City of London Economic Research

Emerging markets and London's investment banks

By James Sproule, Head of UK Research, Accenture

London based investment banks have had a torrid few years. Returns in the order of 20% are as long gone as generous bonuses. If there is to be any hope of the former, new sources of revenues and profits must be found. Those London based investment banks that are in a position to expand, have all made the logical conclusion that emerging markets offer the greatest hope of underlying economic growth and a consequential need for investment banking services.

James Sproule talks about the opportunities that emerging markets offer to London's investment banks

 

Within every emerging market there are of course a host of local banks meeting businesses' financing needs. The mix of business undertaken by local emerging markets investment banks, unsurprisingly, reflects the very different historic business structures found in the underlying economy. But as these economies are changing, so too are financing needs. How rapidly businesses in emerging markets will move away from a ‘corporate lending and bank debt’ dependant model, towards a financial model where wide range of capital markets options are considered is going to vary. But what does seem more certain is that growth is on the agenda. Data over the past few years indicates that corporate lending in emerging markets has continued to grow rapidly, up by 48% in 2010 and 30% in 2011. While many companies may be reluctant to move away from a financial model which has served them well, we believe there are four reasons why emerging markets companies are likely to continue to move towards a capital markets funding structure:

• Others will follow the path of success. The rise in equity market capitalisation seen across rapidly growing emerging market economies points to larger companies embracing capital markets financing solutions.
• Intraregional competition requires capital. Companies from South Africa and China are racing to become early leaders in the next wave of emerging markets such as sub Saharan Africa.
• Bank balance sheets cannot take all the strain. Emerging markets banks do not have the balance sheet strength to support the range of companies needing finance, a problem that becomes more acute as the economies grow.
• Alternative paths can be successful, but they are slow. While many G7 and developed economies have achieved high GDP per capita without relying upon capital markets, their time to double GDP can be measured in decades, the desire for rapid growth points to a capital market financing.

Stock Market Capitalisation and GDP per Capita  

 
What is even more remarkable is how developed market investment banks have come to dominate emerging markets over the last decade. In 2005, the total amount of equity raised in emerging markets was $131 billion; of this sum, 22% was raised by developed market banks. By 2011 the amount of equity capital raised had risen to $686 billion, with 51% of the capital being raised by developed market banks, with similar figures being seen in 2012. Clearly emerging markets are presenting significant opportunities to London based investment banks, opportunities where they are doing their very best to rise to the challenge.  

 About James Sproule

James Sproule is Global Lead for Capital Markets Research and Head of UK Research for  Accenture Growth & Strategy.

Encouraging social investment through tax incentives



Following on from Chancellor George Osborne's announcement of a tax relief on social enterprise investment in today's Budget, Katie Hill from City of London Corporation along with Gavin Francis of Worthstone and Neil Pearson of Wragge and Co, explore how tax incentivisation could be implemented and structured to make investment opportunities in social enterprises more attractive to private investors. Their discussion draws on our recently published report The Role of Tax Incentives in Encouraging Social Investment.

  

The report was prepared for the City of London and Big Society Capital by Worthstone assisted by Wragge & Co LLP.

The full report is available to download for free from The City of London's website.  

Taking Stock of the City and its property market

By Sandra Jones - Ramidus Consulting

Think City of London and many people think of a monolithic monoculture - all big banks and bonuses.

But this research, commissioned by the City of London and launched at MIPIM, shows that to be inaccurate.  Taking Stock is an in-depth study of the City’s built stock and occupiers – it barely left a stone unturned and it highlighted the diversity of the City economy.    

Consider this: 48% of the City ‘s office stock is occupied by the financial sector but turn that around and we can say that more than half is not occupied by the financial sector.  In fact there are 12 key occupier sectors in the City of which finance is only one.  In units under 10,000 sq ft, 70% of the space is occupied by the other 11 sectors.

Or this: there are 3,600 office occupiers over 1,000 sq ft in the City of London, and 85 of them occupy more than 100,000 sq ft.  Considering the amount of time, cost and creative energy that is invested to design space for these big users, it is a pretty thin market.   On the other hand, there are 1,878 businesses occupying between 1,000 sq ft and 5,000 sq ft within the Corporation boundary and another 2,192 in adjoining boroughs on the City fringe.

In fact, our research showed that, since 1997, buildings have grown bigger but the average size of an occupier has shrunk, which means it is critical that large buildings are designed to allow multiple occupation.   Small businesses are a vital part of the City’s ecosystem:  they generally serve the needs of large businesses and sometimes they grow into large businesses themselves, a growth which can, in the new economy, be very rapid indeed.

And that leads to the other big theme flagged up by the research - the propensity of the City economy to change and adapt to new circumstances.  The rise of the internet entrepreneur and the focus of the tech and creative sectors around Old Street roundabout have put the City in the position of being one of London’s most productive seed-beds for new business formation and rapid business growth.   This is just one catalyst for change.

So the big message to take from this research is that the City needs to have an office stock with the scale and range to meet the needs of a highly diverse and changeable occupier base.  

We launched the study at MIPIM in a lively session with panel members: Gerald Kaye, Helical Bar; Clive Bush, Exemplar; Matthew Elliott, Deloitte and Mark Swetman, Hines. 

 

On how well the market provides for a diverse range of occupiers, the view of the panel was that the market ‘responds well’ and they were broadly in agreement that the standard institutional or BCO specification is still appropriate for the new economy.

Opinions also converged on the value of good public realm: it matters. But what was understood by public realm varied, from the presence of a coffee shop to pop-up, meanwhile uses and cycling facilities, which is probably a fair reflection of the range of things that fall under this heading.  The common factor is that they are places that people share and therefore they enable a more collaborative working culture to evolve.

Campus London, Google’s hub in Bonhill St is a mecca for Tech City types with excellent high-speed wifi.  Anyone can register to use the coffee shop and I sometimes work in there between meetings. I was struck by parallels with the London Pavilion at MIPIM.  Both are busy, vibrant and buzzing with conversations about funding, design and collaboration.  There’s a different dress code and demographic of course but the energy is tangible in both.  All this talk of shared spaces and public realm left me wondering if there is a place in the heart of the City where people can exchange ideas, in a learning environment and just be in a different kind of workspace – with excellent high speed wifi.

It seems that when we think City of London in future, small businesses might spring easily to mind - all collaboration and coffee shops.

About Sandra Jones

Sandra Jones is a consultant for Ramidus Consulting and one of the authors of   Taking Stock.

Welcome to the City of London's Economic Research Blog

Hello from the Economic Research team at the City of London. We work with research partners to produce original research into issues that affect London and the Square Mile, the businesses that operate there and its communities. This blog will be a chance for us and our guest writers to share some personal and topical views on issues affecting the City.

Partners and perspectives

We held our annual research reception yesterday at the Guildhall, hosted by the City of London’s Policy Chairman, Mark Boleat. This event is the City of London research team’s annual opportunity to get together with some of the organisations working in related fields of economic research in London and UK-wide, to say thanks to everyone we’ve worked with over the last 12 months, to meet new people, and to discuss ideas for co-working in the coming year.

The roll of honour of our partners over the the last twelve months is at the bottom of this post, and looking around the room, we were proud to be able to say that we’ve collaborated with such a wide range of experts in their fields on topics as diverse as the development of the social enterprise sector, the economic outlook for London, the tax contribution of UK financial services, the internationalisation of the RMB, and the economic impact of the City’s arts and culture offer.

Perhaps more importantly than looking back at past work, last night’s event was a chance to swap notes about new areas of interest, and to germinate new ideas for themes, partnerships and projects for the year ahead. New perspectives were shared on some perennial themes such as London’s relationship with emerging markets, supporting growth among SMEs, the City’s competitive offer, and the challenges of maintaining London’s infrastructure. But there was also interest in specific areas of EU regulation in relation to the City, the impact of visa and immigration policy on London’s ability to compete, and the growing importance of social enterprise. We expect to be discussing all of these areas in some depth over the coming year, on this blog and through our research programme.

Independent research

Another theme that emerged from many of our conversations over the evening was the noticeable move towards outsourcing research. Despite smaller in-house budgets available, organisations’ appetite for high quality research insights is undiminished. But there can be major advantages to using independent research consultancies. It’s a model that City of London research programme has been using since its inception, and the benefits that it brings are the flexibility to cover topics with a far wider reach, according to ever shifting areas of policy and market need. By finding the best partners for the job – agencies and experts with industry experience, local insights or wide networks of contacts and who bring their own expertise and perspective –  our experience has been that deeper insights or new and significant dimensions to research are often the result. The value of independently produced research in providing an evidence base for policy making cannot be overstated – and respect for this independence is a principle that is shared with all of our partners.

Thank you

We’d like to take another chance to thank our long list of partners over the last year or so and ongoing -  Bourse Consult,  Big Society Capital, the Big Lottery Fund, Bone Wells Urbecon, BOP Consulting, the British Standards Institute, the Cabinet Office, Centre for London, Cicero, City Property Association, Cityforum, CSFI, the Department for Work and Pensions, Experian, GHK, Ian Keen Associates, International Regulatory Strategy Group, Jones Lang LaSalle, Llewellyn Consulting, London Economics, London First, London Metropolitan University, LSE Enterprise, Mercer,  ADM Advisory, NHS North East London and the City, Oxford Economics, PHAST CIC, PwC, Ramidus, South East Economics, Stephen Jones and Associates, TheCityUK, Trusted Sources, University of Kent, Worthstone, Wragge & Co, York Aviation, Z/Yen,  and all of our internal partners in the City of London.

Meet the team:

• Dr Laura Davison: Head of Research
• Amy Nash: Research Officer (infrastructure, competitiveness, emerging markets)
• Sabrina Basran: Research Officer (corporate responsibility, social investment, environment and London’s communities)
• Fiona Morrill: Research Officer (financial services, regulation, taxation, Europe, economic analysis)
• Isabelle Almeida: Marketing and Communications Manager
• Sahsine Suleyman: Marketing and Research Assistant

Visit us again

Judging from the buzz at last night’s reception, the next twelve months promise to be even more exciting than the last, and we hope to see you here to share thoughts, perspectives and to debate ideas.