London's Economy Is Fine, Just Don't Let The Politicians Near It

Whilst a great deal of global capital is still attracted to London and the UK in general, yields are relatively flat, and nearly everyone is just waiting for the government to do something stupid. Industry experts at Bisnow's recent Capital Markets and Foreign Money event talked about the four dangers commercial real estate faces from government.

Currency Strength

Patron Capital managing director Keith Breslauer said cheap currency is helping people feel pretty good, which bodes well for the future. Housing stats are good, values are high and products and goods are affordable. The weak Sterling invites new investment and boosts trade and tourism.   

Taxes

Stamp duty was a mistake, Breslauer said. It was a populist measure that did not do a lot in terms of revenue, but it got a lot in terms of political impressions. Is it possible London commercial property could be taxed similarly? That would definitely have an effect: It would shrivel the economy to within an inch of its life, Breslauer said. 

The increase in business rates is already causing widespread outrage. Business owners are worried about expanding — and in some cases just staying afloat.

Interest Rates

Though the U.S. recently raised interest rates, that is not likely to happen in the UK or Europe for a few years, and until they rise, there will not be any dramatic changes.  

With low interest rates, we get more money and occupiers pay better rents. If rates rise with economic growth, we have no worries. But a rate increase without genuine growth would mean we are all looking at big problems.

Wage Growth And Employment

Mitsui Fudosan UK managing director Eiichiro Onozawa said there is no crisis if the interest rates don’t increase, but there will be a political avalanche if wages do not increase.

The Crown Estate chief investment officer Paul Clark agreed. Wage growth finally is creeping up in the U.S. and we desperately need that to happen over here in the UK.

“We’ve gotten used to extraordinarily low interest rate[s] and vast amounts of quantitative easing splashing around in the system,” Clark said. “But the UK has a productivity problem. We’ve struggled to grow real incomes consistently for over a decade.”  

The bottom line: Real estate markets remain relatively buoyant, despite the issues, rather than because of the health of the economy. 

When the talk turned to GDP, Clark said there were better ways to measure a country's health. He is concerned about real employment, what people are earning, levels of productivity and business investment.  

“There are a broad range of things we can use to determine the health of the economy,” he said. “In both the USA and the UK, we’ve seen ‘nutrition-free growth;’ that is, growth without any real improvement in people’s living standards and without any robustness in the economy.

Breslauer agreed there were simpler, more tangible ways to know whether the economy was rollicking or rolling: Has supply kicked up or not? Are companies building space on spec? Are they getting financing? Is the London office sector a scary place to invest or not?

Right now, it is not scary. It does not thrill like it once did, but maybe that is a good thing for a little while.