One of the major post-Brexit debates, in London at least, has been around the possible impact of a loss of passporting agreements for the UK’s financial services companies on London's position as Europe's financial centre.
The authorities in cities including Frankfurt and Paris have been actively campaigning to lure potential occupiers away from London, emphasising their business credentials and continued access to European markets. France is going a step further by reforming its tax regime to be more favourable to expatriates and is looking to streamline the process for registering new financial companies.
Some property market commentators have suggested that, attractive as these cities may appear, they simply don’t have office space of the quality or volume required to accommodate UK occupiers. These commentators may be mistaken: given the long timescales involved in relocation decisions, it is possible that suitable space could be delivered in both Paris and Frankfurt in the near future if there is demonstrable demand.
A more significant barrier to entry for London-based businesses, however, is the size of local labour markets. While the finance and insurance sector in London totals around 400,000 people, its equivalent in the next biggest European city (Paris) has fewer than 250,000 workers. This could be limiting for multinationals used to cherry-picking from a wide pool of talent.
Of course, if barriers to cross-border trade (as well as the ability to hire non-domestic workers) become issues in London, then this will affect many business sectors beyond just finance. Given some of these sectors (such as TMT) have been much more active in the London office market than finance in recent years, the potential impact on take-up in the capital if they choose to relocate could be significant.
But even if UK passporting rights do disappear, suitable office space found, and talent pool issues resolved, we may still not see an exodus of companies from the UK to European cities. This is because the CEOs of London-based businesses face the simple fact that on employment costs alone France and Germany are between 30 and 40 per cent more expensive than the UK.
As our table below shows, labour costs for a UK worker are approximately €26 per hour compared with €32 in Germany and €35 in France. Operating costs in London in a post-Brexit world would therefore have to rise by at least 40 per cent to make a significant relocation from London a sensible financial decision for many businesses, albeit the relocation of certain functions or divisions may be more justifiable. The European countries with lower labour costs than the UK are principally those in Central Eastern and Southern Europe, which do not have developed financial services sectors and therefore would not be attractive alternatives.
On this basis, employment in London is likely to remain static for the foreseeable future.