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Watch Your Six, London

Clockwsie Glasgow ClubLounge

Watch Your Six, London

On a recent trip to Berlin to meet with the buyer of 160 Aldersgate (a Germany-based fund), Mike and our colleague Martin were walking around the Alexa shopping centre in Mitte.

Suddenly, Martin stopped and turned to Mike, remarking with some surprise “even the adverts are all in English!” Of course, one may anticipate relatively widespread use of English in a tourist-trafficked shopping centre in a global city; still, this sentiment should not be downplayed. In East Berlin, anecdotally, you are more likely to find restaurant and bar staff that do not speak German than do not speak English.

Meanwhile, eased in part by common language of business, we see a broader shift in focus by some of the global community from London to continental European cities following Britain’s decision to leave the EU. To be clear, we do not think there will be a mass exodus out of London (we expect most business movement is likely to be gradual and manifest itself over the longer term) but some international companies are already making moves. One recent news article in the FT reported that the European Medicines Agency chose Amsterdam as its new home when it decided to relocate back to the continent. The article reported that some banks and trading houses also chose to relocate to Amsterdam.

Why Amsterdam? Some of the reasons for the moves mentioned in the FT are industry specific. The Netherlands has a banking licence suited to markets activity and what is seen as a more liberal regulatory environment. More broadly, Amsterdam offers widespread use of English (an industry friend living in Amsterdam told us that his recent negotiation with his public utility provider was entirely in English), a skilled local labour force and excellent transport links. Amsterdam’s financial district is only a short taxi ride from Schiphol Airport (which is newer than Heathrow and has six runways to Heathrow’s two) and Amsterdam already functions as a global hub. Moreover, the city is only an hour’s flight from London, Frankfurt and Paris and we understand there will also be direct Eurostar trains from Amsterdam to London from April as well. Importantly, the cost of living in Amsterdam is substantially cheaper than in London. One website that crowdsources cost of living information from its users suggests that it costs about 20% more to live in London, with rents differing between 10-40% depending on size and location. Much or all of the above could apply to any number of western European cities. Indeed, most of our US-based investors should already be well aware of the trend of movement away from the major US cities. Almost weekly we hear of friends in the financial industry back home in the US who have become fed up with places like New York, trading it in for the likes of Denver, Nashville, Portland or Austin.

Especially in Europe, it is important to put some historic context behind this to understand what, aside from the referendum, is behind a likely new long-term trend evidenced above. When Brandon’s family moved to London in the wake of financial deregulation, London possessed some serious advantages relative to Europe for siting a pan-European business. In the late 1980s, competitive locations had neither a broad acceptance and use of English, nor a long history of political stability (Spain was ruled by an authoritarian government not even fifteen years prior and Germany wasn’t the country we currently know until 1990), nor the generally excellent transport infrastructure they do now, which is in some cases better than the UK. Furthermore, some jurisdictions were limited in their ability to conduct business efficiently due to local idiosyncrasies of the legal and title systems, which have in many cases improved significantly thanks in large part to broader EU integration over the past 30 years. Perhaps most importantly, the cost of living in London was low, which it certainly is not now on a relative or even absolute basis!

There is an argument that London does still have a key advantage in its greater wealth of high quality, cosmopolitan retail, food and cultural offerings than many other European cities, and that these arguably create a “critical mass” which should remain desirable for global wealth sources. And indeed, we agree. However, having a head-start does not convey an advantage will last forever. It is easy to forget that much of this highly lauded ecosystem that makes London what it is developed not before but largely after the movement of businesses and people came who could support economically such a cosmopolitan offering. Brandon’s father Jack is quick to remind us that he remembers a time in the early 1990s when a decent hamburger could only be obtained at one place in Covent Garden called Wolfe’s (still there, still makes a decent hamburger!). In future, we would argue that other key cities in Europe have similar or greater growth drivers to support new offerings combined with much lower rents and a cheaper labour force that make it far easier to start new concepts. We already see this happening as certain high-profile restaurants and members clubs have started rolling out into other cities in Europe. In addition, anyone who has visited even medium-sized German cities will be astounded by the culturally high-brow music scene (most have a major opera house), just as any visitor to Amsterdam or Madrid will be blown away by the quality of the Rijksmuseum or the Prado.

Bottom line? London is not going anywhere in the near to medium term, but we do believe that it is vital to understand just how comparable an overall offering competitor cities will be able to provide as time goes by. Dismissing Frankfurt, for example, as “small and boring” and thus unable to compete with London for a meaningful share of the European financial industry, simply because that’s what many American financiers remembered the last time they made big moves out there back in 2006-07, would be tremendously short-sighted.

21st March 2018

Market Commentary