BREXODUS – Translation of an article that appeared in Finance, Slovenia’s daily financial newspaper, on Tuesday 24th October 2017

By Jacqueline Stuart

Goldman Sachs CEO Lloyd Blankfein spelled out the bank’s position on Brexit in a Tweet last week:

“Just left Frankfurt,” he tweeted. “Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there. #Brexit.”

Exodus of financial services companies

Goldman Sachs currently employs 6,500 people in the UK and around 200 in Frankfurt. The bank recently leased a space in a Frankfurt office tower that could accommodate up to 1,000 employees.

Other banks making plans to move employees to mainland Europe include US bank Citi, JPMorgan, HSBC, UBS, and even UK based Lloyds. Reuters reported in May that the largest global banks in London plan to move approximately 9,000 jobs to the continent in the next two years. Thirteen major banks have announced how they would bulk up their operations in Europe to secure access to the single market when Britain leaves the bloc. Six of the 13 favour Frankfurt, three prefer Dublin. These jobs represent only 2% of London’s finance positions, nevertheless bankers are highly paid and Britain’s tax revenues will be hit when they leave.

Why are banks planning to move?

London is home to hundreds of financial institutions, many of which operate across the EU under single market rules, providing services across the union from their UK base.

London’s financial institutions are likely to lose passporting when the UK exits the EU. The French have called for the city of London to be deprived of the right to clear euro-denominated trades.

The Bank of England recently warned that international banks were beginning to implement their worst-case scenario Brexit plans given the UK’s inability to date to secure a transition deal.

Banks need at least a year to set up fully licensed EU subsidiaries and without a transition deal, the March 2019 Brexit deadline means many are beginning to execute plans to relocate jobs to ensure services for European clients are not disrupted.

How will this affect occupancy of office space?

“London represents the largest market for euro-denominated trading, and major banks with euro trading desks in London may find that they need to relocate some of these functions to office markets within the EU,” says Patrick Scanlon of Knight Frank’s Central London Offices desk. “While this does not necessarily mean a wholesale relocation, we should expect some vacant space from banks to come to the market once this restructuring has taken place.”

However, he continues, “it should be noted that many businesses with a large London presence are focused on markets outside the EU, and the UK’s exit from the Union will have a limited impact on them.”

Financial services will not be the only sector affected

Financial and related professional services workers contribute 1.5 times more to the economy than the average UK employee, according to a report from TheCityUK. The industry contributes 10.7% to the economy,  176bn GBP in 2015. However finance will not be the top player in the city of London for much longer. The proportion of city workers in media, tech and professional services is expected to overtake those in financial services by 2030.

Financial services in the UK will be hit by Brexit because they will lose access to the single market. Creative services will be affected in a different way, they will lose access to talent from the single market.

John Kampfner, chief executive of the UK Creative Industries Federation, said: “Securing talent is the biggest challenge facing the creative sector today and restricting immigration will make this even more difficult.

“EU workers currently contribute to the enormous success of Britain’s arts and creative industries, including filling skills gaps not being met by our own education system. Cutting immigration will damage the capacity of the sector to grow and thrive.

“Many creative business are highly mobile and if they are not able to access the workers they need, the risk is they will relocate to places where they can.”

Creative industries represent the fastest growing part of the British economy. Nearly three-quarters of respondents to a recent survey believe that restricting immigration will limit their capacity to do business. The UK’s creative industries contribute almost £90bn  to GDP; and account for one in 11 jobs, a rate rising more quickly than all other parts of the economy. These jobs are also among the least likely to be lost to automation.

The current UK Office market

Current office market indicators in the UK show that rents are expected to rise in the regional markets, with drops forecasted across central London. The supply will increase as towers under construction are completed, and sublease space increases in availability. There is indication that investors in fully leased office buildings are re-evaluating pricing and risks, and this will have an adverse affect on yields.

What about the UK residential market?

Just a short while ago, the remain campaign in the run up to the referendum predicted that Brexit would push the UK into recession and see house prices plummet by 18%. However according to government figures, house prices have risen 5% in the past year. In London the picture is different, with an increase of only 2.6% overall, and a fall of 6.6% in the financial district. The outcome of Brexit is far from clear, and it is too soon to tell how the immigration picture will change once the UK has left the bloc. Business is lobbying to be able to continue to hire workers from the EU and elsewhere. Many of the electorate are sick of what they perceive to be uncontrolled immigration, and want it stopped. Lack of housebuilding has created a chronic shortage of homes in the UK and driven prices up to unaffordable levels. It is likely that increased emmigration, and reduced immigration will have some impact on prices, but probably not drastic given the current poor level of availability.

What markets will benefit from Brexit?

The French have high hopes of being able to tempt London bankers to Paris, however it seems that Frankfurt is the current favourite. Lobbyists for Frankfurt point out the presence of the German and European central banks, an English speaking regulator, and almost a dozen new high-rise buildings as big draws for finance firms. Paris however is a much larger city, with a population of 10 million, compared to Frankfurt’s 730,000. Germany has more attractive tax and labour conditions, but Emmanuel Macron intends to make France more competitive. One of the main draws of Paris is that it is a more attractive place to live, with a culinary, shopping and cultural environment that rivals London’s.  The importance of lifestyle to highly paid bankers should not be underestimated. Paris also has 7 new office towers in planning, due for completion by 2021. It will be interesting to see which city comes out on top as events unfold.

Jacqueline Stuart is a Director of S-Invest d.o.o.