City of London faces stiff competition

UK TrendsCity of London landlords need to guard against becoming complacent about being home to some of the world's largest financial institutions.

They face competition not only from developments in fringe areas of London itself, but also from overseas markets where tenants can have more favourable labour costs and less onerous tax regimes, and access to educated workers.

Home-grown competition to the City, the square mile in central London that is home to the international financial services industry, is coming from government-encouraged regeneration in more peripheral areas.

Large office developments are springing up in the Thames gateway area to the east of London; and for the past decade the City has lost tenants to Canary Wharf, the old east London Docklands area that has become a second financial centre as it permitted larger trading floors than the City.

Overseas, there have always been less expensive emerging markets in which to operate. But today some of those markets - such as China and India - have educated workers who can do sophisticated jobs for lower wages.

Whether the City remains a dominant home for international financial institutions is also affected by forces out of the control of the Corporation of London and City landlords. Key factors include the capital's transport infrastructure, which is suffering from years of under-investment; higher corporate and personal taxes than in other countries; and a planning system that requires approval from parties that often have opposing agendas.

In each of the past two decades there were industry-changing events that led to a significant pick-up of demand in the City. In the 1980s, financial services were deregulated in London and international banks poured into the market. In the 1990s, the bull market and record level of mergers and acquisitions led banks to hire hundreds of new employees.

But now, it is different - and unclear what City landlords are doing to lure and keep international employers. Toby Courtauld, chief executive of Great Portland Estates, says he has tried - so far unsuccessfully - to identify an industry-changing event that could lead banks to take up new space this decade.

With that in mind, Great Portland has reduced its exposure to the City, which now accounts for 25 per cent of its portfolio. The recent bond market boom has not translated into more space requirements in the way the explosion of M&A activity in the late 1990s did, says Tim Congdon, chief economist at Lombard Street Research.

And, says Mr Courtauld, many banks have "grey space", which they do not use but which they can quickly move into to soak up demands they face. That buffer has kept the banks from taking new space.

Many City-related jobs have already departed, though not all of those people were based in the Square Mile, where rents are more expensive than in regional UK cities.

Lloyds TSB is to shut a call centre in Newcastle as it transfers jobs to India. It will cut 986 full and part-time jobs and plans to have 1,500 staff in India by the end of 2004.

Last month HSBC, the world's second-largest bank, announced it was transferring 4,000 jobs in the UK to lower-cost centres in India, Malaysia and China.

The shift of lower-skilled jobs to lower-cost countries began in the 1990s. A more recent trend is to shift highly-skilled and higher-paid jobs, which once could not have functioned outside London, to other countries.

The Corporation of London talks about benefiting from the "cluster" effect, where people in the same or similar industries like to work near each other. But that pull may be diminishing, says Mr Congdon.

Banks, including JP Morgan Chase, have shifted tasks normally done by junior analysts, such as number crunching and financial modelling, to India, which has a highly educated but less expensive workforce and where English is widely spoken.

And insurance has also been moving out of London, known as the international centre for the sector.

Highly skilled people are being lured to Bermuda, where there is no corporate tax and no personal income tax. The island has also become attractive to new insurers setting up because it is inexpensive to raise capital there.

While there is no suggestion that insurers are moving their headquarters to Bermuda, it is an example of a market that has successfully lured away highly-skilled jobs, while many other competing markets have mostly been successful attracting back-office type functions.

The competition from other countries is mostly a long-term threat: so landlords still have some time to work out what tenants need - and want.