Philip Grace: Brexit Shock, Trade Deals and a Trump Card

Published on July 4, 2016 - By Cecilia Amador de San José

Following the UK’s Referendum on EU Membership and its decision to leave, what’s next for the UK flexible workspace industry? OfficingToday asked Philip Grace, founder of i2 Office and Chief Executive of Global Office Group Plc, for his views.

52% of people who voted in the recent referendum have chosen BREXIT. When all people entitled to vote, including those who didn’t turn out to vote, are taken into account, it is calculated that just over 35% of the voting population have elected to leave the world’s second largest economy, home to more than 500 million people.

Exit came as a shock.

There seemed to be no planning by the government or our elected representatives, ¾ of whom wish to remain in the EU. Our elected politicians failed to adequately plan for the direct consequences of BREXIT. Shock waves continue around the world leaving the UK with no effective Prime Minister, Chancellor or Leader of the Opposition. Stock markets crashed, property and bank stocks were significantly affected, banks reported that they were pulling back from lending.

The Governor of the Bank of England came to the rescue, telling everyone on Friday not to worry, the UK has £250B available to defend the status of the UK. The following week, the UK’s AAA credit rating was downgraded, sterling crashed and all this in two working days.  

We have seen something of a recovery, but everything is balanced on a knife edge.

Millions of people are petitioning for a second referendum. Should that happen, it would be interesting to see how many ‘vote leavers’ change sides. Will the younger generations, the ones most affected by BREXIT, be bothered to vote this time? People worry about the value of their pensions, mortgages are becoming harder to secure and it’s more expensive to go on holiday to Europe! This can only lead to job losses across the UK and a recession later in the year.

London is bearing the brunt of financial services cuts, with banks seeking a move to central Europe where traditional mainland European cities are offering to make the transition simple, straight forward, welcoming and cost effective. This uncertainty could last for up to four years whilst the UK gets their act together.

The EU plans to make the ‘divorce’ painful for the UK, to ensure other member states do not follow the UK and vote to leave the EU. Business needs certainty, especially as the world has only just started to recover from the banking crisis. Investment only comes with confidence, without this, any decision to grow a business and to take office space will be delayed.

London has been the capital of Europe for many years and is currently the world’s number one financial city. So great has its contribution to the UK economy been, London has often been seen as a standalone country. The financial engine house of the UK generating the wealth of a nation and being the gateway to Europe.

Overnight, it looks as if that status could be removed.

If that happens, this cannot fail to impact on office demand. Whilst there is uncertainty and challenges ahead, companies will delay moves and put off expansion plans. The status quo can only be repaired if the government moves quickly. This is unlikely as politicians are focused on jockeying for position to secure their own jobs, all made worse, as there is talk about a general election or even another EU referendum later in the year.

Decisive action is required.

If the UK does withdraw from the EU, then we need to secure a number of early trade deals with countries such as China and India. Somehow, these trade deals need to be negotiated ahead of any exit from the EU. The trade deals need to position the UK as a ‘gateway’ to these recent emerging markets, markets which have the potential to offer long term opportunities for trade, with new and fresh opportunities for UK businesses.

As London used to be the gateway to Europe, used frequently by America and other countries to platform access to Europe, the same needs to work for emerging markets. This could significantly contribute to the UK economy, such a strategy could also mitigate the UK’s exposure to the EU and prepare for a possible collapse of the European project.

Flexible office space should be a beneficiary from this uncertain outlook. But challenges are ahead.

In all markets, supply and demand affect pricing. Property voids will follow companies downsizing, this will create new grey space. New serviced office companies, such as Global Office Group Plc*, will emerge and seek to increase the supply of serviced office space.

The headline cost of new space is likely to be lower and new serviced office companies will negotiate better terms than those which were secured earlier this year. Rent reviews, which have fixed dates and higher business rates, will drive the mature operator’s fixed costs upwards. New entrants to the market will be unencumbered, they will be able to deliver newly refurbished, on trend, fashionable solutions to meet with the increased demand at a more cost effective price. This is likely to lead to consolidation in the marketplace as mature serviced office companies collaborate to reduce their central overheads.

My article published in Officing Today during February this year, predicted turbulence in the serviced office market over the next three years, citing the UK referendum, the American election and increased fixed property costs. The BREXIT vote looks likely to accelerate the process.

So, halfway through the year, that’s the UK referendum sorted, now bring on the American elections. The trump card could be a UK general election at the end of the year. Still, at least we can look forward to a great summer, having experienced the wettest June since records began… 2017 can’t come soon enough.

*Disclaimer: Philip Grace is Chief Executive of Global Office Group Plc

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