Finance Sector: Future Demand Trends

Source : The Business Times, October 16, 2007

The office space needs of financial institutions are changing globally. CHRIS ARCHIBOLD discusses how Singapore is rising to the challenge

THE financial services sector has seen unprecedented growth in Singapore over the last two or three years, both as a result of domestic growth and the influx of regional and global jobs into the market.

The accelerated growth, supply pressure and innovation in terms of workplace strategies are having a fundamental impact on the type, location and nature of property required by these financial institutions.

Jones Lang LaSalle's Banking and Finance Industry Group has done much work studying the drivers behind the occupational strategies of this sector, some of which will be covered here. Additionally, we have looked at the pivotal role that the city's office stock will play in maintaining the inflow of investment in this sector.

In the last 20 years, the defining trends in financial markets have been globalisation in the wake of deregulation and liberalisation; growth of markets resulting from demand due to greater securitisation, privatisation policies and developments in emerging markets; and the impact of technology. These trends, in turn, have led to innovation in products and services and to intense competition between financial centres - and firms within those centres - to capture cross-border trade.

Deregulation: The sector has experienced unprecedented levels of change in the last decade. Historically, it could be characterised as a series of highly regulated government monopolies. While this is changing, deregulation is happening faster in the West than the East. In addition to deregulation, which has resulted in increased competition (foreign and domestic), changing consumer demands and improvements in technology have been the key drivers of change.

Globalisation: The sector is going through a spate of mergers and acquisitions (M&A) as banks build global platforms critical to the success of organisations wanting to compete in the global marketplace.

Technology: The technology revolution has enabled the e-banking age, resulting in significant changes in retail banking. This impacts the need for physical branch space (auto lobbies, etc) and associated staff. Technology has also changed bank processing, enabling many tasks to be executed electronically and, often, remotely in a different part of the world where costs are lower.

Within office accommodation and portfolios, economies are being sought through:

# The consolidation of functions to decentralised locations

# Selection of cost-efficient locations

# Appropriate adjacencies

# Improved technical reliability/performance.

Corporate banking has high margins and is a client- driven business. It therefore prefers proximity to its client base and is likely to retain its core CBD presence. Exceptions to this may occur where high-specification buildings are available at a rental discount to the traditional city core.

Front office presence

As cost becomes a stronger driver, particularly in the current economic environment, banks are challenging how much corporate and investment banking needs a front office presence.

In recent years, there has been an increasing trend globally to decrease the percentage of 'front office' accommodation situated in expensive downtown locations. Many traditional non-client-facing functions have been relocated to the city fringe or decentralised locations for a number of reasons:

# Lower cost

# Control of dedicated facilities and consolidation into one 'campus'-style location (hence promoting synergies between business units)

# Convenience and amenities for staff.

The relative split between front and back office accommodation varies significantly depending on the bank involved although current 'best practice' is considered to be 60 per cent back and 40 per cent front office. This split often varies more towards the front office in the case of a global or regional headquarters.

Our benchmarking analysis undertaken on some 40 banks and financial services companies globally indicated the following trends in respect of front and back office splits:

# North American and European-based companies traditionally have a higher decentralised component.

# The impetus to move was primarily due to availability of better-quality buildings with cost savings being ranked second.

# Staff amenities and facilities were a major issue.

Providing a higher percentage of decentralised facilities is becoming a major priority for Asian-based banks as infrastructure and technology improve.

Recent technology and globalisation trends have impacted the real estate requirements of large banks (and other corporations). In general terms, the requirements are grouped into a range of location, design, occupancy and tenure considerations. A number of core objectives of large banks include:

# Flexibility and ability to accommodate rapid growth

# Building design that promotes workplace flexibility, efficiency and interaction between employees

# Cost-effectiveness and cost certainty

# Security.

Flexibility has become a key issue for large financial institutions, particularly in the last five years, as market cycles, economic conditions and M&A activity demand industry participants to be quick in reacting to change.

Flexibility

One of the greatest challenges is the rate of change, the unpredictability of space requirements and the ongoing need to manage costs. As a result, the emphasis in planning administrative office portfolios has shifted to a need to plan for flexibility. This is manifested in a number of ways:

# Standardising modules of space, providing structured IT and services infrastructure that allow the relocation of 'people, not desks'.

# Providing exit strategies for buildings, whether owned or leased as well as considering both local market leasing practices and financial considerations, and also depending on the nature and criticality of the functions housed therein.

# Providing strategy for rapid growth, especially in supporting unpredictable but rapid growth of new delivery channels.

The style and design of accommodation has over the last 5-10 years has become increasingly important, as occupants realise the impact it has on staff retention, a cooperative working environment and flexibility. Workplace planning and strategy is a huge topic and issue in its own right. Recent trends and design consideration will likely be investigated during an exploration of occupier objectives.

Singapore has some of the most reliable infrastructure within Asia and is fully able to support centralised facilities. This benefit of putting this infrastructure in place has been demonstrated by the massive influx of investment by financial institutions over the last two years.

The latest Grade A office development, One Raffles Quay, serves as a excellent barometer of this expansion activity. Analysis of the occupancy of this development shows that over 80 per cent of the space is leased to financial institutions and over 60 per cent of this take-up is expansion space.

To date, much of the activity has been centred in the core CBD area and while we expect to see more of this over the next 12-18 months we are also predicting that many of the major financial institutions will turn their attention to splitting their operations and growing their back office operations. The reasoning behind this prediction is as follows:

# We now have significant real estate cost differentials between the CBD and decentralised locations. In some locations, rents are only 25 per cent of Grade A CBD core rents.

# Rental fluctuations in many back office locations are very low (in dollar terms) compared to CBD locations and therefore afford the occupiers more cost certainty, which aids business planning.

# Many of the banks have reached critical mass (in terms of area occupied) making a front office/back office split a viable option.

# Some locations afford the occupier the opportunity to enter into a build-to-suit, giving total control over the type of environment created.

# Current island-wide supply is limited. Build-to-suit back office premises can be constructed within tight timelines, some as short as 18 months.

There are a number of companies currently looking at their back office portfolio and while they are considering a number of potential locations, many are focusing their attention on Changi Business Park and the HarbourFront/Alexandra area.

Banks appear to be moving to more 'campus'-style buildings for their back offices with larger floor plates that encourage business unit interaction. The real drivers in location selection are expected to be the quality of specification, design of available floor plates/buildings, and the ability to attract and retain quality staff at competitive salaries.

The writer is regional director - head of markets at Jones Lang LaSalle