Boum! The Rebirth of Paris Has London Rattled

(Bloomberg Opinion) -- Perception isn't reality, but it matters. A new EY survey has ranked Paris above London as the most attractive destination for foreign investment, for the first time since the accounting firm started doing yearly reports on the subject.

Grading cities is obviously an art rather than a science – this is more about sentiment than hard capital flows – and the same survey still had London ahead as a tech hub. The U.K. perma-bulls who believe Brexit will just be a historic blip should pay attention, nonetheless.

One measure of a city’s confidence and attractiveness is the number of cranes adorning its skyline as new office buildings are constructed. And while London is still throwing up plenty of its oddly shaped skyscrapers, there have been worrying signs. Meanwhile, Paris has embarked on an even more vigorous construction program – something that will no doubt please France’s ambitious young president Emmanuel Macron.

London’s residential property bubble is deflating and office space under construction in the capital fell 9 percent in the six months to September, according to Deloitte. Shares in real-estate developers are still below where they were before the 2016 EU referendum.

Boum! The Rebirth of Paris Has London Rattled

It’s still too soon to write London off, of course. Brexit hasn't happened yet, the U.K. capital remains a talent magnet and the weak pound makes investment cheaper for foreigners. Deloitte notes that the volume of new starts for office construction did return to above-average levels in early 2018. There’s still money sloshing around looking for a home, interest rates are low and cool technology companies are replacing cautious banks as the city’s landmark tenants. Google is building a “landscraper” in London – which will be as long as the Shard is high, apparently –  and Apple is taking over a power station. 

Yet, apart from the tech giants, there’s a lingering concern about who is going to fill all of the new corporate temples. The amount of office supply set to hit London is high by historical standards, even after the drop in construction last year. Delivered volumes in 2017 were estimated at their highest level in 13 years, and there’s at least 10 million square feet of new space due over the next few years.

Boum! The Rebirth of Paris Has London Rattled

Developers will be praying that the City of London’s finance sector can reach accommodation with Europe after the exit from the EU, while the burgeoning popularity of flexible workspaces depends to a large degree on a thriving startup scene – something that again will depend on a workable relationship with the rest of the world post-Brexit. WeWork Cos Inc. is central London's biggest office occupier.

Meanwhile, the proliferation of cranes in Paris has been impressive. In the six months to September, Deloitte data for the enlarged “Grand Paris” area -- which at 7 million people isn’t too far below London – tracked a 5 percent rise in office construction. At 1.75 million square meters, the total volume of space being built was bigger than London's. New starts were 25 percent above historical averages.

The tenants taking up Paris space are certainly less glitzy than London's, for now. Government departments, law firms and a new “House of Europe” for EU bureaucrats won’t bother the Brexiteers too much. But Uber Technologies Inc. and WeWork are leasing space in Paris too. Google and Facebook are investing in artificial intelligence hubs. And Brexit certainly won’t hurt the Paris finance scene. Bank of America is looking to transfer more people than expected there in a 400-person move.

To argue that Paris might take London's place is a stretch still. But sentiment matters. Even if EY’s is only one survey, it’s a warning to Boris Johnson and co. that there’s too much complacency on one side of the Channel.

©2018 Bloomberg L.P.