It's not quite The Beano Annual, but you know that Xmas is approaching when the Economist's annual glossy hits the newstands. In a pleasant change, most of the content of The World in 2008 is available free online. Another (new?) development is that author's names are now included - still famously not the case in the weekly.
One piece that caught my eye was a short piece by Lionel Barber, editor-in-chief at the Financial Times, warning of "tougher times ahead" for the City in 2008: London loses its cool
Host of the 2012 Olympic games, financial rival to New York, magnet for football-mad billionaires: London’s reputation as cool, classy and cosmopolitan has never been higher. The capital’s dynamic growth has been driven by the City of London, the location of choice for hedge funds, private-equity firms and Wall Street exiles. Thanks to a favourable tax regime, light regulation and an open-armed welcome to foreigners, the City is the bejewelled crown of Britain’s economy.
But that crown is in danger of slipping in 2008. Even before the great credit squeeze of 2007, there were clear signs that mergers and acquisitions as well as private-equity buy-outs had peaked. The return of conservative risk management in the banks and hedge funds will be a prominent theme in the coming year. Inevitably, this will lead to staff culls, lower Christmas bonuses and the disappearance of the more exotic off-balance-sheet financing which proliferated in the era of cheap money.
In 2008 investment banks will still be digesting the more leveraged deals struck at the height of the debt-driven boom. Some of these deals may fall by the wayside; others will have to be renegotiated. As one prominent banker says: “We will still see M&A activity in London, but it will be more of the mid-size and small-cap end rather than the really big deals.”
Private equity, which has enjoyed mouth-watering returns, will have a far tougher time in 2008. Not only has competition increased; the industry’s image has taken a beating amid accusations of asset-stripping and unduly favourable tax treatment. Gordon Brown’s government may tinker further with the tax code, but not enough to drive wealthy partners and non-domiciled London residents to sunnier (or snowier) tax havens such as Monaco or Switzerland.
When money was cheap a plethora of companies, many from the former Soviet Union, raised hundreds of millions of pounds by listing their shares in London. It should be no surprise if one or two high-profile casualties emerge in a less benign environment. Watch those smug faces in New York, where regulators have made rude noises about “casino capitalism” in London.
A slowdown in the financial-services industry will also be keenly felt in the property market, both commercial and residential. Financial firms hold nearly a third of office space in London. With commercial rents rising at a rate of more than 15% a year, estate agents have not blinked at charging up to £140 ($280) a square foot for prime space in, say, London’s West End. That will surely change in 2008.
Despite bullish talk among estate agents and property developers, it is hard to see those sky-high rates holding up. True, the vacancy rate in the City (as well as Lower Manhattan) has fallen below 6%. But millions of square feet are under development in the Square Mile, adding to the supply of office space just at the moment when the City’s growth is slowing down. Residential prices in London, though unlikely to fall, will certainly witness a slowdown in the rate of growth.
On a brighter note, London’s antiquated transport system should receive a face-lift in 2008. Terminal 5 will open at Heathrow airport in March, providing desperately needed relief for frustrated air passengers. In 2008 the government will push ahead with Crossrail—a rail link between Heathrow and Canary Wharf. But overall London’s infrastructure is a blight on the City, a shabby remnant of a glorious Victorian heritage.
The music goes on
London still has a few shots left in the locker. The light, one-stop touch of the Financial Services Authority will offer a competitive advantage compared with New York: as a principle, comply-with-the-rules will always trump comply-or-go-to-jail. London’s record of innovation—from the invention of the Eurobond market to the launch of sharia-compliant bonds—remains second to none.
In 2008 the City’s secret weapon may well prove to be money from the Middle East. Peter Weinberg, a former Goldman Sachs banker, estimates that between $50 billion and $100 billion of Middle Eastern capital could come to London. Since September 11th 2001, Arab investors have found London a friendlier place to do business than New York.
In the first years of the 21st century, London never had it so good. Times will be tougher in 2008. But to paraphrase Chuck Prince, boss of Citigroup: the music has not stopped, it has merely slowed down. Would-be dancers should be on notice: more waltz, less samba.