Britain's investment banks are set to rapidly reduce their property requirements during the next two years as the sector sheds jobs and cuts spending after scandals and continuing economic worries.
In a survey of the industry by CB Richard Ellis Ltd., the world's largest property fund by assets, three-quarters of banks with a presence in London said that they were planning to cut the amount of office space they used.
The expected reduction highlights the pressure on banks, both political and economic, to rein in spending and improve efficiency ahead of sweeping regulatory changes.
The downsizing will be a concern to London's commercial property landlords, particularly those in the City of London – long Britain's banking heartland.
According to the CBRE survey, other measures that might affect the volume of London office space taken by the sector in the next two years include a fashion for large financial institutions to relocate some functions to more cost-effective regional markets, in a trend that could reduce real estate costs by as much as 40 per cent.
"The pressure on the banks in recent years has undoubtedly had an impact on their real estate requirements and recovery in the sector is likely to be slow in an environment of tighter regulation," said Frances Warner-Lacey, senior director at CBRE's central London tenant advisory group.
Changes being ushered in during the next five years under Basel III – a third update to banking regulation – will have the effect of increasing the amount of capital that banks have to hold against loans.
The sector has also been rocked by the Libor scandal and faced tough questions over executive pay during the past year.
Since the middle of 2009 – the nadir of the commercial property market – rents in the City of London have risen to about £55 a square foot from £42.50.
In spite of the shrinkage in the banking sector, other businesses have expanded into the City, notably technology, media and telecommunication companies, which have, during the past 18 months, migrated inward from fringe areas such as Shoreditch and Farringdon.
Major deals in the past 18 months include Skype taking 88,000 square feet at Waterhouse Square; Weber Shandwick, the communications group, signing up to 65,000 square feet in the same building; and Oracle acquiring 22,000 square feet at 1 South Place.
Amazon signed a 200,000-square-foot-office lease in the City last month.
Technology, media and telecommunication companies are on course to absorb an additional 1.2 million square feet by 2014, according to a study by BNP Paribas Real Estate. If the demand materializes, it will pep up London's commercial property landlords, who are suffering from declining uptake in other sectors.