BUSINESS BRIEFING BANKING – OPPORTUNITIES IN A DIFFICULT MARKET Q1 2009
A CUSHMAN & WAKEFIELD PUBLIC ATION
CONTENTS
EXECUTIVE SUMMARY
1 Executive Summary 1 Banking Sector Trends 2 Sale and Leasebacks Continue 2 Mergers & Acquisitions 3 Disposal of Surplus Space 3 Banking Take-Up 5 Future Banking Sector Trends 5 Future Property Trends
2008 was an “annus horribilis” for the banking industry but despite all expectations letting activity to banks increased by 25% year on year in 2008, albeit bolstered by a few large deals. However, a sharp slowdown was evident in the first quarter of 2009, with activity 80% below the quarterly average. Supply of office space across Europe increased by 20% over the year, but, as yet, there has been very little evidence of sublet space being brought to the market, particularly from the banks. Many banks are now reviewing their space needs and disposal of surplus property is starting to occur. Office rents across Europe declined by 6.8% in the year to March, with the City of London and Moscow CBD recording falls of 20% and 34% respectively. Incentives have moved out, with the most generous terms available in the City of London where rent free periods are now around 30 months on a 10 year lease. There is evidence that many banks are seeking to take advantage of the current conditions in the property market by renegotiating and re-gearing their leases to make significant savings to their operational costs.
Cushman & Wakefield LLP European Headquar ters 43/45 Por tman Square London, UK W1A 3BG www.cushmanwakefield.com
Banks continue to raise capital through sale and leaseback programmes, particularly as property remains a cost effective source of finance.
BANKING SECTOR TRENDS According to the International Monetary Fund (IMF), the international banking system lost around $792 (US) billion in 2008 and the Western European banking sector continued to be in a difficult condition into 2009. In some countries, such as the UK, Germany and France, governments have resorted to buying shares in troubled banks in order to keep them afloat. The level of investment by banks across the global has been massive and accounts for a growing proportion of GDP. The UK has seen the largest bailout in terms of GDP of any country in the world at almost 20%. Following the nationalisation of Northern Rock and a 70% government stake in the Royal Bank of Scotland, the government has now increased its ownership of the Lloyds Banking Group (the new identity for the merged LloydsTSB and Halifax Bank of Scotland (HBOS)) to 43%.
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PUBLIC COSTS OF BANKING FAILURE Country
UK Norway Canada USA Netherlands Sweden Greece Austria Ireland Belgium Spain Germany Portugal France Italy Switzerland Hungary
Government financial sector bailout as a proportion of GDP (as at 18/02/09) (%) 19.8 13.8 8.8 6.3 6.2 5.8 5.4 5.3 5.3 4.7 4.6 3.7 2.4 1.5 1.3 1.1 1.1
In Germany the mechanism that has been put in place has been described as “temporary nationalisation”. The German government also confirmed that it will undertake its first post war nationalisation of a bank, when it will take over Hypo Real Estate. Germany, like the UK, is also considering the setting up of a “bad bank” that will resolve the problem of toxic debts within the balance sheets of the banks. The economic growth of Central and Eastern Europe (CEE) was assisted by foreign credit and loans, and the IMF estimates that 70% of the foreign bank loans in CEE reside in banks from Western Europe. At the current time, banks from Western Europe are exposed to over £1 (€1.12) trillion of Eastern European debt and in CEE many of the dominant banks are owned by Western European parents. The biggest lenders to the region were Italian and Austrian banks, with loans from Austrian banks to Eastern European countries equivalent to 70% of Austrian GDP. However, with the advent of the current slowdown, a number of countries in CEE are experiencing economic difficulties. The Czech Republic, Hungary and Ukraine have all recently had to ask for financial assistance from the IMF. Therefore, the outlook for the banking sector in CEE and those related banks in Western Europe, especially those in Austria and Italy, is not one of immediate optimism.
Source: IMF
SALE AND LEASEBACKS CONTINUE Banks are continuing to raise capital through sale and leaseback programmes in an effort to bolster their balance sheets. Whilst equity capital remains expensive and debt finance difficult to obtain, banks are increasingly looking at their own real estate base for cost effective capital. There remains a large amount of equity which is seeking to invest in sale and leasebacks of high quality properties, in good locations to strong covenants. Italian banking group Unicredit reported the sale of 70 occupied properties into a fund with an overall value of €800m in return for an 18 year leaseback. Units in the fund were sold to institutional investors. HSBC is currently seeking to raise €2.5bn through the sale and leaseback of its three HQ buildings in London, New York and Paris. This follows the repurchase of its Canary Wharf tower from Metrovacesa in December 2008. BBVA recently sold and leasebacked its Spanish HQ for €82m and is seeking to raise a further €1bn through sale and leasebacks on its property portfolio. We expect the banking sector to increase their sale and leaseback programmes within the next 12 months, particularly for those banks seeking to repay government capital.
MERGERS & ACQUISITIONS Although the banking sector in Europe has slowed significantly, there are still opportunities for the more acquisitive banks to seek a merger or takeover opportunity of distressed competitors. One of the most significant is currently taking place in Germany, where Commerzbank is taking over the Allianz subsidiary Dresdner Bank for €9.8bn, with the two stage transaction expected to be completed by the end of 2009. In the UK, the struggling Halifax Bank of Scotland (HBOS) was taken over by Lloyds TSB, to form the Lloyds Banking Group. The UK government currently now holds 43% of the newly formed bank as part of the rescue package announced by the UK government in late 2008.
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DISPOSAL OF SURPLUS SPACE As banking occupational space needs have fallen, in light of reducing headcounts, surprisingly there has been very little tenant led space being openly marketed to date across Europe. In part this is due to the fact that banks are already using their space reasonably efficiently, but many banks are still awaiting business property needs to be outlined. Once this is confirmed, there is an opportunity for banks to reduce the space they occupy and to increase space densities. A number of banks are already reviewing their space needs and disposal of surplus property is starting to occur. The most successful banks in letting their space have been those that were first to the market and have been able to compete with landlord space in terms of quality and finish. As banks start to restructure and adapt their space utilisation, more sublease space is anticipated to be brought to the market. There has been evidence in the larger banking locations such as Frankfurt and London that banks sub-letting space has already started to occur but this is still relatively small scale. However, many banks, if challenged, will admit that they have grey space that could be made available on the back of confirmed tenant demand. It is anticipated that a large proportion of this space will be officially be brought to the market in 2009. Those that bring the space to the market earlier than their competitors are more likely to be successful in letting the space as they gain first mover advantage. At the end of March, there was around 6,000 sq.m in the Frankfurt market being offered as sublet space by banks including Bear Stearns and State Street Bank. This still only accounts for less than 1% of the total supply in the city. There has been a rise in tenant led space on the market in the London and a number of banks have started to put surplus property on the market in the City & Docklands including JP Morgan and Citigroup. The Docklands submarket has a significant amount of sublet space currently being offered, with over 50,000 sq.m available mainly from a number of US based banks. This sublet space represents just over 42% of total available space within the Docklands submarket. In the City, the amount of space in noticeably lower with a shade under 10,000 sq.m currently available.
BANKING TAKE-UP The overall European lettings market slowed further, as the economic crisis continued to take its toll on occupier sentiment. Year on year take-up activity was down by 10% but what is evident is that the pace of decline increased as 2008 progressed. Moreover, in the first three months of 2009 all sector take-up was just over 1 million sq.m, significantly lower than the previous quarter. Most occupiers are looking to reduce their operational costs and to minimise capital expenditure and with expectations of rental falls, many occupiers are holding firm in anticipation of potential cost savings. Throughout 2008 banking take up held up longer than expected and it was not until the first quarter of 2009 that figures showed that banking take up had finally ground to a halt. It is clear that banks are now retreating from making property decisions, as further unwinding of the banks’ businesses continues. • Over the last six months (Q4 2008 – Q1 2009) banking take up declined by almost 16% compared to the previous six monthly period. • A total of 451,000 sq.m was let over this period, although this included the 177,000 sq.m JP Morgan pre-sale in the London City & Docklands submarket. As a result of this deal, London City & Docklands was the most active market within the last 6 months, recording 221,000 sq.m of banking lettings. BUSINESS BRIEFING
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• Banking letting activity is volatile and there are no discernable trends in city take-up activity from quarter to quarter, as all markets are suffering the impact of the economic slowdown. • The next most active cities for banks were located in CEE, with Moscow recording 68,000 sq.m and Budapest 47,000 sq.m of banking take up over the last six months. TOTAL BANKING TAKE UP (Q4 2008 TO Q1 2009) Q4 2008
Q1 2009
200,000
70,000 Sq.m
60,000 50,000 40,000 30,000 20,000 10,000 G las go w
Ba rc elo na & D oc Lo kla nd nd on s -W es tE nd Ed in bu rg h
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Pa
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M ad rid
M os co w
W ar sa w
M ila n Am st er da m
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Bu da pe st
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Fr
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Pr ag ue -I
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Br
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0
Source: Cushman & Wakefield
% OF EUROPEAN BANKING TAKE UP BY CITY/SUBMARKET IN Q4 2008 - Q1 2009
London Ð West End Glasgow Brussels Milan
Edinburgh Madrid Barcelona Prague Frankfurt Warsaw Amsterdam Paris Ð Ile de France
Budapest London Ð City & Docklands Moscow
Source: Cushman & Wakefield
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FUTURE BANKING SECTOR TRENDS The Banking sector will continue to be fragile for the immediate future and until the levels of toxic debts have been determined and removed from the balance sheets, the banking industry will remain subdued. Government intervention, both globally and throughout Europe, has clearly had an effect and it could be argued that the rescue packages announced in a number of countries have kept a number of banks operating where otherwise they may have folded. Tighter legislation both from the EU and domestic governments is likely to be discussed before the end of the year. Whether it takes the form of restricting the size of banks or tightening the regulation of their operations, new legislation will affect banking operations in the future. This intervention is likely to lead to a consolidation within the sector and merger and acquisition activity could rise. The stronger, more opportunist banks will be the first movers within the sector, although banks will be more considerably more selective than in the past before deciding on any potential acquisition target. The primary aims for banks within Europe will be to remove the toxic debt from their balance sheets and increase their Tier 1 capital. To date, this has resulted in a number of banks announcing significant numbers of redundancies and this is a trend likely to continue over the course of the year. With most banks operating across borders, job losses are likely to be spread across a large number of countries and the effects will be wide ranging, with London hit the hardest.
FUTURE PROPERTY TRENDS: OPPORTUNITIES IN A DIFFICULT MARKET What is apparent from a property perspective is that property decisions have moved up the corporate decision ladder, as there is a realisation that by managing property portfolios effectively cost savings can be made. Many banks will be seriously considering the volume of space they occupy and looking at ways in which they can save money. Many will seek to take advantage of falling rents to re-gear their existing leases at a more cost effective rate and this will be the main driver of banking activity. Since their peak in mid 2007 capital values have fallen by an average of 22% across Europe, with up to 40% wiped off values in the UK. With further falls forecast, many landlords are now increasingly willing to renegotiate to secure a tenant rather than risk an empty property in the current climate. In the next six months a notable increase in sublet space is anticipated as banks seek to drive down their cost base and dispose of surplus space from their portfolio. The principal banking markets, such as Frankfurt, London (City) and Paris are likely to lead the way in terms of the amount of sublet space, although the trend is likely to grow across Europe. Active demand from banks will be tentative at best, and banks are only likely to relocate if an exceptional offer is available. Therefore, banking take up levels throughout Europe are likely to remain low throughout the remainder of the year. However, demand levels may increase towards the end of the year as banks may look to move to more efficient buildings, and take advantage of the increased incentives and the decline in rents across Europe. Despite the gloomy outlook, there are many opportunities for banks to take advantage of the current market conditions within the office occupational market and to create value from their real estate. A number are mentioned throughout this briefing but please read all Our Top 10 Tips for Occupiers.
*Europe is classified as the 15 cities that C&W collects banking data in. BUSINESS BRIEFING
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ABOUT THE BANKING GROUP
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Our financial institution clients are among the very largest occupiers and owners of real estate. Be it administrative offices, retail branches, customer call centres or storage depots, they can make up a substantial proportion of a financial institution’s asset base and require constant management. Good strategic and operational control of the real estate portfolio can therefore make a significant difference to a financial institution’s performance.
Guy Douetil Cushman & Wakefield LLP European Headquarters 43/45 Portman Square London, W1A 3BG UK Tel: + 44 (0)20 7152 5220 guy.douetil@eur.cushwake.com
The desire to control their real estate is made acute by the fact that few sectors have undergone as much change in the past twenty years as banking. The growth of personal banking, the automation of services and the restructuring within the sector have all demanded a fresh look at delivery channels. Many European financial institutions still have a legacy of real estate holdings that were assembled – in terms of both style and location – for a different era. Cushman & Wakefield can actively help a financial institution to achieve a more productive real estate portfolio.
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