London commercial realty’s imminent demise is a myth

Fears that London is set to lose swathes of bank jobs now look overblown, but finance has been shrinking in importance for the capital’s economy and property market for some time.

Since the vote to leave the EU, uncertainty has surrounded the outlook for London’s financial sector, with the risk that banks and insurers may relocate functions to continue serving their European clients. However, Knight Frank has seen in recent weeks a number of statements by policymakers in the EU that suggest the impact of Brexit on London’s financial hub may not be as great as initially feared.

An air of compromise appears to be emerging.

Yet, we also need to be mindful of long term changes in London, where finance has been reducing in importance for nearly a decade now. Back-office jobs have been leaving the capital, but this evolution away from finance is ultimately leaving the London economy stronger.

There is going to be change, but no one wants a cliff edge, and London is a great market place for European firms to raise finance. This supports Knight Frank’s view that some finance jobs will leave London, but probably thousands — not tens of thousands — of posts.

The moment stockbroking firms installed telephones in their offices, decision-makers no longer needed to be located in the city whose markets they traded. The people who need to be on the ground in the European single market are the back-office staff — or increasingly, the computers that are playing an ever greater role in this process.

Job relocations due to Brexit will accelerate a long established trend of London migrating towards being a front-office location. Those in the London office will be senior executives and rainmakers, plus the teams that support them. Yes, London loses the back-office finance jobs, but headcount growth in technology and creative industries will fill the void.

In fact, technology, media and telecoms (TMT) firms overtook finance in job numbers back in 2013.

Interestingly, popular tech and creative districts like Shoreditch and Southbank once housed the back-offices, so to date surplus finance space has dovetailed nicely with rising demand from the new wave of occupiers. Moreover, the lesson from San Francisco is that tech firms are willing to spill into the core financial district when supply becomes constrained in the trendy areas.

Deals like Deliveroo taking space in what was once the LIFFE building on Cannon Street suggest techs are looking at offices in previously finance-led locations like the City Core.

Focusing on fewer financial jobs is to miss the big picture: that total office demand in London is evolving. Process jobs are leaving, but being replaced by high value jobs in growth sectors like tech.

Critically, this evolution is introducing gentrification into the commercial property market, which is over the long-term delivering higher rents. In 1999, when Clerkenwell and Shoreditch were financial back-office locations, prime rents were £28.50 per square feet, which was 46 per cent less than City Core rents at £52.50 per square feet.

Today, rents in tech-driven Clerkenwell and Shoreditch are £65.00 per square feet, or just 5 per cent cheaper than the City Core.

The demise of London’s back-offices only becomes a problem if the rise of new sources of employment fails to keep pace. If the TMT sector in London continues to grow at its average rate over the next three years, enough jobs would be created to offset a 15 per cent fall in financial headcount.

Nevertheless, changes in supply and demand will never match perfectly, and there will be some short-term and localised increases in supply in places where banks are especially prevalent.

Central London in Knight Frank’s opinion will lose a few thousand jobs to other European cities over the next three to five years. The losses will be made up from 2019 onwards, as City institutions find new ways to make money outside the European Union.

However, the finance jobs that remain in London will be the most productive and profitable ones, which will have implications for office demand. The London office will house the roles that are better paid, difficult to automate, and client-facing.

The financial sector, far from disappearing from the radar screen, will in the future drive demand for high quality C-suites in London.

The writer is Chief Economist at Knight Frank.