Is London facing a tech property bubble?

November 9, 2018

London holds on to its position of one of the leading global tech hubs, despite Brexit-induced uncertainty. Tech companies struggling to find affordable rents in Old Street and Shoreditch, turn to other locations within the capital, or to other UK cities such as Birmingham and Manchester.

BusinessCloud’s recent event entitled ‘Is London’s tech property bubble about to burst?’ highlighted an existing misconception – it is wrong to assume that the capital’s tech sector is centred around Old Street and Shoreditch. According to Cal Lee, the founder of Savills’ flexible office space provider – Work there, tech and creative companies have significantly shaped demand in the property market, given take-up rates of 34% in 2016, 28% in 2017, and 46% to date, seen in the West End.

With Facebook signing a deal to take more than 600,000 square feet of office space across three buildings at King’s Cross, whilst companies like Apple choose the old Battersea power station as their new headquarters location, it becomes clear that the activity of the tech sector is not centred around specific hubs, given the lack of new office space supply for teams of 1000+ staff in the Old Street and Shoreditch localities.

Furthermore, cities like Birmingham and Manchester have enjoyed an influx of demand from tech businesses who choose to move their back-end office functions outside London. This trend is set to continue, with tech companies recently reporting innovative environments and outstanding entrepreneurial spirit in such locations. In addition, options outside the capital offer a significantly lower cost base, in comparison to the staggering rents of £75 to £80 per square foot in Shoreditch, which are unaffordable for growing tech businesses. This gives rise to the notion of a tech property bubble, with rental figures in Shoreditch now exceeding those observed in the City of London, despite being more than 25% lower than the figures seen in the latter region five years ago.

Rising concerns over the consequences of Brexit have made investors and developers question London’s ability to continue housing a large segment of the ever-growing tech sector in the long-run. Despite the UK’s position slipping from joint top (with Germany) to third place in the annual FT1000 list of Europe’s fastest-growing companies, London remains home to 74 fast-growth companies, which is more than any other European city. According to Tech Nation 2018, UK tech companies have more foreign customers than those based in the Silicon Valley, suggesting that the raised level of uncertainty and potential future limitations bought about by the Brexit are unlikely to shift London’s position as a global tech hub.

Professionals in the office space sector suggest that Southwark and the London Bridge area are likely to be the next hotspots, while rents in existing hubs – Old Street and Shoreditch – should plateau at the current level. This is scenario is highly likely, given that growing tech companies are willing to be the ‘trendsetters’ who open up previously unexplored locations, whilst searching for lower rents and innovative communities. Finally, the latter predictions also dissipate any existing fears of a tech property bubble, seeing as the companies’ unwillingness to pay extremely high rents, fears of a ‘hard’ Brexit scenario, as well as the government’s support for plans involving new office creation, are all factors that will assist in stabilising any further incremental price movements