LONDON — Will London’s loss be the Continent’s — or Ireland’s — gain as Britain quits the European Union?
That’s what Europe’s smaller cities are hoping as they attempt to woo business from banks and financial institutions wary of operating in post-Brexit Britain, a foggy landscape of unanswered questions and the almost certain loss of passport-ing rights, the freedom to sell their services inside the European Union.
With British Prime Minister Theresa May firing the starter pistol on Brexit last week, setting in motion two long years of divorce proceedings, some investors, property developers and retail experts say it’s still too early to gauge the impact of a bankers’ exodus on fashion and luxury retail in cities such as Paris, Dublin, Frankfurt and Amsterdam.
Others believe the impact will be minor as the number of bankers set to move could be negligible, office space in the midsized cities hard to come by, labor laws and business costs unfavorable, and native populations too small to support a boom in retail. Tourism is still a big driver of fashion and luxury, which means that London will remain a dominant city for retail, especially given the weaker pound.
“There will be some winners, some cities will grow a bit more, but there will be no huge dramatic shift in retail. Detroit won’t all of a sudden become New York,” said Tami Chuang, principal at Meyer Bergman, the retail-focused real estate investment management firm with properties in the U.K. and across Continental Europe.
“Supply in these smaller cities is limited — you can’t just build a mall — and even with an influx of bankers, we don’t see a huge surge in the number of retailers opening.”
Chuang added that wealth is increasingly mobile and even if bankers — and their bonuses — land in these smaller cities, it doesn’t necessarily mean they’ll be dashing to the local Hermès. “People move with great fluidity throughout Europe, and they’re not only shopping in their home markets, they’re buying duty-free or choosing other ways to spend their wealth,” she said.
Cushman & Wakefield, the property and real estate consultants, has taken a look at the potential for cities such as Dublin, Paris, Frankfurt and Amsterdam to absorb banking jobs from London. In a recent report, “Winning in Growth Cities,” Cushman said the loss of passport-ing rights could see a shift of “some financial service business functions” from London to other cities, “although, at present, it looks likely that any such moves will be on the margins of overall headcount.”
Property company Savills, in their European Cities 2017 report, concurred. “No single city will take London’s crown, but rather, the EU passport-ing functions of many institutions will be dispersed throughout Europe to a variety of cities for different reasons.” Savills said London would continue to serve as a global financial center “in partnership” with some smaller European cities, for passport-ing in particular.
George Wallace, chief executive officer of MHE Retail, the consultancy that works with businesses across the U.K. and Europe, said it remains to be seen how many bankers will move out of London and into the smaller Continental cities. He said whatever the final numbers are, they won’t move the needle on local retail.
He said an influx of bankers “won’t be enough to change the retailing infrastructure in any of the cities,” adding that it could boost other segments of the local economy such as hotels, restaurants and the housing sector.
“Retail won’t be at the front of the queue — it will get some tasty crumbs from the table, but it won’t be a feast.” Wallace also said bankers tend to be time-poor, and are mostly likely doing their shopping online rather than on the high street.
Another dynamic at work in these cities is tourism. Matt Farrell, director at Trophaeum Asset Management, which has a portfolio of high-end retail properties in Mayfair, in addition to holdings in Paris, said even if the French capital were to get a fresh shot of banking talent, it wouldn’t necessarily translate into more retail sales.
“Paris is one of the most popular tourist destinations in the world and we see tourism as the principal driving force of retail spend there. The retail market in Paris is strong anyway,” he said.
Tourism is one reason why, even with the Brexit proceedings hanging like a dark cloud over the country, London remains the place for brands to open stores.
According to a report published earlier this month by CBRE, the Los Angeles-based commercial real estate and investment firm, the U.K. is the most popular destination for retailers looking to expand their store presence in Europe in 2017. CBRE said 65 percent of retailers surveyed cited the U.K. as their target market for expansion, compared with the 43 percent prioritizing France and 38 percent eyeing Germany.
Industry observers also say the net number of financial workers who might be moving from London to the Continent remains unclear. Last week, Goldman Sachs was the first bank to confirm it’s putting its contingency plan in action, moving staff out of London and making local hires on the Continent.
Richard Gnodde, ceo of Goldman Sachs, told CNBC that the bank was upgrading its facilities in Germany, France and other Continental cities ahead of the changes. Asked about employee numbers, he said: “For this first period, this is in the hundreds of people as opposed to anything much greater.”
He said Goldman’s eventual footprint on the Continent would depend on the Brexit negotiations, and added that whatever the scenario, “London will remain for us a very significant regional hub and a significant global hub.” The bank has declined to provide more details about its Brexit plans.
Deutsche Bank, meanwhile, is bullish on London, with plans to expand its base in the British capital in the long-term.
The same week that Goldman revealed it would be moving bankers out, Deutsche Bank said it remained committed to the City of London. It is in talks with property company Land Securities to secure a 25-year lease on a new U.K. headquarters at 21 Moorfields, a new development.
In an interview with WWD earlier this year, Kaela Fenn-Smith, head of commercial at Land Securities, said: “Brexit or no Brexit, London will survive as a global financial center, as it has for hundreds of years,” and pointed out that since the referendum, IBM, Apple, Snapchat and Facebook are just some of the names that have pledged fresh investment in the city.
As reported, Google said it would spend 1 billion pounds, or $1.25 billion, building a new headquarters in King’s Cross, with plans to create 3,000 jobs by 2020.
Sean Hyatt of Global Data, a data and insights provider, said banks are overall reluctant to move jobs out of London for a variety of reasons. “No other city matches London for the breadth of its expertise — or for its regulatory appeal,” he said.
London has flourished as a financial center since the so-called Big Bang in 1986 under the Thatcher era because of its relatively lax regulations, tax structure, ease of doing business and labor laws, which are not nearly as stringent as those on the Continent.
Hyatt is the author of a recent report called “Attracting Business From London After Brexit: Can Paris, Dublin, Frankfurt or Amsterdam Become Europe’s New Financial Center?”
He believes all of those cities — and others, such as Warsaw, have potential — and will likely attract jobs on a sector-by-sector basis. (He isn’t the only one talking about Poland, which has been establishing itself as a back-office location. Some of the big American banks are relocating jobs there).
Hyatt also said smaller cities such as Dublin would undoubtedly benefit from a few hundred new bankers. He said they’d give a boost to the local economy, to consumer confidence, in particular to bars and restaurants. He also believes Dublin is one of the more attractive cities for bankers because of its legal and regulatory system, which is similar to that of the U.K., and the fact that it shares a language and culture with Britain.
Hyatt is not alone in spotting Dublin’s potential. Aykut Bussian, leader fund solutions at Baker Tilly Roelfs, the management, tax and financial consultants, said the company sees “Dublin in the forefront” due to the English language and legal system. The city also has bigger tax benefits than Germany or France and a well-educated workforce.
According to the Cushman & Wakefield report, Dublin has a larger population than Frankfurt and is home to the highest proportion of EU talent within its workforce, although office stock is limited and the real estate market small.
In its 2017 cities report, Savills speculated that those with higher levels of office space “may find their corporate and personal tax regimes discourage some companies.” Although Savills didn’t name names, Paris is the obvious example. The City of Light may be a big draw for tourists, but its famously inflexible labor laws, powerful unions and tight fiscal regulations have long dampened growth in the financial sector.
Some believe other European cities could benefit from Brexit in sectors beyond banking.
Karsten Jungk, manager and partner at real estate consultants Wüest Partner Germany, said the impact and consequences of Brexit on established business sectors remains a very tough call — and believes it’s Berlin, rather than Frankfurt, that will benefit.
“Regarding the banks, I’m not so sure about the general Frankfurt euphoria,” he said. “In my opinion, it’s not yet certain that Frankfurt will be the Brexit’s big profiteer, though with the European Central Bank, it does have a certain advantage. However, it is pretty sure that not all the migrating London banks will be able to agree on one city.”
Jungk said he believes Brexit will further fuel the start-up boom in Berlin, with more venture capital flowing into companies in the EU. “In recent years, Berlin has fallen somewhat behind London as the start-up capital. This development will again be reversed.”