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Commercial property v. Brexit?

14 February 2019

As Brexit uncertainty and online shopping weigh on sentiment, Philip Gadsden describes how the Property fund is positioned.

The UK commercial property market behaves very differently to bond and equity markets, but that doesn’t mean it’s not subject to some of the same pressures and shifts.

The most obvious among these is Brexit. After the referendum, several UK property funds were suspended on fears of costly mass redemptions. That experience may feel distant, but the theme of Brexit remains as relevant as ever – and not just because growth has slowed since the referendum.

“Property has not been immune, but there are segments of the commercial property market that seem more at risk to Brexit – one example is the City of London, with the potential exodus of large financial institutions to cities such as Paris,” says Philip Gadsden of Orchard Street, manager of the St. James’s Place Property fund.

City office buildings with large ‘floor plates’ can have values of hundreds of millions of pounds and face some of the greatest risks. Orchard Street’s approach has been to buy buildings worth more like £30 or £40 million but without making sacrifices on location.

“In fact, one of the effects of Brexit may count in our favour: the uncertainties have led many developers to hold back from further projects after the current wave of building,” says Gadsden. “So, there isn’t much in the pipeline, especially in London, and there may be an opportunity for potentially rapid rental growth in two or three years’ time, reflecting the lack of supply.”

Culture change

Yet Brexit is just one of the factors reshaping the UK commercial property market. Another is the shift to online, which has forced high street retailers to engage with how they can differentiate themselves from merely offering the same goods available online.

“When we visit a retail centre, we want a nice, bright, safe environment where we can collect or return a previous online purchase or browse among shops we know – and discover others we don’t; plus have the opportunity to enjoy a coffee, some lunch or even a movie,” says Gadsden. “Shopping centres around the country such as Westfield, Merry Hill and the Trafford Centre offer just such a pleasant retail experience.”

It is different, he argues, when you shop locally. Here convenience and value are the watchwords; although there are also exceptions that still work locally; bulky items such as furniture, for example.

“These priorities lend themselves more to out-of-town retail environments, including supermarkets; and this is where we hold most of our retail assets,” he says. “Indeed, our retail property assets are 97% occupied – which proves that, for the right property, there remains a good level of occupier demand.”

Offices without walls

Even office culture has changed rapidly in recent years, with a rising preference for shared working spaces. Under this model, a provider such as WeWork takes away the hassle of fitting out an office for your staff. It simply provides a central amenity space – such as lounge areas for an informal chat – and then makes office space available on flexible short-term arrangements. This suits many smaller companies or start-ups better than the long-lease arrangements of old.

“We have reflected some of these innovations at Bauhaus, our prime office asset in Manchester city centre, which we’ve comprehensively refurbished,” says Gadsden. “The building now offers a large communal area. It has a modern, contemporary feel, and we’ve considered carefully its environmental impact and the wellbeing of those who will occupy it. Demand for traditional leases will continue, of course, but co-working has become embedded in the expectations of businesses, both large and small, and it is important we are alive to that.”


Orchard Street is a fund manager for St. James’s Place.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The opinions expressed are those of Philip Gadsden of Orchard Street as of February 2019 and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.


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