London is currently Europe’s leading financial and banking services hub, but it may lose some of its appeal for businesses targeting the European Union following Brexit. Some financial institutions will move their operations outside the UK. Frankfurt and Paris will definitely benefit, but Warsaw is also one of the contenders. Bolesław Kołodziejczyk, PhD, Head of Research & Advisory, Cresa Poland analysed the potential impact of the UK’s departure from the European Union on the Polish market.
The UK’s financial market on the eve of Brexit
The UK’s financial sector employs approximately 1.3 million people, including more than 200,000 foreign nationals, and generates a lion’s share of the country’s GDP. It is also one of the world’s leading financial markets and the second largest in terms of turnover volumes after the US.
It is also very expensive for financial institutions due to high labour and office occupancy costs accounting for up to 90% of their overheads. Such inflated costs are not compensated by higher quality infrastructure – other European cities offer infrastructure similar to that in the UK.
Brexit, however, is the biggest single challenge for the market. Financial giants realize that they would benefit from moving to the EU and their relocation plans are leading to erosion of trust in the British pound and its depreciation against the euro.
The weakening of the UK financial services market is manifested through the following: slowdown in growth of residential and commercial rents, sector investment stagnation and no influx of new employees.
Where are London office tenants moving to?
Europe’s banking and financial hubs with first-rate infrastructure such as Paris, Frankfurt and Amsterdam are already competing to capture some of the most reputable and largest financial businesses. For instance, Morgan Stanley has chosen Frankfurt as the site of its financial centre in a move that could see about 200 new jobs created. Other banks and institutions are also going to relocate high-profile functions to Frankfurt.
That said, mid-tier transactions will be transferred to lower-cost locations. JP Morgan, for example, has bought an office building in Dublin to house 1,000 staff and is looking to set up a centre in Poland accommodating 2,500 employees. These major market developments are likely to be followed by other moves.
Is Poland ready to seize the opportunities lying ahead?
Since the 1990s, Poland has quickly transformed from a post-socialist market into a modern economy and is now a very attractive market for the financial sector. Availability of skilled and well-qualified staff demanding much lower salaries than in the UK is instrumental in this. Salaries in the financial sector which are currently three times lower in Poland than in the UK will rise at a rapid pace to meet demands, but are highly unlikely to reach the UK’s levels in the next five years.
In addition, personal data protection standards, critical to the banking and insurance sector, have improved. In 2018, the EU General Data Protection Regulation (GDPR) will enter into force, leading to further improvements in this area and bringing Polish regulations in line with protection afforded in other EU countries.
Availability of suitable office space for lease is also an important factor. The Warsaw office stock amounts to more than 5.2 million sq m, and new supply is expected to meet practically all tenant requirements. The same volume of existing office space is available on Poland’s other core office markets. Despite rising demand for office space coming from other sectors and local businesses, banks have a wide choice of suitable office premises in buildings under construction or planned as otherwise there is limited space of appropriate quality available for immediate occupation.
Poland is already attracting financial businesses. In addition to JP Morgan, which is moving a major part of its European operations to Poland, other market players have followed suit, including UBS Group AG and Goldman Sachs Group Inc. UK banks are also likely to offshore their operations as having a presence within the EU may serve their interest. It is difficult, however, to predict what course of action will be taken by Far East financial companies as for them having a head office or branch in London is an issue of prestige rather than of financial calculation. Their reaction will largely depend on the outcome of the EU-UK negotiations and the scale of restrictions on access to EU markets.
