In or out, the advent of the euro is likely to have an impact on occupier demand for UK offices. Charlie Jacoby asks whether there will be increased pressure to compete with Europe
Brokers may grumble about having to wake up an hour earlier as the London Stock Exchange harmonises to the euro-time of the Frankfurt B”rse. The burghers of Manchester may go through their traditional round of hand-wringing as they fail to take another high-profile scalp – this time General Motors, which is moving its European central accounting facility to Bilbao.
But there are those reading the tea leaves who believe that all this means is it’s time to wake up, smell the coffee and join the euro or lose much, much more. Fears abound that Britain will soon become the Mexico to a United States of Europe, with sterling as much use as a peso over the border.
Predictions about the effect of the euro on UK property are largely in line with predictions about its effect on the UK economy. New research by GVA Grimley indicates that Britain will do well from a euro that has a rough ride in the next five years – while Britain is out – and a euro which will succeed in the long term – when Britain comes in.
GVA’s worries are mainly about Britain staying out of the euro in the long term. In this case, the country will not enjoy the advantages of the net increase in internal cross-border trade which will lead to company mergers and activity in the property market.
The UK will lose out on inward investment encouraged by Europe’s improved economy of scale; and it will miss the greater economic growth and lower unemployment caused by the left-of-centre governments of Europe tweaking the Maastricht treaty signed by their old, right-of-centre predecessors.
Were Britain to join the euro, GVA’s misgivings include the euro-assumption that a one-size-fits-all interest rate cannot reflect the economic situation in each member country. The UK may also suffer euro-teething as its economic cycle comes into phase with core Europe.
In a recent research paper, Stephen Mallen of Knight Frank pointed out that the removal of currency risk within euroland is of considerable significance to the European property market. “Faced with an already complex market, foreign and cross-border investors have often been deterred in their international plans owing to uncertainties over future currency fluctuations,” he wrote. “Removing currency risk should, in theory, foster increased investment within Europe and further encourage non-European funds and vehicles to enter a more transparent and less risky market. In practice, however, progress will be incremental owing to general uncertainty regarding EMU and the fact that each country still offers a unique and complex local property regime.”
Overstated anxieties
BCO spokesman Patrick Morrissey of CB Hillier Parker in Manchester believes the danger of the euro is overstated. “If members of the German government keep resigning and the value of the euro goes up, we should do well,” he says. “CB Hillier Parker advised General Motors and the reason it went to Bilbao was only partly due to the euro. Among other reasons, the principal GM directors involved were Spanish, Bilbao has an educated and bilingual workforce, and it offered more incentives. I think all the scaremongering was only about getting a headline and I think that that was fundamentally misguided and dishonest. After all, US pharmaceutical company Bristol-Myers Squibb recently announced it is to base its European central accounting facility in Chester.”
Morrissey says that the office market will be cushioned from any euro-fallout by its lack of volatility. “The manufacturing sector may see more change, especially among those whose activities are genuinely pan-European,” he says. “Manfacturers may feel they will need to base themselves where the bulk of their business is transacted. But offices form a more amorphous marketplace.
“In terms of the relative value of the currencies, we will not be a Mexico to a United States of Europe. I think it will be a non-issue in four years, because we’ll be in.”
One area that is ripe for merger and acquisition – and which will certainly see Britain largely left out of the property windfall – is with the tobacco companies of Europe. As the likes of BAT and Philip Morris grow mightier, rumours grow stronger that there will soon be a mega continental cigarette company based on a Franco-Spanish axis of Seita and Tabacalera. It could include some or all of Austria Tabak, Swedish Match, Denmark’s Skandinavisk Tobakskompagni, Germany’s Reemstma, the UK’s Gallaher Group and Imperial Tobacco and the state cigarette makers of Italy, Turkey, Romania and Bulgaria. It will almost certainly not include a British-based head office.
For every example of where Britain loses out, however, there are others which show us among the winners. The euro received a short sharp shock after German insurance giant Allianz and utility company RWE said recently they were considering moving their headquarters out of Germany to escape tax reforms currently in progress. London, Zurich and New York were bandied as possible locations. This was doubtless politicking to extract concessions from the German government but it frightened the French parliament enough adopt a budget for 1999 which includes a “poison pill” intended to prevent French entrepreneurs relocating to other, more tax-friendly European countries.
The internecine war to attract inward investment and hold on to investors they have applies to all countries in Europe, in or out of the euro-zone. Whether it is gifts of cash or reform of lease structures, Europe’s nations are honing their relocation incentives.
Leases come into line
King Sturge & Co research predicts that the biggest impact of the euro on Britain may be harmonisation of lease structures with other European countries. The University of Reading’s 1997 report Right space: right price shows that office lease lengths fell from an average of 23.5 years at the end of the 1980s to around 12.2 years. For example, the four existing offices of the three foreign banks which have recently announced prelets in the City of London barely came within a decade of their lease terms. Merrill Lynch, which expects to move in 2000, took its old office at Ropemaker Place for 27 years in 1985. By the time it moves, it will have occupied it for just 15 years. Deutsche Bank lasted only 15 years out of a possible 31 at 6-8 Bishopsgate and 13 years out of 20 at 20 Finsbury Circus. And ABN Amro did a mere 17 years of 25 at 101 Moorgate.
King Sturge & Co’s Helen Morris says that, coupled with financial services companies’ typical inability to see more than three years ahead, lease terms will fall further. “Tenants can get what they want if they pay,” she says. “JP Morgan was quoted as suggesting that a 10% to 15% premium would be acceptable for flexibility.”
Morrissey agrees. “We are already seeing far more flexibility in lease terms, with a number of major players beginning to look at more flexible office rents,” he says. “Among landlords, Akeler – a new company – and the older Grosvenor Estate are both now promoting very flexible short-term interests in their properties. There are serviced office providers coming into the market such as Regus and HQ who are prepared to offer the short-term flexibility that people – even the big corporates – want. The influence on lease terms of the big, stoic, property-owning institutions and pension funds is weakening.”
Short leases are only one weapon in the arsenal, however. The battleground is bloodiest in sectors of the office market where Britain performs best. And nowhere is there more potential carnage than in the City.
Craig McDonald of Healey & Baker believes it is more than just a failure to join the euro that prevents the City of London from taking an effective stand against Frankfurt. He sees a suicidal dilatoriness in the way the City encourages development. “By the time Frankfurt takes over from London, we will be old men,” he says. “But it may happen. The latest planning brief for Frankfurt’s city centre has created a bit of PR – the way it is actively trying to encourage office development. The trouble is the City won’t do anything about it because our planning is restricted by the height of our churches. Therefore, we lack the profile of Frankfurt.”
McDonald is looking further ahead than most. City agents are generally happy with the City’s ability to maintain its dominance. “The scare in the newspapers was that all eurobond trading was going to walk out the door and thousands of jobs were at risk,” says Mark Bourne of King Sturge & Co. “But this is nonsense. Two German banks have just announced they are increasing their investment in London – Westdeutsche Landesbank and Deutsche Bank – and they are bringing in members of their German workforce.
“This is globalisation: that London, New York and Tokyo are seen as the three platforms and that London is also America’s gateway to Europe. The US law firms which are moving in keep talking about London as their ‘springboard’. Frankly, Frankfurt doesn’t figure.”
And with the announcement that the Paris and Zurich stock exchanges are to extend their cross-membership agreement to include Milan, stepping up pressure on the Frankfurt and London bourses to speed up plans for a single stock market for Europe’s top 300 companies, perhaps a “virtual” world stock market will not be confined by a single currency. The future is cross-border, euro or no euro.
