A report in today’s Observer claims leading banks will pull out of London early next year. As well as the obvious impact on the financial services sector, Britain’s commercial real estate market could also be decimated. London’s office market could have 26 million sq ft of space at risk vacancy if rules enabling companies to trade freely within the European Union (EU) were revoked, according to analysis by DealX, a property analytics start-up.

The so-called “passporting” rules enable banks, insurers and asset managers to trade in other EU countries from a UK base. They are seen as key to keeping the City alive but could lead to a collapse in rents if removed.

Research from DealX, a London and Berlin-based big data analytics start-up, estimated over 1,900 firms would be reviewing office requirements if passporting was revoked. The analysis said that 91 percent of the space initially at risk is occupied by companies in the banking, insurance and asset management sectors.

With 2,079 companies registered with the EU’s MiFID financial services regulations, Britain boasts three quarters of all cross-border investment firms licensed across the entire EU.

The quandary for British firms is that the next prime minister will find it extremely difficult to both satisfy demands to limit EU immigration and retain access to the single market and passporting. Freedom of movement is a key element of the single market, and other EU countries are likely to only allow Britain to maintain passporting rights under a deal which preserves the four freedoms of the single market – goods, capital, services and people.

The findings, found by crunching official data on the capital’s office occupiers and through a survey of 100 leading financial businesses in London, show

  • 26 million square foot (2.46 million square metres) of office space – 9 percent of London’s office stock – is at risk from relocation, an area equivalent to 23 O2 Arenas or 2,731 Wimbledon centre courts.
  • Over half (57 percent) of the firms surveyed using passporting could be forced to relocate staff, which would constitute around 1,100 of the
    capital’s firms.
  • Under a worst-case scenario (complete exit from the single market) a sharp fall in office rents would occur as these firms relocate.
  • Over 90 percent of space identified at risk is in the City and Canary Wharf.
  • Rent falls are still likely even if Britain remains in the European Economic Area (in the single market, with passporting rights) due to uncertainty and reduced investment during Article 50 negotiations.
  • Though 70 percent of the 97 EEA passport holder firms surveyed think the UK will retain EEA access and passporting rights, 55 percent of respondents said they had already looked at the option of relocating staff.
  • Dublin was the most popular potential destination among firms for relocation, followed by Luxembourg and Frankfurt. Edinburgh was found to be a potentially popular destination in the event of Scotland retaining single market access and passporting rights.

Whether many of those voting for Brexit have an interest in the City’s bankers or property investors is highly debatable. But ministers should do and the focus therefore is for the sector – and its occupiers – to band together to help politicians make the case for a sensible outcome. In the interim, market disruption is inevitable.

“London’s financial services industry is a crucial part of our economy and underpins a huge proportion of commercial real estate,” says Joseph Kelly, CEO and co-founder of DealX. “What these data show in great detail are the sheer number of buildings whose occupiers rely on passporting to conduct their business. Being able to understand real estate is as much about cutting and slicing the assets to see the profile of tenants. While many of the real estate investment trusts (Reits) have varied exposure to global businesses, thousands of buildings, owned by all manner of parties, will be reliant on the prime minister carving out a sensible deal to protect London.”