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Brexit Begins: Will New York Take London's Spot As The Banking Capital Of Europe?

Theresa May triggered Article 50 on Wednesday, throwing London’s access to the European Single Market into jeopardy. That uncertainty and the roadblocks caused by separation from the European Union have already spurred some banks to flee London. The Old Smoke is in danger of losing its crown as Europe's banking capital.

What city would take the helm? Surprise: The answer is not in Europe.

 

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As Brexit begins, 90% of finance in Europe happens in London. But removing the UK from the Single Market will hinder deals. Banks based in London will have to conform to each country's rules and regulations, and will have to set up shop in every city in which they want to do business, a major overhead cost.

Brexit is as bad for Europe as it is for the UK, said Simeon Djankov, former deputy prime minister and minister of finance of Bulgaria, a former vice president of the World Bank and current director of the Financial Markets Group at the London School of Economics. Europe will lose out on all the business that London provides and will have to scramble for its financial products.

But Djankov does not think the financial sector will choose another EU city to flow deals through. He predicts the balance of power will shift outside of Europe entirely.

Can London Thrive Without Its Financial Stronghold?

Financial companies have an enormous footprint in London. According to a January 2017 report by Savills, the insurance and financial services sector accounted for the highest portion of takeup in 2016 — 20% or 1.2M SF — followed by the tech and media sector at 16%. The financial sector comprises about 11% of the London economy. But not the entire economy.

Knight Frank chief economist James Roberts said the 2007 credit crunch taught London that it needed several large industries to weather downturns, so Brexit might not have the impact some fear. In fact, banks were already leaving London — the EU referendum just accelerated the timeline.  

That acceleration has many alarmed, though. According to a September 2016 survey published by KPMG, 76% of UK CEOs are considering moving their headquarters or operations outside of the country. Banks have been true to their word. Lloyds Bank has set up an "EU Group" in Berlin to maintain access to its European clients. HSBC plans to move about 20% of its staff to Paris, taking about 150K SF out of London. Barclays is heading to Dublin.   

None of these defections are necessarily as scary as they sound, Roberts said. The total square footage lost so far, according to Bisnow data, is less than 500K SF, and the loss of a back-office HQ does not mean an institution has completed deserted the city.  

London is already well on the way to being a front-office location. The glossy skyscrapers in the city now house high-value staff, the hard-to-replace, fee-earning people who are wining and dining clients. The people buying shares or currency are elsewhere — maybe at a co-working facility, perhaps even at home.  

While London may lose the back office head count, Roberts predicts the technology and creative industries will fill the void. Technology, media and telecoms overtook finance in job numbers back in 2013. Creative hubs on the "City Fringe" in places like Clerkenwell and Shoreditch once housed the financial back offices, so to date, the excess financial space has dovetailed nicely with rising demand from creative occupiers.  

“There are far fewer suits and ties in the city,” Roberts said. 

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Roberts said Deliveroo’s new space near what was once the LIFFE building on Cannon Street, and Bloomberg’s new digs on Queen Victoria Street, in the shadow of the Bank of England, demonstrate that creative firms are already spilling into traditional financial cores.  

Roberts said office demand in London is evolving and could ultimately lead to higher rents since technology and media are growth sectors.  

But that optimistic view is not universal. Djankov said the financial fingerprint on London is too great; technology cannot fill the void. Banking, consisting of investment, business asset management and private equity, is not particularly technology-driven. It mostly relies on communication and reputations because it deals with large, individual transactions.  

Insurance is relatively protected from Brexit, Djankov said, because it is subject to different regulations and because insurers write millions of contracts that can be tweaked if they need to be, but generally do business in bulk.  

The New Financial Capital Of Europe?

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Eiffel Tower, Paris

Djankov agrees that the back office will move elsewhere, but not to Frankfurt or Paris, like many have speculated.  

“Investment banks will go directly to New York,”  Djankov said.

The American legal framework is the same as the UK, there are good lawyers in New York, a fabulous talent pool, and the time difference between New York and London is manageable; parties can still complete business within the same day.   

Djankov said no other city in Europe can handle large commercial transactions, has lawyers and a judiciary that operates within the common law, and is optimally located. Some asset managers may move to Berlin because it has good technology and a robust stock market. “It is natural for Berlin to attract a bit of asset management business,” Djankov said. But Berlin will not attract private equity companies or investment bankers.

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There are advantages to Dublin, such as the fact that it will remain in the EU, so banks moving their back offices there have access to all 28 countries of Europe. Dublin also has the same common law legal framework as the UK, so it is possible that banks in some large British cities like Manchester and Liverpool might decide to send their back offices to Dublin. But banks with large headquarters in London will not be moving to Dublin in droves because it is simply too small. According to Savills, Dublin has just 951K SF of vacant space in the city centre and docklands area — about equal to two Shard buildings. 

Despite Paris’ attempts to lure technology companies, the City of Light is a non-starter, Djankov said, because there is no efficiency. France simply does not move fast enough for business. Amsterdam has some development, but it does not have the same legal framework as the UK.

Some financial firms might move to Singapore because that country has the same common law framework as the UK and British judges. Nowhere else in Asia is even a possibility, Djankov said. Tokyo is too far away to fly there in a day and the time difference is too great. 

The debate about where to go after Brexit highlights London’s unique place in the world. The talent is excellent; there are top universities with very bright graduates, particularly in economics and finance, Djankov said. But it appears their skills will be more in demand elsewhere.