Originally published May 2021.

Globally cities have taken a hit, but that’s a blip – and the UK capital in particular is set to thrive.

London is in crisis. Over the past year the UK capital has experienced population loss of biblical proportions. A mass exodus in the face of pestilence and Brexit. So why am I positive on the outlook for London property?

As many will know, in January the Economic Statistics Centre of Excellence released analysis estimating that 700,000 foreign-born nationals, or 8% of London’s total population, left the city in the 12 months to September 2020. Picked up by the Financial Times, this report reverberated across the globe.

The quality of the analysis is not in question. However, reporting of it in the press has often been poor and with little context. This is important for understanding not just why the exodus has happened, but also what happens next. For me the most glaring omission was any discussion around the performance of other cities during the pandemic. Is this problem unique to London? The answer is a resounding no.

Intuitively this should come as no surprise. Global cities are magnets for students, migrants and the young, attracted by opportunities for education, employment and entertainment, and for experiences beyond what’s available at home. In the absence of these, thanks to lockdowns, why move there, or why remain? Add to this the restrictions on travel and it’s a wonder even more people aren’t fleeing for the exit.

This is showing up across the globe. Net migration into Germany was down by more than half in the first six months of last year; foreign workers entering Japan fell 60% in 2020; and, according to the OECD, last year marked the end of a decade-long increase in migration flows, with new visas and permits in OECD countries plunging 72% in the second quarter alone.

In October, a report by the Mitchell Institute estimated that the pandemic had driven the number of international students in Australia down by 210,000. As a result, certain suburbs of central Melbourne are thought to have lost around 15% of their population. 

With London being home to more than 100,000 international students, and the city’s overall foreign-born population estimated at just under 40% of its total, it’s not surprising that these global trends are being reflected in the UK capital.

But it’s not just international workers and students. As we’ve also seen reported in the UK, the pandemic has led many to seek a life outside the capital. Again, this is far from unique to London. It’s hard to forget the 700km of gridlock as Parisians fled the city in the face of a second lockdown last October. 

Turning to the US, according to analysis conducted by MYMOVE using postal service data, the first six months of the pandemic saw a 27% increase in people registering temporary moves, with cities such as New York and San Francisco reporting large falls in population, often to the benefit of surrounding districts.

This is in line with our experience at DWS. Across global residential markets we’re seeing growing demand for accommodation outside the centre, and suburban rents often rising well in advance of the market average. 

This is by no means a new phenomenon and is something I’ve written about previously, but it does look likely that the pandemic has quickened a trend towards suburbanisation, whether in London, Paris, Berlin or San Francisco.

What we weren’t seeing in London ahead of the pandemic was declining population. Unlike New York, London had seen several decades of sustained increase, pushing the number of inhabitants to record high levels. And, while the pace of growth slowed after the 2016 referendum, it had certainly not gone into reverse. 

If we take the view that London is now destined for a period of decline, then it stands to reason that we should expect something similar in many global cities. While London may face unique challenges from Brexit, let’s not forget that non-EU migration continued to grow in the years before the pandemic. 

However, widespread de-urbanisation is highly unlikely. As the impact of the pandemic starts to wane, the things that drew us into these great cities will reassert themselves. While not everything will be the same, this is a far cry from the death of the city. Most will find full-time remote working unviable, online learning will not replace in-person tuition and the pub will always win out over a Zoom quiz.

If the past 12 months have taught us anything, then surely it’s the importance of human interaction. Urban areas facilitate an unquantifiable level of connection, enriching the professional and the personal, driving change, productivity and innovation. And, while much can be done online, it is telling that Big Tech has continued to soak up office space. Even as the pandemic raged, Facebook took an additional 730,000 sq ft of office space in New York.

Turning back to London property: as I mentioned at the start, despite everything, the market outlook is a positive one. Indeed, if we look out over the next 10 years, then our latest forecasts at DWS show London is one of the top-performing cities. Whether residential, office or logistics, our models are showing the UK capital provides some of the highest risk-adjusted returns in Europe.

Not only do we expect urban areas to thrive over the coming decade, with London no exception, but real estate pricing in the capital now looks comparatively cheap. Having been a serial underperformer since the referendum, rental affordability in both the office and the residential sectors has improved, while a considerable yield spread has opened up against other European cities.

It’s important that we continue to question the ongoing impact of Brexit, but a 150 basis point yield premium between prime offices in the City of London and the equivalent in Berlin looks excessive. 

The past year has been terrible for cities, but this is temporary and not a trend. While some things will change, there are good grounds to maintain a firm belief in city-led strategies, with London continuing to play a major part.