Research article

A new era for finance

Does the post-crisis decline of traditional banking & investment spell the end for Europe’s finance centres?

Moscow’s economy has suffered from oil price falls

▲ Moscow’s economy has suffered from oil price falls

The fortunes of the financial sector in Europe’s cities have varied greatly in the past ten years. Some have grown significantly, most have grown little and a few have increased very significantly.

A tough act to follow

The evidence is mounting that no single European city has everything that London has provided for financial sector occupiers in the past. Nowhere seems to have the magic combination of favourable taxation, labour laws and adequate office space alongside English language skills plus the variety of social and cultural attractions found in London. But this doesn’t mean that London could necessarily have continued to be a dominant world finance centre as it had in the past – even without Brexit.

The recent rise of the finance sector in centres like Moscow, Warsaw, Milan or Brussels point to a trend that was already in train. These cities have increasingly been acting as financial service hubs for a single country or particular localised sectors and their growth suggests that the dispersal of Europe’s financial industry had already begun.

Many financial companies were already offshoring, nearshoring or even reshoring some of their activities before June 2016. As a consequence, the small and specialised financial centre of Frankfurt is actually 2% smaller in GVA terms than it was 10 years ago and London’s growth in the last decade has been much slower than it was in the previous one.

London now employs more people in the information and communications sector than it does in finance and insurance, and the relative decline of traditional finance and investment organisations seems inevitable as tech and creative enterprises grow faster. The future of London’s financial sector seems more likely to lie in FinTech of various types than in traditional banking and investment.

The geographical dispersal of financial activity in Europe has been, and is likely to continue to be facilitated by technological innovation and it is no coincidence that some of the fastest growing finance sectors are found in strong tech cities like Stockholm and Amsterdam.

Figure 16

FIGURE 16Growth of GVA in finance and insurance sector

Source: Oxford Economics, Savills World Research

Is there an exodus from London?

There has been a great deal of speculation in the media and business circles about how London will fare as a financial centre as Britain leaves the European Union. Many international companies, including banks, use London as their gateway city to Europe and there is now great uncertainty as to whether London will be able to give them continued access to European financial markets.

Currently, UK based businesses regulated by UK authorities, are able to provide financial services anywhere in the EU and wider European Economic Area (EEA) because they have ‘passporting’ rights. Any EU exit where the UK remained in or re-joined the EEA would see no impact on these rights but if the UK leaves the EU without retaining EEA membership, limited or no passporting could impair the ability of UK firms to provide services to the rest of the EEA.

As the UK is a significant provider of financial services there is a chance that some agreement may be reached but already, some international banks and other companies are looking at relocating at least some of their relevant operations elsewhere in Europe.

The issue of post-Brexit relocation is not just confined to big banks. Insurance companies too seem to have been making plans: Lloyd’s of London has said insurers will be forced to move part of their businesses from the City to the European Union if they can’t continue to access the single market. Big corporations and multinational companies with large internal financial operations can also find themselves with similar issues to banks and insurance companies.

Figure 17

FIGURE 172016 Real estate investment volume

Source: Mori

The scale of the financial exodus from London is yet to be determined

▲ The scale of the financial exodus from London is yet to be determined

Where will they go?

There are enormous practical issues involved in moving just ten percent of London’s 400,000 or so financial sector employees to another European city. Frankfurt for example, only has 80,000 financial sector employees in total so even a decile of London’s industry would swamp it.

Few European cities have sufficient contiguous office space of ‘financial quality’ to accommodate significant numbers of staff quickly. If the 13,000 workers earmarked for relocation from London so far really were all to move at once to the same city, this would create instant demand for around 250,000 square metres of prime office space in 1,000 to 5,000 square metre lots – which is simply not currently available in most places. Figure 18 shows stock and availability in European cities.

It is unlikely that a single city will win out in the competition to become Europe’s sole financial centre. Instead, it seems likely that different financial organisations will choose different cities for a variety of different reasons.

It would take several years to see sufficient office development before a financial cluster of a similar scale to London could begin to be created. This means that, although first movers may gain an advantage given the limited stock of space, it will be some time before they are joined by others.

Prospective financial re-locators will not only want to choose their city on the grounds of business location but will also need to look at how ‘build-able’ a city is. Those with low levels of real estate investment will likely have a stickier supply pipeline, so Paris, Berlin, Madrid and Frankfurt look good prospects in this respect.

The need to construct purposed buildings might favour cities like Warsaw if it can attract development capital because of its large land supply closer to the centre. Also, cities like Amsterdam with more flexible and responsive planning policies could benefit from its flexible supply-side.

Figure 18

FIGURE 18Accommodating Europe’s next global financial centre Office stock, construction and vacancy rates

Source: Savills World Research

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