LONDON BUSINESS SURVEY FEBRUARY Sponsored by

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1 LONDON BUSINESS SURVEY FEBRUARY 2017 Sponsored by

2 London s business climate 19% feel more optimistic for the economy over the next six months 26% feel more optimistic about their business prospects over the next six months 71% ranked uncertainty over the UK s role in Europe as their top business concern Recent political impacts on business investment 54% plan to maintain their current investment plans 58% think the outcome of the EU referendum had no impact on their ability to recruit/retain talent 50% of businesses think the mayor s London Economic Action Partnership should focus funding on housing and transport projects Future transport investment: Crossrail 2 84% cited Crossrail 2 as very important or important for the successful running of the capital 12% would be happy to contribute financially to the development of Crossrail 2 32% are not sure or say that it is too early to tell whether they could contribute financially Future transport investment: Heathrow airport and river crossings 80% think the third runway at Heathrow is vital to London s attractiveness 84% think new river crossings to the east of the capital would benefit London s growth enormously 38% believe river-crossings to the east of the capital are important to their business

3 Foreword Following a challenging year in which businesses have operated against a backdrop of significant political uncertainty, it is positive to see that in the first CBI/CBRE London business survey of 2017, there are signs that optimism is improving. The proportion of businesses that are feeling more optimistic about business prospects (26%) and economic prospects (19%) over the next six months in comparison to the previous six months has risen relative to the views registered in the survey immediately after the EU referendum in June. As the country looks to the government to negotiate the best deal for business following the referendum, London s firms report that the outcome of the EU referendum is having a limited impact on operations so far. Over half of businesses surveyed state that the outcome has had no direct impact on their ability to recruit and retain staff (58%) and similarly, over half state their intentions to maintain their investment plans (54%). It is imperative that the government provides firms with as clear a picture as possible as to the likely Brexit outcome to give them the confidence to invest and grow their business in the future. Firms believe that investment in the capital s infrastructure remains a strong driver of London s success, with the majority of businesses citing the construction of Crossrail 2, the third runway at Heathrow and river-crossings to the east of the capital as being vital for London s growth. On Crossrail 2, funding of the project still remains unclear. While an eighth of firms would be happy to contribute financially to the implementation of the new line, two thirds of firms would not, stating that it is too early to say or they lacked information to make a decision. Transport for London will need to make clear the funding policy for this project together with a clear statement of benefits to ensure it gets the business buy-in it needs. Eddie Curzon CBI LONDON DIRECTOR Adam J Hetherington CBRE MANAGING DIRECTOR, LONDON

4 London s business climate Optimism over future economic and business prospects has shown signs of recovery following the decline in business optimism shortly after the EU referendum last year. The top issue of concern remains the uncertainty firms are facing over the UK s future relationship with Europe. Firms will be watching the UK-EU negotiations closely and are looking for the certainty they need. Business and economic prospects Following a turbulent 2016, business optimism is on the rise with just under a fifth of firms (19%) feeling more optimistic about the economy over the next six months, compared with six months ago, where only 4% of firms felt more optimistic. This was the lowest level ever recorded in the London business survey (going back to 2008) and was directly after the EU referendum. The percentage of firms who feel less optimistic about the next six months has fallen by 38 percentage points to 43%. While this is still a large figure, it is substantially lower compared with four fifths of respondents (81%) feeling the same last year.

5 Exhibit 1: Firms feeling more optimistic about business and economic prospects (%) Business prospects Economic prospects Oct '10 Apr '11 Sept '11 Apr '12 Oct '12 May '13 July '13 Nov '13 Apr'14 May'14 July'14 Nov'14 June'15 Dec'15 July'16 Dec'16 Firms are slightly more optimistic about their own business prospects than they were six months ago. Just over a quarter (26%) feel more optimistic about their business for the next six months, which is eighteen percentage points higher than how firms were feeling post-referendum last year (8%). Almost half of companies (49%) feel the same as they did six months ago about their future business prospects, and only a quarter of firms (25%) feel less optimistic about the next six months compared with over a half saying the same last year (55% Exhibit 1). Almost half of companies feel the same as they did six months ago about their future business prospects.

6 Exhibit 2: Major concerns for business over the next year (%) Uncertainty over UK s role in Europe 71 Price increases and inflation 60 Retaining our best people 52 Regulatory pressures Lack of appropriately skilled staff Reduced consumer demand Residential property prices Commercial property prices Impact of interest rates in the US Energy costs and security of supply 16 Other 7 None of these Top issues of concern Uncertainty over the UK s role in Europe has come out as the most worrying issue for firms consecutively over the last three surveys. Seventy-one percent of firms ranked this as their number one concern (Exhibit 2). Following sterling s sharp depreciation, price increases and inflation (60%) was also ranked as a worry, making it the highest this issue has ranked since the survey began. Retaining our best people (52%), regulatory pressures (38%) and reduced consumer demand (36%) are all highlighted as the third, fourth and fifth biggest concerns for business.

7 Following sterling s sharp depreciation, price increases and inflation was also ranked as a worry

8 Recent political impacts on business London businesses have operated in an increasingly uncertain political environment, with the recent EU referendum, political change in the USA and a new UK government. Despite this, firms remain resilient with many maintaining their investment plans and continuing with their current hiring intentions. Housing and transport remain the key priorities for firms, with many highlighting the need for the new London Economic Action Partnership (LEAP) to prioritise its funds in these areas. Investment and hiring intentions Businesses remain optimistic with over half of companies (54%) maintaining their current investment plans and over a quarter of firms (26%) citing their intentions to increase their investment plans in the capital. This is positive news which highlights how London continues to be an attractive place to invest and do business, despite the recent political uncertainty (Exhibit 3). Over half of firms (58%) think the outcome of the EU referendum has had no impact on their businesses ability to hire and/or retain their best people thus far, while one quarter (25%) said that it had a negative impact.

9 Exhibit 3: Business optimism firms planning to maintain or increase immediate investment plans (%) Will maintain their investment plans 54 Will increase their investment plans 26 Will reduce their investment plans 5 Will freeze their investment plans Recent investment decisions by global firms reinforces London s emergence as the leading European tech hub. We believe these build on London s competitive advantage and continue to drive strong growth. Kevin McCauley HEAD OF LONDON RESEARCH, CBRE

10 In terms of current hiring intentions, just over a third of firms (39%) are increasing their head count and only 6% are making redundancies. The majority of companies surveyed plan to maintain their current head count or impose a recruitment freeze (41%). While investment and hiring intentions remain resilient, 43% of businesses indicated they expect the recent depreciation of the pound to have a negative impact on their organisation s profitability over the next twelve months. Almost a third of firms (29%) expect no impact while one fifth of firms (21%) expect a positive impact. In the last couple of months, London s attractiveness as a place to invest and do business has been demonstrated by key firms choosing the capital as the base for significant European hubs. Following Google, tech giants such as Facebook, Apple and Expedia recently announced that the capital would be home to substantial new facilities (their new UK headquarters). By the end of this year, Facebook will employ 1,500 people in London an increase of 50% in head count. The c500,000 sq ft leasing at the iconic Battersea Power Station by a global tech giant is the largest office letting in London s wider West End in 20 years. Housing and transport projects should be priority for new pan-london LEAP The mayor of London recently announced the creation of the London Economic Action Partnership (LEAP). This body will provide oversight of the London Growth Hub, London s European structural and investment funds and business support in the capital. In last year s autumn statement, the chancellor announced that the London LEAP and the south east local enterprise partnerships will be awarded 492m for local projects. When asked which two areas should benefit from this funding, business prioritised local transport projects (50%) and support for housing developments (50%). This was closely followed by investment in local skills programmes (45%).

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12 Future infrastructure investment: Crossrail 2 Firms clearly see the benefits of the development of Crossrail 2 for the capital and for their own business, but when it comes to the future funding of the project, firms remain uncertain over whether they would be willing to contribute financially. Transport for London will need to make clear the funding policy for this project, together with a clear statement of benefits, to ensure it gets the business buy-in that it needs. Crossrail 2 is the proposed north/ south new rail route supporting London. If it gets the go-ahead from the government, the line could be operational by Businesses recognise the importance of this project for the capital with most firms (84%) citing the project as very important or important for the successful running of London. In common with the new Elizabeth Line, Crossrail 2 s ability to support the capital s population growth and resultant passenger demand on the underground network makes it an essential piece of infrastructure. When commenting on the direct benefits a business might receive from the proposed line, opinions are mixed. Almost a half of firms (44%) believe Crossrail 2 will benefit their business while the other half (45%) believe the line will make no real difference to their business.

13 Funding Crossrail 2 While the funding package for the project is still to be finalised, it has been proposed that those who will benefit from the line should contribute to the cost, similar to the funding model for Crossrail 1. Although firms seem positive about the benefits of Crossrail 2 for their business and London more widely, when it comes to how the project should be funded, businesses are undecided as to whether they would be prepared to financially support the line. Just over a third of firms (35%) would not be happy to contribute to the funding of the project and under a third (32%) say they are not sure or that it is too early to tell whether they could contribute. Around one eighth of firms (12%) would be happy to contribute financially to the development of Crossrail 2, while just over a fifth (22%) would contribute but would be somewhat reluctant. It is clear that if Transport for London and the mayor s team are to get business support for the project, then clear communications over the funding arrangements and benefits must be provided. 12% firms happy to contribute 32% firms not happy to contribute 35% firms unsure about contributing

14 Future infrastructure investment: Heathrow airport and river crossings Ensuring the government sticks to the current construction timescales for the third runway at Heathrow airport is vital for London s attractiveness as a place to invest and do business. Firms also recognise the importance of river crossings to the east of the capital, with many citing these as being important to the successful running of London. The importance of the third runway at Heathrow airport With the government confirming the go-ahead for the third runway at London Heathrow, businesses think it is imperative that construction begins by 2020 as planned. While half of firms think that staying on track with construction of the project is important for their business, just under three quarters (74%) think it is important for the capital s tourism industry and four fifths (80%) think it is vital for London s attractiveness as a place to invest. Aviation capacity in the south east is set to be full as early as 2025, so it is crucial the third runway starts construction as soon as possible to boost London s aviation capacity (Exhibit 4).

15 Exhibit 4: Importance of Heathrow expansion on business, tourism and London s attractiveness (%) London's attractiveness 80 Tourism 74 Business The survey demonstrates the importance of Heathrow expansion to business, tourism and London s attractiveness as a place to invest. At a time of political uncertainty, delivering the third runway will signal a timely vote of confidence in London s global economic future. Eddie Curzon CBI LONDON DIRECTOR

16 River crossings to the east of the capital London is growing, with expansion and growth shifting particularly to the east and south east of the capital. The Docklands is a thriving opportunity area which is already home to the Canary Wharf financial hub and amenities such as London City airport and the ExCel centre. The area has hectares of public sector land that is ripe for development, and ensuring we have the right infrastructure to support its growth is key. Businesses recognise the importance of developing the east of the capital. Four fifths (84%) of firms think the construction of river crossings in east London are essential for the successful running of London. The direct benefits these river crossings could have for a business are less obvious with over half of firms (57%) citing river crossings as not being important for their business. On the other hand, just over a third (38%) think river crossings to the east of the capital would benefit their business. Towards the end of last year, the mayor of London, Sadiq Khan, gave the green light to three new river crossings across the Thames in east London, including the new Silvertown Tunnel.

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18 About the survey The London business survey was carried out between 13 December 2016 and 12 January We received 183 responses, many directly from CEOs of leading London-based companies, representing approximately 685,000 employees. Professional services was the largest sector, covering 24% of the total sample, followed by banking, finance & insurance (15%), property (11%), creative industries, information, communications & technology (10%), energy, manufacturing & construction (9%), hospitality, leisure & retail (8%) and transport & distribution (4%) About the sponsor CBRE s capabilities extend broader and deeper than any other real estate services provider, offering unparalleled tools and resources, leverage, credibility, market coverage and local expertise. London s dynamic real estate market demands the full spectrum of these specialisms to ensure market-leading advice in investment, development, agency and lease consultancy. At CBRE our uniquely integrated London business team of some 300 experts and support staff achieve this by leveraging our scale, perspectives and connections to create worldclass solutions to our clients most demanding real estate challenges. This combination and approach achieves exceptional outcomes through the advantage we create for our clients in everything we do. About the CBI The CBI s mission is to promote the conditions in which businesses of all sizes and sectors in the UK can compete and prosper for the benefit of all. To achieve this, we campaign in the UK, the EU and internationally for a competitive business landscape.

19 For the CBI Eddie Curzon CBI LONDON DIRECTOR T: +44(0) E: For CBRE Adam J Hetherington MANAGING DIRECTOR, LONDON T: +44(0) E: adam.hetherington@cbre.com John Kent EXECUTIVE DIRECTOR, LONDON T: +44(0) E: john.kent@cbre.com

20 For further information, or for a copy in large-text format contact: Daniel Woolf ASSISTANT DIRECTOR, POLICY T: +44 (0) E: daniel.woolf@cbi.org.uk February 2017 Copyright CBI 2017 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI. Product code: 11741