Insight 1:

London’s Global

Differentiators

Resilience, renewal and reinvention

With global tensions rising and economic uncertainty yet to abate, London has reprised its role as a leading safe haven. Yet there is also a more progressive case for London, driven by rising employment and expansion in new growth sectors.

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It was meant to be a return to the Roaring Twenties. A time for global output and prosperity to recover the lost years of the pandemic. A revival of the familiar. Instead, major economies around the world are expanding sluggishly, at best. The pernicious inflation that has helped reverse a generational decline in interest rates and caused widespread social disruption is only just beginning to normalise. At home, governments fret about ballooning fiscal obligations at a time when borrowing costs are suddenly no longer trivial. And that's before they consider the vast investments in infrastructure required to address climate change and growing, or ageing, populations.

On the global stage, geopolitical tensions are escalating, with social media amplifying the immediacy and reach of crises at a rate unseen before.

Figure 1 The new age of uncertainty? – Geopolitical risk index

Source: Macrobond/Knight Frank Research

'Fragmentation' or 'fracturing' have become popular narratives amongst thought leaders, as governments and corporates alike openly question whether the forward march of political and economic globalisation is going into reverse.

For what is still, just about, a period of economic expansion, the mood is remarkably jittery.

Figure 2 Mentions of 'fragmentation' keywords in corporate earnings calls - 2013-2015=100

Source: IMF World Economic Outlook, October 2023

Reprising the safe haven role

Against this confusing backdrop, the idea of a global city as a safe haven takes on a new significance. The promise of the rule of law, political stability and pragmatism, and even personal safety are not inconsiderable attractions in the prevailing context.

A window of investment opportunity

None of this has been lost on real estate investors. While commercial real estate investment has slowed globally, London remains the top destination for overseas capital, with almost £5bn deployed in 2023.

Unlike many other global cities, London offices did not see the sharp decline in yields from 2016 onwards and have been quicker to reprice post-covid. With favourable currency effects, this has equated to a material advantage for overseas buyers. Private purchasers have been a notable driver of recent activity and accounted for almost 50% of office investment by volume in the third quarter of 2023.

The new case for London

London's role as a safe haven is compelling, but there is also a more progressive case to be made. The post-Brexit environment has, of course, brought change. But on the big questions of employment, global financial significance, and the ability to successfully fund and incubate new ventures, London's dominant position is intact, alive, and well.

Employment and talent

Greater London added a net 400,000 jobs from December 2019 to mid-2023, a 7% increase over one of the most disruptive economic periods of modern times.

London's future talent pool will be bolstered by rising student numbers. We forecast a 16% increase in full-time undergraduates between now and 2030. Driven by rising overseas demand and growth in the UK 18-year-old cohort, this could equate to an increase of 263,000 students and, eventually, a similar impact on London's talent pool.

London remains unquestionably the financial capital of Europe, ranking second only to New York in Z-Yen's long-running Global Financial Centres index and retaining its position as the leading green finance hub.

Figure 3 Workforce jobs growth – Greater London

Source: Nomis/Knight Frank Research

Our own data shows that the ongoing appeal of London as a home for professional services, financial and technology businesses is translating into demand for London office space. Meanwhile, London continues to draw the largest share of venture capital in Europe.

This funding is being deployed into several new growth sectors, ranging from the relatively well-established areas such as life sciences, to cleantech and climatetech, and creative sectors including film and gaming.

The rapidly growing AI industry is a case in point. London is home to over 2,000 AI companies and leading research institutions, such as the Alan Turing Institute. More than 70% of UK AI firms are based in London, attracted by the symbiotic relationship with the 50,000 professionals listing AI as a core skill.

Figure 4 Venture capital funding by city – $bn 2020-2022

Source: Dealroom/Knight Frank Research

Challenges

While building a compelling case for London's future is straightforward, it is not entirely without challenges. The anticipation of political change risks slowing decision-making in 2024, even if our analysis shows that national politics tend to have little direct correlation with either economic or real estate performance. In the longer term, London is grappling with the same questions that many large cities face: how to tackle the scarcity and cost of housing, how to upgrade buildings to more sustainable standards, and the need to adapt infrastructure to changing societal requirements.

None of this is easy to address and is likely to require partnership approaches.

Timing is everything

Although always a nuanced and evolving picture, previous reservations over London’s ongoing significance as a global city have been shown to be misplaced. Now, with clear reasons to forecast an ongoing expansion and some macroeconomic headwinds just beginning to ease, the question for any decision-maker becomes one of timing.

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