Bankers keep the flags flying

Banks are CURRENTLY having to cope with all manner of problems, cutting expenses wherever they can. 
In the West, savings are being made in terms of office space – but not in Central Europe. Here financiers seem intent on staying put

Emil Górecki, Mladen Petrov

Offices in the City of London are alive with the sound of removal services. To a greater degree than other institutions, banks have been exposed to what the financial crisis really entails and were among the first to inform their employees that redundancies were inevitable. The City is beginning to empty. Demand from City banks fell 69 pct in the second half of 2008 compared with 2007. Rental rates also fell by 11.5 pct in the same period. 
  But London is not alone in its suffering. Banking centres such as Frankfurt and Amsterdam are also sharing the agonies felt by these important tenants of prime office space. Although ambitious plans to rescue the largest banks are still being implemented, job cuts continue. The Centre for Economic and Business Research predicts that employment in the banking sector in London alone may be reduced by around 34,000 workers, and this comes after 28,000 redundancies were made in this sector in 2008. Were the gloomiest prognoses to come true, another 60,000-90,000 London bankers could be out of work in the coming years. According to Cushman & Wakefield, such a scenario would result in an increase of vacant office space of about 14 pct in 2010.

Numbers not so worrying over here

The question is: will the storm eventually reach Central Europe? There is little doubt, 
if any, that the crisis will take its toll everywhere, but the region’s capital city office markets, with certain exceptions, still seem to be coping relatively well. In Warsaw at the end of Q3 2008 the vacancy rate was less than 3 pct, while it reached as high as 8 pct in Prague. 
Both capitals have seen a gradual growth in 
vacancy rates, but analysts are not beginning to panic.

  In Budapest, however, there are very real grounds for concern. According to a recent Colliers International survey, 355,000 sqm of new office space will be delivered onto the Budapest market this year. If all schedules are adhered to, office space in the city will rise by 17 pct. There is no doubt that in the country’s current worrying economic situation this would seriously affect the level of vacancy. Colliers International in Hungary predicts that the vacancy rate could actually increase to as much as 25 pct by the end of the year.

Something in common

A substantially slower demand for office space may prove to be a problem common to Warsaw, Prague and Budapest. The first signs of a slowdown became evident on the Hungarian market last year, but despite this, several large leasing transactions were concluded at the time, with a significant proportion of business coming from the banking sector. 
 Last year K&H Bank signed a build-to-suit contract to lease 40,000 sqm in the separate development stages of the Millennium City Centre building. The same bank has also leased almost 7,000 sqm of the Millennium Tower II building. Raiffeisen Bank was next to sign a contract, leasing 8,400 sqm of Arena Corner. The latest report of DTZ’s Hungarian branch claims that the financial sector generated 17 pct of the demand for office space in Budapest in September 2008.

Natalia Ignatova, director of the client support department of the Moscow branch of Cushman & Wakefield/Stiles & Riabokobylko, has also not noticed any recent office downsizing by the banking community. According to her, while banks are suffering difficulties, they are behaving, as office tenants, in exactly the same way as businesses in other sectors of the economy. Investment banking in Moscow has not developed to the same extent as in London, Paris or New York, but even here banks have been hit very severely by the crisis. They are laying-off staff, but no cost cutting has yet been made over office space. This, however, may take place in 2010, Ms Ignatova suggests.

What is the situation like in the other CEE markets?

Czechs take advantage

The bad news emanating from the UK could actually have a positive effect on the region, for instance in the Czech Republic. Reports on the European office market highlight the rising trend of shifting sections of western banks’ operations to less expensive, but nevertheless highly attractive, premises in Central Europe, a trend confirmed by data from DTZ. Demand from banks for office space between 2004 and 2006 remained steady at an annual figure of below 15,000 sqm. In 2007, however, demand rose significantly to around 40,000 sqm, and in 2008 to almost double that.

Those figures come as no surprise to Jaromír Smetana, director of the Czech office of DTZ: “Tax incentives and labour, which is still relatively in-
expensive, are definite attractions of the country.” In short, the key is cost optimization. To achieve this, banks are looking for good locations outside the city centre but not as far as Prague’s distant outskirts. Last year saw several large leasing transactions on the office market, which must give grounds for continued optimism. The financial sector accounted for 27 pct of the demand for office space in 2008. Raiffeisen bank leased 17,500 sqm of the City Tower building and renegotiated another 7,000 sqm in Raiffeisen Centrum. Another large transaction on the Prague office market was Česká Spořitelna bank’s lease of more than 12,600 sqm in the Trianon Building.

Inexpensive removals

According to DTZ, 2009 will probably see a slump in office demand in all sectors of the Czech Republic, although as Jaromír Smetana reveals, his company is engaged in the restructuring of Unicredit Bank’s property portfolio, which is also reviewing the possibility of moving office. Mr Smetana claims that “for the moment, at least, the banks continue to be attractive as tenants and we have not detected any gloominess.”

An office leasing contract involving one of the largest bank operators in Bratislava will probably soon be concluded. Office market analysts are also casting an eye on the office potential in regional cities such as Ostrava, Brno and Plzeň, which might be interesting as off-shoring and outsourcing centres. DTZ’s most recent report reveals that there is almost 320,000 sqm class ‘A’ and ‘B’ office space there, with more than 500,000 sqm under construction. However banks seem to be avoiding these cities, an exception being HSBC, which leased 4,500 sqm in 2007 for a call centre in Ostrava.

A similar situation exists in Poland. Marcin Kania, partner of the office department of Colliers International’s Warsaw office, observes that: “As with all other sectors, financial tenants are looking for ways to cut expenses, postponing growth plans and making much more effective use of occupied space than has been the case up to now. But there have been no dramatic changes. Decision processes take much longer in banks than with other tenants, which is why I am not expecting important office leasing decisions until Q2 of 2009.”

He believes that banks which have offices spread around a number of premises are considering whether to bring them all under one roof,  something that would result in substantial savings. It’s a good time for such decisions, since rents in Warsaw city centre around a year ago were as high as EUR 35 per sqm, while today they can fall as low as EUR 20-25 as a result of re-negotiations, taking into account the standard of the building, the length of the contract and the space to be let. This should lead to eventual renegotiation and remaining situated in the city centre – something which would have been unfeasible around a year ago. Marcin Kania adds that: “The number of cases where banks want to reduce the space they occupy and sub-lease it to another company is increasing.”

A developer’s viewpoint

Office developers do not seem to be worried by the intentions of the banks, at least for the moment. Lots of interesting large scale leases were finalized last year. As 2008 came to a close, Pekao Bank Hipoteczny leased 1,500 sqm of the Horizon Plaza building in Warsaw. Since January 2009, BRE Bank has occupied 5,500 sqm of the Luminar building in Cybernetyki Office Park in Warsaw. GE Money Ba