could Berlin, Paris,
Dublin, Stockholm
and Amsterdam
pick up digital
tech jobs?
“The problem,
as far as tech
companies are
concerned, is
that many of the
brightest and the
best actually come
from Central and
Eastern Europe”
The leave camp argues that when the UK
leaves the EU, unfettered migration from
Central and Eastern Europe should be
replaced by a points-based system that allows
UK companies to pick the brightest and the
best from around the world.
Airbnb, Dublin
Google, Stockholm
London, with its Tech City and Silicon
Roundabout is the tech start-up capital of
Europe but it’s not without competition. There
are actually more people working in statistical
classification “computer programming and
consultancy” in Paris with London coming
second in the EU jobs hierarchy. The rest
of the EU’s top five is made up of Madrid,
Frankfurt and Munich.
The Factory, Berlin
The problem, as far as tech companies are
concerned, is that many of the brightest and
the best actually come from Central and
Eastern Europe and that whatever system is
introduced it will be less flexible than what
we currently have. In addition, the current
points-based system that applies to non-EU
immigrants has been criticised with companies
citing problems of bureaucracy, inflexibility
and excessive delays.
Official data is not available to a detailed
enough level to verify this selection, but
analysis of detailed CBRE data on takeup and active requirements confirms the
importance of these cities to Europe’s digital
tech landscape and also points to Paris as a
major player too.
In fact, Paris has a number of emerging
digital-tech sub-markets6 (centred around the
‘Silicon Boulevards’ of Sentier and SaintLazare/Opéra/Bourse). The city is probably
third in the digital tech hierarchy after London
and Berlin, and must be considered as a
potential destination for any jobs leaving
London too.
One element of the London digital tech boom
is ‘fintech’. To some extent this has developed
because of the available pool of talent and
finance that comes with being part of a bigger
digital tech cluster, but proximity to one of
the world’s biggest financial services centres
is also likely to play a part. However, the
implication is that if London loses banking
jobs to competing centres then fintech
jobs could go too. Frankfurt is not a major
digital-tech centre so if Brexit is followed by
a substantial re-location of financial services
jobs to Paris it would also give a shot in
the arm to the city’s growing digital tech
industries. Some of the second-tier financial
centres such as Amsterdam or Dublin might
be well-placed to pick up these jobs too.
The focus of much of the UK remain camp’s
protests in the tech sector has been SMEs and
start-ups but large tech companies are now
locating in London partly because of the depth
of talent and the networks created by the
smaller companies. So the ease of movement
of international staff is also an issue for large
companies. This is not just a start-up and
SME issue.
“London doesn’t just compete in aggregate size,
however. It’s also a key contender in terms of
jobs and companies where the focus is on new
applications-based technologies.”
6
© 2016, CBRE Ltd.
London doesn’t just compete in aggregate
size, however. It’s also a key contender in
terms of jobs and companies where the focus
is on new applications-based technologies.
This is owing to its beneficial mix of
entrepreneurial climate, established venture
capital industry and attractive environment
for a very cosmopolitan workforce. Its main
competitors are not necessarily the biggest
and the cities most often cited are Berlin,
Dublin, Stockholm and Amsterdam.
http://www.cartonspleins.fr/paris-ladresse-de-la-nouvelle-economie/
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CONTINENTAL DRIFT
THE EUROPEAN EFFECT
So what should occupiers take from
all of this?
There is massive uncertainty over the timing of Brexit
and the shape of the eventual settlement. It will be
tempting for occupiers to wait and see before making
major leasing decisions but it could be a long wait
The leave vote is likely to take
the pressure off London rents
and availability in the shortterm. But this comes with
two caveats
1. A reduced development pipeline
means that the situation could
reverse within five years
2. And if the location of choice has to
be London, the next one-two years
will be a good time to secure a
new lease
Ravensbourne is a university college for digital media and design, London
One element of the London digital tech
boom is ‘fintech’7. To some extent this has
developed because of the available pool of
talent and finance that comes with being part
of a bigger digital tech cluster, but proximity
to one of the world’s biggest financial services
centres is also likely to play a part. However,
the implication is that if London loses banking
jobs to competing centres then fintech
jobs could go too. Frankfurt is not a major
digital-tech centre so if Brexit is followed by a
substantial relocation of financial services jobs
to Paris it would also give a shot in the arm to
the city’s growing digital tech industries. Some
of the second-tier financial centres such as
Amsterdam or Dublin might be might be well
placed to pick up these jobs too.
7
London, A Leading Fin-Tech Cluster, CBRE September 2015 London
© 2016, CBRE Ltd.
There will also be
offsetting effects
• At the time of writing, sterling has
fallen by over 11 percent against
the euro since the referendum (over
15 percent since the end of 2015).
The future path of exchange rates is
always uncertain but most forecasters
don’t expect sterling to recover to its
previous levels while the period of
uncertainty continues and many think
it may take a long-term hit.
• The UK government is likely to
announce a number of measures
aimed at offsetting the negative
impact of Brexit. These will range
from additional infrastructure
spending, to lower corporation
tax and possibly other cuts to
the corporate tax bill as well as
deregulation — although the
latter could take some time to
come through.
• This combination of offsetting
factors may actually make the UK
more attractive for occupiers if
the UK can negotiate a beneficial
settlement on trade and passporting
rights. And for occupiers, regardless
of the settlement, this could have
a positive impact if they’re not
particularly sensitive to the eventual
negotiated settlement.
There are a number of
competing centres for both
financial services and tech
For those companies who feel they
have to relocate some or all of their
functions from London there are some
alternatives. But none have the same mix
of scale, skills, infrastructure, regulatory
environment and office stock as
London but their property costs at least,
are cheaper.
19
20
CONTINENTAL DRIFT
3
THE EUROPEAN EFFECT
What will happen to the EU
when the UK leaves?
Section 2 looked at which UK industries might
be vulnerable to the UK’s leave vote and
which other European cities might benefit
from any relocation of economic activity. This
implicitly assumes that the UK loses out by
leaving the EU while the rest of the EU gains
— a lose-win scenario. This is not the only
potential outcome, however, nor is it the only
one that property investors are thinking about.
1. A less competitive EU
Figure 5 shows investors’ response to this
question from a survey of 191 investors
carried out by CBRE in February 2016. The
majority of respondents (27 percent) opted
for the lose-win scenario but there was a
significant minority (21 percent) who opted
for the lose-lose scenario whereby the UK
is worse off as a result of Brexit and the rest
of the EU is worse off too. Few respondents
thought that the alternative win-lose (the UK
wins and the rest of the EU loses) or the winwin options were likely.
The UK has been the mainstay of the marketfriendly liberal block in the EU10. Whenever
policy, in a number of areas ranging from
trade to regulation to competition, is up for
debate or for a vote, the UK tends to find
itself at one end of the spectrum supported
by a number of other countries usually
including the Netherlands, Sweden, Denmark
and Estonia.
Figure 5: Brexit: Who Wins and Who Loses
27.2%
Europe Wins,
UK Loses
3.3%
UK Wins,
Europe Loses
0.6%
Win: Win,
Both more attractive
20.6%
This affects voting in both the European
Parliament and the Council of Ministers.
In the case of the latter, it has gone further
than just voting behaviour. Officials aim
for a consensus and most policies do not
go to a vote but there is still a perceptible
market friendly, liberal influence from this
block on many policies. This has been
the case for successive UK governments,
not just the current one. And, significantly,
Labour members of the European Parliament
have shared some of the pro-market,
anti-regulation bias of some of their
Conservative colleagues.
Lose: Lose,
Both less attractive
The leave vote might not necessarily be bad
for the UK. If the UK becomes a deregulated
beacon in the mire of an increasingly
regulated Europe then it might attract more
rather than less foreign direct investment than
at present. But there are issues associated
with that.
a. It wouldn’t benefit the UK if its nearest
and largest trading partner were to be
hamstrung by an increasingly regulatory
system as well as by an anti-competitive
and free-market bias.
b. The new EU would demand that the UK, or
any other trading partner, stick to the new
regime when doing business with Europe
and a financial transaction taxmight be
one way in which it does it.
c. The UK could simply be excluded from
some areas of business — such as clearing
in Euro-denominated bonds
Overall, a weaker and more regulated Europe
would appear to point to a lose-lose outcome
rather than win-lose. So, when thinking about
which industries could leave the UK, the
leave outcome may point to economic activity
leaving Europe altogether rather than moving
from the UK to locations in the rest of the EU.
Source: CBRE Flash Investors Survey February 2016. Responses do not sum to 100% as other responses are omitted.
Why might the rest
of the EU lose out if
the UK leaves?
There are a number of reasons why the rest
of the EU might lose out when the UK leaves.
Some of these could take years to unfold,
some could happen rather sooner. A number
of countries are highly dependent on the UK
as an export market. Ireland8, Malta, Belgium,
the Netherlands, Cyprus and Luxembourg
all have exports to the UK that are the
equivalent of eight percent or more of their
GDP9 and might be seen as being particularly
vulnerable, but the main threats from Brexit
are less direct.
8
Ireland and the UK would also have the complication of a land border that would no longer be part of the EU customs union which could cause particular problems for the Northern Ireland economy
http://www.irishtimes.com/business/economy/brexit-threatens-northern-ireland-more-than-rest-of-uk-says-davy-1.2614006
9
Fitch Ratings, ‘Brexit’ Would Raise Downside Risks to EU Sovereigns, May 2016
© 2016, CBRE Ltd.
10
Buiter, Rahbari & Schultz March 2019, http://voxeu.org/article/implications-brexit-rest-eu
“the leave outcome
may point to
economic activity
leaving Europe
altogether rather
than moving
from the UK to
locations in the
rest of the EU.”
21
22
CONTINENTAL DRIFT
THE EUROPEAN EFFECT
2. Fragmentation
The UK is not unique in its Euroscepticism.
As Figure 6 shows, there are countries that
display even more Euroscepticism than the
UK. Even countries that we’d consider central
to the EU and to the euro area such as
Germany, the Netherlands and France are not
too far behind the UK.
Public perceptions of the EU are heavily
related to current issues. Given that migration
rather than economics is currently the
hot topic, some of the data in Figure 6
could be seen as surprising. Nonetheless,
when the UK leaves the EU it would
almost certainly increase the potential for
further fragmentation.
“The Italian Five
Star Movement
(M5S) is neither
anti-migrant nor
anti-EU but it is
anti-euro and
has called for a
referendum on
euro membership.”
France
Germany
The big and immediate threat comes from
the 2017 French presidential election. The
policy of Marine Le Pen’s Front National
(FN)11 is to emulate the UK in renegotiating
the conditions of France’s membership of the
EU against a threat of an in-out referendum.
Le Pen is far from being the favourite to win
the election, but the UK’s leave vote could
give the FN’s campaign a shot in the arm and
would give its ideas more credence in French
politics generally. The FN’s ambition is to push
back on migration and ‘ever closer union’
rather than EU membership per se. A French
renegotiation would be disruptive to say the
least, and could even lead to the breakup of
the EU were France to actually leave.
The FN in France is not the only eurosceptic
party in the larger countries. The Alternative
für Deutschland (AfD) in Germany follows
a similar right-wing, populist mix as the
FN and it has made some gains in recent
local elections. Italy has more than its fair
share of eurosceptic parties including the
Five Star Movement (M5S) on the left, the
Lega Nord (or Northern League) — a right
wing separatist party and Fratelli d’Italia —
Alleanza Nazionale (Brothers of Italy or FDI)
which espouses similar sentiments to the FN in
France and the AfD in Germany. As with the
FN, many of these parties are anti-immigration
and Eurosceptic rather than anti-EU, although
the Party for Freedom in the Netherlands (PVV)
is an out and out anti-EU party. In all cases,
the referendum result in the UK could act to
‘encourager les autres’ with unsettling results.
Italy
Figure 6: Euroscepticism in the EU
The Italian Five Star Movement (M5S) is
neither anti-migrant nor anti-EU but it is antieuro and has called for a referendum on euro
membership. The M5S has done well in this
year’s municipal elections and forthcoming
referendum on constitutional change in Italy
will give the MSS another chance to inflict
damage on the government. If the government
loses, which is looking like a distinct
possibility, Prime Minister Renzi will resign and,
although it will not immediately usher in an
MSS government it could bring the day of an
MSS government and a referendum on euro
membership closer.
Austria
Greece
Poland
Czech Republic
United Kingdom
Germany
Netherlands
France
Sweden
Slovakia
Italy
Belgium
Slovenia
Finland
Hungary
Luxemborg
Spain
Denmark
Bulgaria
Portugal
Ireland
Croatia
Romania
0
Source: European Commission Autumn 2015
11
5
10
15
20
30
% having a fairly or very negative perception of the EU
Financial Times 16/2/16. http://www.ft.com/cms/s/0/58f9cc98-ce51-11e5-92a1-c5e23ef99c77.html#axzz48B6koZD0
© 2016, CBRE Ltd.
25
35
40
45
Protest parties aside, the non-euro area
countries could face different issues. Every
EU country except Denmark and the UK are
committed to eventually joining the euro and,
indeed, the euro was originally intended to be
the currency of the entire EU not just a part
of it. Following the great financial and euro
area sovereign debt crises, however, it looks
unlikely that many of the current non-euro
countries will be in a hurry to join.
12
Sweden in particular looks like an
unenthusiastic candidate. The Swedish
government maintains that a referendum
would be needed before Sweden could join
the euro. With opinion polls currently showing
75:14 against, it doesn’t look like there’ll be
one soon. Other countries where European
Union membership looks likely to happen
later rather than sooner — if at all — include
Poland, where the ruling Law and Justice
Party is against membership, and the Czech
Republic where opinion polls currently show a
70:29 anti-euro majority.
The coexistence of the European Union and
the euro area already creates tensions. The
monetary union experiment has had major
difficulties and many now see that the only
way that it can survive long-term is if it is
accompanied by fiscal union too. Were this to
happen it would be consistent with ever closer
union but it would make life for countries
outside of the euro block but within the EU
increasingly difficult. For as long as the UK is
an EU member, it acts as a balance against
the centralising tendencies of the euro area.
Without the UK, countries like Sweden,
Denmark, Poland and the Czech Republic
will find it increasingly difficult to live outside
of the euro area. Perhaps for this reason,
an opinion poll in Sweden before the UK
referendum found that while support for the
EU commanded a 44:32 majority, were the
UK to leave this would reverse to a 36:32
balance of opinion in favour of leaving the
European Union.12
Opinion polls taken since the UK referendum
result have actually shown a firming of support
for the EU in continental European countries
but this sentiment might not last that long.
The workings of the single currency are still
an issue as is migration and the referenda
and elections of the coming year still have the
potential to be quite unsettling.
Poll by Sifo for SVT. http://www.breitbart.com/london/2016/04/21/majority-of-swedes-would-want-to-follow-britain-out-of-the-eu/
23
24
CONTINENTAL DRIFT
Could there be a
win-win outcome?
Much of the preceding discussion and most
of the debate on what happens to the UK
and the rest of the EU after Brexit assumes
that the EU will continue, more-or-less, as it
is now, possibly losing a few more members,
after the UK leaves but this is not the only
potential outcome.
As mentioned, issues with the single currency
were causing stresses and strains within the
EU when Brexit was a mere twinkle in the eyes
of UKIP members and the right wing of the
Conservative Party. Moreover, the discussion
of populist and protest parties across Europe
reveals that many of them are anti-euro (or
anti-euro as it functions now) rather than
anti-EU. Brexit may provide an opportunity
to tackle long-standing problems with the
single currency as well as to define the postBrexit EU.
Possible outcomes
after Brexit
No outcome, of course, is certain but
Figure 7 attempts to broadly categorise the
potential scenarios.
‘Muddle through’ the top left quadrant or
scenario describes what most analysts believe
is likely. The UK manages, eventually, to
negotiate an amicable settlement which
preserves some aspects of the UK’s current
access to EU markets for financial services
with a compromise on migration — and
possibly budget contributions. The rest of the
EU continues much as before but is perhaps a
little more introspective as described above.
‘UK excluded’ describes the scenario that the
rhetoric coming from some other EU members
might suggest. The UK leaves the EU and
compromise on financial services and trade is
not possible unless the UK accepts the ‘four
freedoms’ which it will not do. The rest of the
EU then becomes rather more introspective.
© 2016, CBRE Ltd.
THE EUROPEAN EFFECT
Figure 7: What might Europe look like in five years time?
Muddle Through
UK Excluded
Free Trade Agreement (FTA)
World Trade Organisation
(WTO) rules
Compromise on
financial services
Compromise on migration
No passporting
Migration Controls in UK
No changes to the workings
of the Euro area
European Re-alignment
Further Breakup
Re-invented EFTA
Sweden, Denmark leave
too; possibly others
(Netherlands)
Compromise on migration
Political integration
in Eurozone
Consolidated Eurozone?
FTAs or WTO rules
Limited access for
financial services
Migration controls
Political integration
in Eurozone
‘Further break-up’ is the scenario where the
single currency area assumes greater power
within the EU and economic policy generally
is focused on the needs of the single currency
area. The result is that other countries, notably
Sweden and Denmark leave the EU and the
remainder of the EU becomes much more
aligned within a single currency area. The
central European countries who are not euro
members stay as long as Structural Fund
money keeps flowing but could also be leavers
if the funds start to dry up.
‘European Realignment’ is an extension of
‘further break-up’ but it goes further and is
much more thought-provoking. This scenario
would see much more political and fiscal
integration in the euro area. This may be
combined with a consolidation of membership
with some of the southern European countries
leaving the euro altogether or forming an
alternative monetary union (the ‘flexible euro’
option). Either way, the current failings of the
single currency would cease to be a drag on
economic growth in the euro area. The move
towards political and fiscal integration in the
core euro area countries would make it much
more certain that countries like Sweden and
Denmark and possibly more would leave.
The realisation that the ambition of a single
large European Union with a single currency
was no longer an option would lead to more
flexible arrangements with other countries.
There could, for example, be a smaller,
consolidated single currency area with
growing political and economic integration,
coexisting with a wider trading block which
includes the existing EFTA countries, the UK,
Sweden, Denmark, possibly some southern
European who leave the single currency
and, possibly, some of the central European
countries eventually.
These scenarios have implications for
economic growth which will inevitably drive
property market prospects too.
‘Muddle through’ would see the kind of
growth rates expected before the referendum,
possibly a little worse for the UK in the shortterm and little change for the rest of the UK.
‘UK excluded’ would be one of the much
talked about downside outcomes for the UK
before the referendum and this would have
negative consequences for the rest of the EU.
‘Further breakup’ would be negative too if
compromise deals couldn’t be made between
the exiting and the remaining EU countries.
The residual EU would also suffer from
negative trade effects and more introspective
policy making. If there was a move towards
sorting out the problems with the single
currency, however, this scenario could
have an upside too, particularly for single
currency countries.
‘European realignment’ is the really upbeat
scenario. This overcomes the single currency’s
economic problems and many of the political
strains within Europe while permitting an
open trading relationship between EU and
non-EU members in a more flexible European
economic block. The result could be higher
rates of economic growth all round.
As to the probability of any of these scenarios
we are in the realms of speculation. ‘Muddle
through’ is definitely the base case with, say a
40 percent chance of being the outcome and
we can give a 20 percent probability to each
of the other three. We are not sure exactly
how, but the odds are that Europe will look
rather different in five, or so, years’ time.
“The realisation
that the ambition
of a single large
European Union
with a single
currency was no
longer an option
would lead to
more flexible
arrangements with
other countries”
25
26
CONTINENTAL DRIFT
Conclusions
for occupiers
An unavoidable message
from Section 3, and to a
considerable extent the
whole of this publication
is that occupiers will
face a number of years
of uncertainty
Years could actually pass and it will still not
be entirely clear which of the four scenarios,
or a different outcome completely, will be
the eventual outcome of Brexit. Whatever
the scenario though, there will be a major
impact on the relative attractiveness of
different locations.
Under the ‘muddle through’ scenario the UK
competitive position remains more-or-less the
same as it is now but:
• there will be considerable uncertainty for
some time over the eventual settlement
• depending on how long it takes for the
eventual settlement to become clear,
companies with a UK presence and a
reliance on either passporting rights or
on migrant labour might want to delay
location decisions or to ‘insure’ against
future problems by maintaining or setting
up a presence in another EU country
THE EUROPEAN EFFECT
‘UK Excluded’ has more serious consequences
but it’s unlikely to go further than the ‘Canada
option’. The loss of passporting rights will
mean that many banks, both UK and nonEuropean domiciled, will need to have a
presence in at least one EU country:
Faced with such uncertainty,
occupiers should ask:
• Some overseas banks may find it beneficial
to have their main European HQ in the EU
with a smaller operating division in the UK.
• Would the UK still be an attractive location
under the ‘Canada option’ which might be
the fall-back position?
• Tech and other companies, who are
particularly dependent on quick and easy
access to skilled labour from Europe will
also have to consider their location.
• If yes, are they in a position to take
advantage of potentially attractive leasing
deals that may appear over the next one
or two years?
• On the other hand, UK excluded could
lead to a more introspective and anticompetitive EU which may help to balance
the UK’s disadvantages from ‘exclusion’ as
will the likely further weakness in sterling
under this outcome.
• What are the labour / workforce
implications of the current situation?
Anecdotal evidence that some are finding
it harder to attract EU labour even now,
and others have voted with their feet?
‘Further breakup’ has some of the
characteristics of ‘UK Excluded’. The
difficulties associated with the loss of
passporting rights and limits on migration will
still pose challenges for UK locations but:
• the UK and other countries leaving the EU
may benefit from lower corporate taxes
and de-regulation (eventually)
• any movement towards political integration
in the Eurozone could improve economic
performance there but the benefits could
be mitigated if it is accompanied by
more introspective and anti-competitive
policy making.
‘European Re-Alignment’ is potentially a
higher growth scenario for most of Europe,
particularly southern Europe:
• In cases where market proximity is an
important consideration for location
decisions, southern Europe will become
more attractive for additional locations
• The UK and other countries leaving the
EU will not suffer any of the adverse
consequences associated with ‘UK
excluded’ or ‘further breakup’.
© 2016, CBRE Ltd.
Questions for occupiers to consider
• If no, where are the alternative locations?
But there’s no hurry. Alternative outcomes
that may benefit one location over another
may start to appear.
• What is the optimal trade off between
on the one hand, waiting for greater
informational clarity and on the other
hand, enjoying any first mover advantages
associated with major relocations?
Occupiers should also proceed with
re-configuration plans aimed at
locating activities that do not need to
be in expensive city-centre locations
elsewhere. The rationale for this
will not change although the list of
alternative locations to be considered
might because of changes to exchange
rates, taxation and regulation.
27
28
CONTINENTAL DRIFT
© 2016, CBRE Ltd.
Contacts
For more information about the issues raised by this report, please contact:
Neil Blake
Head of EMEA Research
Jan Linsin
Senior Director
t: +44 20 7182 2133
t: +49 691 700 77663
e: [email protected]
e: [email protected]
Jos Tromp
Head of Continental
Europe Research
Marie Hunt
Executive Director
t: +49 8924 206018
e: [email protected]
t: 353 161 85543
e: [email protected]
Richard Holberton
Senior Director
t: +44 20 7182 3348
e: [email protected]
Miles Gibson
Head of UK Research
t: +44 20 7182 2738
e: [email protected]
Aurélie Lemoine
Director, Divisional Research
t: +31 153 64 34 88
e: [email protected]
Cecilia Gunnarsson
Research Manager
t: +46 84 1018757
e: [email protected]
www.cbre.co.uk/research
Global Research and Consulting
This report was prepared by the CBRE UK Research Team which forms part of CBRE Global Research and Consulting — a network of preeminent researchers and consultants who collaborate to provide real estate market
research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.
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