Finance Capitals Imperiled by Threats Beyond Working From Home
(Bloomberg) -- As global finance leaders take a fresh look this year at the hubs that have long been their homes, they’re increasingly seeing high costs and political chaos.
Amid a work-from-home boom spawned by the Covid-19 pandemic, those headwinds threaten to redraw the global map of where money is raised and made. In New York, Goldman Sachs Group Inc. and Moelis & Co. may soon see key moneymakers heading to Florida, moves that highlight the high taxes and expenses in their hometown. Meanwhile, Brexit is peeling away assets and talent from London, while China’s heavy hand is undermining the longtime appeal of Hong Kong.
“Financial hubs are under threat like never before,” said Michael Mainelli, co-founder of Z/Yen Group, a London-based think tank that compiles the Global Financial Centres Index. “The city under most pressure is Hong Kong. New York has more economic diversity perhaps even than London. Its problem is that it’s quite domestic,” while business in London tends to be more international.
While great cities remain great through constant reinvention -- in the mid-20th century, New York was home to the busiest seaport in the world -- some just fade. Think of Florence, Italy, the birthplace not just of the Renaissance but of modern banking. Recent signs point to an acceleration in the dispersion of finance jobs and expertise, especially since full-time office work could become a relic of the pre-pandemic era.
Employers expect working from home to average two days per week, according to a survey this month by Barclays Plc. The “WFH revolution” translates into a “10% to 20% structural reduction” in office demand, with the U.K. the most vulnerable, according to the report.
London’s share of real estate investment among the largest European cities this year through September has more than halved from a peak of about 40% a year before the 2016 Brexit referendum, according to data compiled by Real Capital Analytics and Savills Plc. In contrast, Paris, Berlin and Frankfurt have all attracted a greater share.
As the Brexit transition period heads toward its Dec. 31 deadline, marking the final break between the U.K. and European Union, Goldman Sachs and JPMorgan Chase & Co. have indicated that, between the two banks, more than 300 employees will move to continental cities. Goldman is shifting as much as $60 billion in assets to Frankfurt, while JPMorgan is moving about $230 billion to the German city.
Consulting firm EY said in a report last month that only 10% of big financial-services firms are planning to establish or expand operations in the U.K. in the coming year, discouraged by the uncertainties of Brexit and the Covid-19 pandemic. That is down from 45% in April and bodes ill for the U.K., where finance employs more than 1 million people, makes up about 7% of the economy and accounts for more than a 10th of all tax revenue.
So far, few are writing obituaries for London or any of the world’s other financial headquarters, pointing to their hard-to-emulate combination of talent, resources and services.
“We will still need hubs, as proximity and personal contact matter a lot,” said Tim Skeet, a banker who has worked in the City of London for nearly 40 years and advises the International Capital Market Association. “The concentration of brainpower and financial firepower is useful to the high-end, people-driven businesses we represent.”
That said, New York has seen domestic competition gnaw away at its finance supremacy.
Dallas; Atlanta; Nashville, Tennessee; and Charlotte and Raleigh, North Carolina, are among the cities drawing companies away from the home of Wall Street, said Mark Williams, who advises companies on location-planning as president of Strategic Development Group.
Securities-industry jobs have fallen about 7% in New York state since 2000, while rising more than 5% in the country as a whole, according to Labor Department data.
“I don’t think we’re going to see a mass exodus from New York or Chicago, but we’re going to see more and more of this,” Williams said.
Goldman Sachs is considering creating a base for its asset management arm in Florida, which boasts no income tax and a mild climate, hurricane season notwithstanding. Paul Singer’s Elliott Management Corp. plans to move its headquarters to West Palm Beach from midtown Manhattan.
Other investing powerhouses, such as Blackstone Group Inc. and Ken Griffin’s Citadel, have been bulking up their presence in the state, and Moelis Chief Executive Officer Ken Moelis said this week that his firm will support bankers who move to Florida, and will consider opening or expanding offices outside New York as staff relocate.
While China has handled Covid-19 more thoroughly -- and ruthlessly -- than the U.S. and U.K., Hong Kong has issues of its own. The former British colony is caught between Beijing’s shifting priorities and the freewheeling markets at China’s doorstep that have provided the city’s raison d’etre.
“Financial institutions in Hong Kong are finding themselves in a tricky situation,” said Benjamin Quinlan, CEO at strategy-consulting firm Quinlan & Associates in the city. “However, there is likely to be increasingly more focus on integrating with the mainland, capitalizing on China’s stronger macroeconomic-growth story.”
A crackdown by Beijing this year on democratic leaders and institutions -- a response to 2019 protests that virtually shut down the city -- is putting finance companies such as HSBC Holdings Plc in a bind. Just this week, the London-based lender was criticized for freezing the accounts of a former pro-democracy lawmaker and a local church that’s helped protesters.
Office-property prices in Central, the city’s main business district, fell by almost 27% in the third quarter from the start of the year, data from CBRE Group Inc. show. Vacancies are also at a record in prime areas, with the rate in Central at 6.9% in October, according to Colliers International Group Inc.
Hong Kong’s status is also being undercut by China’s financial opening, which is setting Shanghai up as a competitor. Initial public offerings have boomed in both Shanghai and Shenzhen, China, and Hong Kong’s homegrown investment bankers are rapidly losing their status as go-to dealmakers, supplanted by mainland Chinese rivals.
Still, Hong Kong remains the region’s financial capital for now, and the durability of other global hubs can’t be ignored.
“London has faced invasion, fire, plague, cholera epidemics and world wars over the centuries, and has always recovered,” said Tony Travers, a professor of government at the London School of Economics. “These cities will recover. The question is whether it takes six months, six years or 25 years.”
©2020 Bloomberg L.P.