Barclays’s 25% UK office space cut signals glut threat

Bloomberg

Barclays Plc’s decision to cut 25 percent of its London office space highlights the growing risk that tenants will be in short supply for developers of buildings being constructed.
The lender is seeking to sublease offices in the Canary Wharf financial district to the UK government, according to two people with knowledge of the matter. They asked not to be identified because the information is private. It shows how space that was previously occupied can suddenly come back on the market as companies downsize, providing more competition for tenants than investors expected.
Developers sought to capitalize on escalating rents by starting work on a record number of central-London office projects in the six months through March — making oversupplya bigger threat to rents and values than Brexit, UBS Group AG said in August. Companies could shift as many as 100,000 jobs away from London within two years of the U.K. starting the process to leave the European Union, Jefferies Group LLC analyst Mike Prew wrote in a note to clients in June. That’s enough to fill the equivalent of 20 skyscrapers the size of the Gherkin building, he said.

Upper Hand
“Tenants are getting the upper hand in rental negotiations, with banks optioning space to relocate from London,” Prew wrote in a note to clients on Monday. “Property yields may give the illusion of looking screamingly cheap, but we have expected rising yields” since August 2015.
Barclays’s space cut, for which the bank took a 150 million-pound ($183 million) charge in the third quarter, will probably be completed in the next two weeks, Chief Executive Officer Jes Staley said on a Oct. 27 call with analysts. It’s the equivalent of about 5,000 desks. The reduction in office space came after a hiring freeze was put in place, a spokesman for the bank said.
Office values in the City of London financial district fell the most in at least seven years in July after Britain voted to leave the EU. The referendum result is already forcing landlords to offer longer rent-free periods to attract occupiers and will cause rents in the City and docklands to fall 10 percent to 12 percent over the next two years, according to broker Carter Jonas.

Increased Incentives
“There has been an increase in tenant space becoming available recently,” said Jules Hind, head of leasing and development at broker Farebrother Ltd. “If that trend continues it will have an impact on the wider market where landlords have already increased incentives to secure deals.” The space being subleased by banks may provide a solution for firms that are still looking for office space, said William Beardmore-Gray, who leads Knight Frank’s leasing business.
“Retrenchment in the financial sector will help fill the gap between demand and supply,” he said. “Firms outside of finance have moved on from the referendum vote and are back out looking for office space, especially tech and creative firms, because their lease expiries are not going away.”
Barclays isn’t the only bank cutting the amount of space it occupies in London. Citigroup Inc. has offered to rent about 300,000 square feet (28,000 square meters) in its 25 Canada Square tower to Her Majesty’s Revenue & Customs, people familiar with the plan said in October. HSBC Holdings Plc plans to move 1,000 workers to Birmingham, Britain’s second-biggest city, to cut costs and separate its U.K. operations.
“Barclays’s decision could become a more widespread phenomenon if the U.K. has a hard Brexit and doesn’t retain full rights to passport financial services to the European Union,” said Michael Pain, head of the central London unit that advises
office tenants at Carter Jonas.
“If that is the case developers will find themselves competing more and more” with tenants looking to sublease space.