Brexit scare over? Why Wells Fargo bought a $400M building in London.

Could the purchase signal renewed confidence in Britain’s commercial real estate market?

After the Brexit vote, an air of uncertainty has hung over London’s financial district like summer cumulonimbus.

So why is Wells Fargo buying up property there?

In a significant post-Brexit real estate deal, the San Francisco-based bank agreed to purchase new headquarters in London. The move has surprised some analysts, as commercial real estate markets were expected to take a hit after the Brexit decision. Is London's financial center already recovering from the dire Brexit warnings? 

In June, Britain voted to leave the European Union, prompting forecasts of “global financial collapse.” The British pound tumbled. But those predictions so far have proven largely hyperbolic – many stocks bounced back after sudden declines – but market uncertainty has left a tangible mark.

Under EU membership, foreign institutions could sell their services across the EU via London. But that little financial perk may not carry over to a post-Brexit Britain, so firms may consider moving to economic centers elsewhere in Europe. Vodafone, the world’s second largest telecom company announced it may move its headquarters from London to mainland Europe. A wave of relocations could leave empty office spaces in its wake, causing property values to decline.

But the Wells Fargo purchase suggests market confidence, not pessimism.

Renewed confidence, or just good business?

On Monday, Wells Fargo agreed to buy the 11-story development in London’s financial district. The deal was in the works before the Brexit vote, spokeswoman Kathryn Ellis told The Wall Street Journal.

In 2018, the bank plans to consolidate more than 800 London employees at the new headquarters – but job cuts are not expected. In other words, Wells Fargo is optimistic about business opportunities in a post-Brexit Britain.

Delores Conway, a professor of real estate economics and statistics at the University of Rochester in New York, says Britain’s commercial real estate market is likely more stable than many assume. London’s office market has a 3.3 percent vacancy rate, according to JLL’s Global Market Perspective, making it one of the tightest in the world. By comparison, San Francisco, which is the tightest in the US, has an 8 percent vacancy rate.

“That means there’s not a lot of space to rent,” says Dr. Conway in a phone interview with The Christian Science Monitor. “So any space that becomes available would be very valuable, even with Brexit.”

Declines in property value will probably be slow and subtle, Conway says.

“Even if some European companies do move their offices out of London, it’s not going to be right away,” Conway says. “These things take time, so the vacancy rates would rise gradually. But at 3.3 percent, there’s room for them to rise without it having as great an impact on property values as people might expect.”

Additionally, the pound’s decline relative to the dollar makes the purchase a lot more affordable. In an interview with The Wall Street Journal, Ms. Ellis declined to comment on whether devaluation of the pound influenced the bank’s decision to buy. The property went for about £300 million, or just under $400 million, Reuters reported.

The decision to buy, rather than lease, has been seen by some as a risky move in an uncertain market. But according to Conway, the decision probably had more to do with real estate fundamentals than Brexit.

“Real estate decisions of this magnitude always have to be done in the space of uncertainty,” Conway says. “Even if they were going to lease, these are normally 10-year leases. There’s a lot that can happen in a 10-year cycle.”

“My guess is that they’re willing to ride out any cycles that happen,” she adds. “And that would include Brexit.”