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Brexit and the City: Tracking the fortunes of London's financial districts

[March 28, 2018] By Andrew MacAskill

LONDON (Reuters) - Is London's position as the largest international center of finance slipping as a result of Brexit?

London has been a critical artery for the flow of money around the world for centuries. The financial services sector accounts for about 12 percent of Britain’s economic output, employs about 1.1 million people and pays more taxes than any other industry.

From its traditional City heartland to the brash Canary Wharf skyscrapers and plush Mayfair townhouses, London represents one of the greatest concentrations of financial wealth on earth.

Its only rival, New York, is centered on American markets, while London has more banks than any other hub, dominates markets such as global foreign exchange and commercial insurance and is home to international bond trading and fund management.

But about a third of the transactions on its exchanges and in its trading rooms involve clients in the European Union. These may be jeopardized after Brexit unless Britain manages to maintain similar levels of access to the trading bloc.

The French finance minister predicts Paris will overtake London as Europe's most important financial center in a few years, although supporters of leaving the EU say Britain will benefit over the long term by setting its own rules.

London remained top of the rankings in the annual Global Financial Centres Index released this week by Z/Yen Partners and the China Development Institute, although the gap between it and New York in second closed to one point on a scale of 1,000 and its rating rose by less than the other four top centers.

Reuters is publishing its second Brexit tracker, monitoring six indicators to help assess the City's fortunes, taking a regular check on its pulse through public transport usage, bar and restaurant openings, commercial property prices and jobs.

Almost a year before Britain is due to leave the EU, the tracker suggests London's financial districts have been held back, but there is no evidence of a mass exodus.

"London has not come close to taking a mortal blow or anything like it ... The increasing uncertainty though over London’s future has led to a stall in its growth," Michael Mainelli, Executive Chairman of Z/Yen, told Reuters.

(Graphic: Brexit and the City - https://tmsnrt.rs/2zzQOfC)

Jobs leaving London?

Firms employing the bulk of UK-based workers in international finance told Reuters that the number of finance jobs they plan to shift out of Britain or create overseas by March 2019 due to Brexit has dropped to 5,000, half the figure six months ago.

This comes amid more conciliatory signals from British Prime Minister Theresa May, while progress in talks with the EU have prompted some companies to delay large staff moves.

The findings suggest that the first wave of job losses may be at the lower end of initial industry estimates, meaning London will keep its place as the continent's top finance center in the short term.

London's finance industry should emerge largely unscathed from Brexit even if thousands of jobs move, the City of London's political leader Catherine McGuinness says, adding that it could take years to feel the full impact of Brexit.

"All the signs are that companies are just making plans to move the minimum necessary," she told Reuters, adding "just because you can't see a massive change suddenly happening you can't assume everything is okay."

Hiring numbers

The number of available jobs in London's financial services industry fell the most in six years in 2017, said recruitment agency Morgan McKinley which hires staff in finance.

It bases its number on the overall volume of mandates it receives to find jobs and applies a multiplier based on its market share of London's finance industry.

The recruiter found 82,147 new financial services jobs were created last year, a 12.45 percent drop on a year earlier. This is the lowest number of jobs available since 2011.

"Brexit has stalled the growth of jobs. Companies are reluctant to make major investment decisions at the moment," said Hakan Enver, operations director at Morgan McKinley Financial Services, which carried out the survey.

Commercial property

Reuters obtained property data from Savills and Knight Frank, two of the biggest real estate firms in Britain. Savills calculates the value from all-known property deals within the City of London area.

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A City of London financial district buildings are seen reflected in windows of another office block in London, Britain, January 25, 2018. REUTERS/Toby Melville/File Photo

Savills says commercial property prices in the City of London are now at the highest level since the third quarter of 2016, three months after the Brexit vote, driven by a surge in office purchasing and leasing in the final quarter of 2017.

The price of renting real estate in the City of London district rose 9.5 percent in the last three months of the year, climbing to 78 pounds ($107) per square foot, from 71.21 pounds in the third quarter of 2017, Savills says.

"There has been a lot of exaggeration about the demise of the City," Philip Pearce, a director at Savills, said. "The expectation post-Brexit was the world would start draining away from the City, whereas the reverse has happened."

In Canary Wharf, prices were also unchanged in 2017 compared with the year before, Knight Frank, whose data comes from landlords, developers and agents, says.

Going Underground

Some 400,000 journeys are recorded every day at the three main underground stations that serve the City and Canary Wharf.

Reuters filed Freedom of Information Act requests to Transport for London, to get this data which shows that the number of people using Bank and Monument stations is on course for its first fall since the final year of the financial crisis.

Travelers going in and out of Bank and Monument fell by a fifth in 2017 compared with 2016, the data shows. This follows an annual increase each year since 2009.

In Canary Wharf, the number of people using the station fell by 10 percent, while the number of people using London's underground network fell about 2 percent overall last year.

Mike Brown, the commissioner for Transport for London, said it is struggling to explain the drop in passenger numbers.

"Is it an element of economic uncertainty? Is it a handful of jobs here or there maybe not being there this year, compared to last year, or is it actually just that people are working from home?" he said. "It is a bit difficult to be categoric."

Canary Wharf's owners did not respond to requests for comment.

City Airport

The number of passengers using London City Airport, a popular gateway for finance executives, fell for the first time since the final year of the 2007-2009 global financial crisis in 2017, its publicly available figures show.

The number of passengers at the airport, close to Canary Wharf's financial district, fell 0.2 percent last year. That compares with an average annual 8.8 percent increase in the previous six years.

London City Airport said the stagnating numbers were partly caused by some airlines cutting routes.

"We are very confident about the long term future prospect of London City Airport and aviation in the UK, with passenger growth expected to resume in 2018," a spokesman said.

Bar and restaurant openings

Reuters filed a Freedom of Information Act request to the City of London Corporation to find the number of new premises which have applied for licenses to sell alcohol and license renewals.

The number of venues, such as bars and restaurants, with licenses to sell alcohol in the City of London in 2017 fell 1.6 percent, data from the municipal local authority shows.

The number of venues applying for new licenses was flat compared with 2016, the data shows, although the City of London Corporation said such fluctuations were normal.

"As some establishments close and others open, it is inevitable that licensing renewal figures will fall and rise but overall, the number of licensed premises in the City has steadily increased in recent years," it said in a statement.

($1 = 0.7278 pounds)

(Reporting by Andrew MacAskill; Editing by Alexander Smith)

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