Brexit

The risk of a hard Brexit puts businesses in a tight spot – stormy autumn is approaching

Companies on both sides of the channel are hoping for clarity on the impact of Brexit on their businesses by the EU summit in October, and no later than the possible EU special summit in November. To what extent the autumn will bring a transition agreement setting the status quo until the end of December 2020, remains unclear. Although this transitional period is foreseen in principle, it is highly dependent on conditions that remain unfulfilled which pose considerable obstacles. This is especially true for the Irish border issue.

Whether there will soon be clarity is still uncertain. From September onwards, the management of Frankfurt Main Finance expects a stormy autumn. Banks will have to make important decisions about their set-up over the next few weeks, as the time to prepare for Brexit at the end of March 2019 will otherwise be too tight. Just a few months before the UK’s exit from the European Union, the risk of a relatively hard Brexit has not been averted. This brings trade, industry and financial services alike under time pressure and pressure to move.

In the coming weeks, financial institutions expect not only increased inquiries from their customers, but also to decide for themselves which of the scenarios they are preparing for. “Time is running out,” says Hubertus Väth, Managing Director of Frankfurt Main Finance. “We’re expecting a stormy autumn: industrial and trade companies, as well as the asset management industry, must now seek to make the necessary arrangements with their financial services providers. It is important to Brexit-proof their financing and investments. That does not work at the touch of a button. We’re heading for a mass start which will lead to a bottleneck for those late to the line.”

Therefore, Frankfurt Main Finance advises companies from trade and industry as well as asset managers to actively pursue dialogue with their financial services providers to Brexit-proof their financing. This applies in particular to the clearing for euro-denominated interest rate derivatives. “Companies must take initiative themselves and approach the banks,” says Väth. “It is in their own interest, for example, to hedge their financing and hedge their interest rate risks even for a hard Brexit. Unfortunately, this case can still not be ruled out. The sooner they talk to their banks, the better the preparation will be, because companies will be the main victims in any case of doubt.”

Frankfurt Main Finance sees the Financial Centre Frankfurt as the logical first choice in the reorganization and orientation of the financial sector after Brexit. However, to make use of these opportunities under increasingly intense international competition requires further substantial effort.

Green and Sustainable Finance Cluster

Green and Sustainable Finance Cluster Germany releases baseline report

Mobilising the finance sector for climate protection and sustainable investment

On Friday, in Frankfurt, the Green and Sustainable Finance Cluster Germany issued its baseline report presenting an inventory of sustainability activities at the financial centre of Frankfurt/Main. The report is the first publication from this cluster, created in spring 2018 in a merger between the Green Finance Cluster Frankfurt of the Hessian Ministry of Economics and the Accelerating Sustainable Finance Initiative of Deutsche Börse. The cluster’s objective is to further mobilise the finance sector for climate protection and sustainable investment.

One encouraging result is that sustainability is now a hot topic in the boards of financial institutions, resulting in more and more innovative products and services, notes Hessian Minister for Economics Tarek Al-Wazir. “Now it’s about coordinating these activities to make Frankfurt a leader in this area that can articulate the German voice in international discussions.”

The report analyses the current state of sustainable activities in Frankfurt and other European financial centres. The baseline report draws from extensive field research. The results show that 86 per cent of respondents discuss sustainability topics at management board level. 100 per cent of participating companies report on their sustainability activities. The increasing importance of this topic is also evident in current figures from a survey by the Forum Nachhaltige Geldanlagen (Sustainable Investment Forum), which found that sustainable investment in Germany was already at €1.4 trillion in 2017. Since 2005, annual growth has hovered at 27 per cent.

Al-Wazir made reference to European Commission estimates that €180 billion per year in additional investments are needed to meet Europe’s 2030 climate targets.

“The required sustainability investments are far too great for the public sector to bear alone. This means we must mobilise large volumes of private capital. For investors, this is about creating high demand. Practically every financial centre in the world now recognises the importance of green and sustainable finance. Frankfurt must play a leading role in this, concludes Karsten Löffler, Co-Head of the Frankfurt School/UNEP Collaborating Centre for Climate & Sustainable Energy Finance, and one of the two cluster directors.

Analysis of the baseline report finds that sustainable finance should become a much more prominent topic in the finance sector, not only for reputation, but also for its strategic business potential. It is becoming increasingly vital to identify risks to investments and financing arising from factors such as climate change. On the other hand, this also offers a variety of new business opportunities, stemming directly from the financing of sustainable infrastructure needs. In light of the high financing volume required for the transformation to a more sustainable economic system, financial institutions are increasingly compelled to take a forward-looking tack and develop corresponding strategies.

Aside from many encouraging trends, the baseline report still finds insufficient data on sustainable investments, due to factors such as a lack of standards and definitions, explains Kristina Jeromin, Head of Group Sustainability at Deutsche Börse and second cluster director.

“This is a key issue,” agrees Al-Wazir. “Uncertainty is poison to investment. Investors must have confidence that they are not getting scammed.”

The cluster wants to take on this and other challenges in four defined areas of activity:

  • Inventory and innovation: e.g. taking stock of activities thus far, identifying potential for development
  • Metrics and standards: e.g. developing definitions and measurement methods for sustainable investment
  • Data and digitalisation: e.g. expansion of the traditional key business figures to include environmental and social indicators
  • Dialogue and knowledge building: e.g. employee training, creation of permanent platforms for dialogue

The cluster is an association. The current sponsors are BNP Paribas Germany, Commerzbank AG, DekaBank Deutsche Girozentrale, Deutsche Bank AG, Deutsche Börse AG, DZ BANK AG, Deutsche Zentral-Genossenschaftsbank, Helaba, KfW Bankengruppe and Metzler Asset Management GmbH. The cluster is headquartered at the Frankfurt School of Finance & Management. The signatories to the Frankfurt Declaration also support the cluster.

For the full baseline report and further details on the Green and Sustainable Finance Cluster Germany, please visit the new website at http://www.gsfc-germany.com

 

CFS survey: German financial industry takes a critical view of ICOs, calls for stronger regulation

ICOs (initial coin offerings) are especially popular with start-up companies as a means of corporate financing by issuing cryptocurrencies, also known as tokens. These may be acquired in exchange for fiat currencies or virtual currencies such as Bitcoin and Ether. In contrast to IPOs, tokens issued in ICOs are not subject to strict capital market regulations, even though they serve the purpose of corporate financing. The German financial regulator BaFin is currently biding its time before taking a clear stance on cryptocurrencies and ICOs, although it does rate ICOs as highly speculative financial assets.

In light of the enormous risks, the German financial industry is clearly in favour of stricter ICO regulation (70%) and would like BaFin to play a more active role in this sector (60%). This was revealed in a recent study by the Center for Financial Studies.

“We are seeing a veritable flood of ICOs on the market at the moment. This development is only in its initial stages in Germany, but soon we will also be hit with a wave of new tokens. The survey makes it clear that action is urgently required in the ICO sector. It is time for a clear regulatory framework with an appropriate mandate for the financial regulator,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the survey results.

Mindful of the risks of fraud when ICOs are conducted on unregulated online exchanges, 50% of the survey respondents believe established exchanges should develop their own cryptocurrency trading platforms as a secure alternative.

“ICO platforms on reputable exchanges could help build trust among investors by establishing transparent and standardised processes, which could in turn benefit the issuing companies,” Brühl explains.

Just 12% of the respondents see opportunities for the Financial Centre Germany in this as yet largely unregulated sector.

As Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., emphasises: “ICOs undoubtedly are an innovation baring remarkable potential for the financial industry. The industry’s request for stronger regulation is an understandable and welcomed approach to making use of the potential while managing the risks.”

 

The results are based on a quarterly management survey in the German financial sector.

The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

CFS Index rises slightly

  • Financial institutions report strong decline in earnings growth, despite continued positive revenue growth
  • Service provider investment volume reaches second-highest level since survey began in 2007

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises by 1.8 points to a strong level of 118.5 points in the second quarter of 2018. The slight increase can be attributed to an all-round positive development in revenues, earnings, investment and employee numbers among the service providers. The financial institutions, on the other hand, report a clear decline in earnings growth, despite continued positive revenue growth. A further decline is expected in the current quarter, and this also applies to revenue growth. In addition, the financial institutions scaled back jobs temporarily in the second quarter. However, they are more optimistic in this regard for the current quarter. The investment volume of the financial industry remains stable at a high level.

“In the banking sector the increased competitive pressure, especially with regard to innovation, is evident from the survey results: earnings are on the decline, while investments have increased and many new employees have been hired,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

The future international importance of the Financial Centre Germany continues to be rated very positively

With a slight decrease of 0.5 points to 131.3 points, the business location sub-index, which measures the future international importance of the Financial Centre Germany, remains almost unchanged at a very high level, which has been maintained since the Brexit vote in 2016.

“The importance of the Financial Centre Frankfurt will continue to grow – a progress the financial industry has no doubt about as is shown by the indicator. The degree to which Frankfurt’s importance will grow depends on how those responsible will make use of the opportunities arising for the Financial Centre,” comments Hubertus Väth, Managing Director of Frankfurt Main Finance e.V. on the survey’s results.

Financial industry revenues at a high level / Earnings growth declines slightly among financial institutions but remains positive among service providers

Revenue growth among the surveyed financial institutions remains almost unchanged, edging up 0.2 points to a strong level of 118.8 points, which represents a year-on-year increase of 12.4 points. The corresponding sub-index for the service providers sees a significant rise of 7.6 points to 128.9 points, which is 4.4 points higher than one year ago. A further increase is anticipated. The financial institutions, by contrast, are expecting a fairly considerable decline in revenue growth in the current quarter.

The earnings growth of the two groups reveals contrasting trends. The financial institutions record a 9.3 point decrease to 101.8 points, which is the lowest level of this sub-index for two years. They are expecting a similarly substantial decline in the current quarter. The service providers, on the other hand, record a 5.4 point increase to 127.6 points, reaching the second-highest level since 2007. They remain optimistic regarding the current quarter.

Service provider investment volume reaches second-highest level since survey began in 2007

The growth in investment volume in product and process innovations among the service providers rises by 9.8 points to 122.4 points, reaching its second-highest level since the survey began in 2007. However, it is expected to decrease again in the current quarter. The corresponding sub-index for the financial institutions also reveals a slight increase of 1.3 points to 116.1 points. This group expects the positive trend to continue in the current quarter.

New brief period of job cuts at financial institutions

Following the prolonged period of job cuts in recent quarters, the financial institutions reported that their employee numbers rose again for the first time in the first quarter of 2018. This trend is now temporarily interrupted, as the employee numbers sub-index falls by 6.2 points to 96.4 points. However, the financial institutions are more optimistic regarding the current quarter. The trend among the service providers is positive; their level of recruitment is on the rise. The sub-index rises by 3.3 points to 126.3 points. Slightly lower growth in employee numbers is expected in the current quarter.

 

 

The results are based on a quarterly management survey in the German financial sector.

The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

Sustainable Finance, Frankfurt

What is Sustainable Finance and why is it reaching the mainstream of financial markets?

Increasing pressure on the environment, damages to ecosystems and environmental changes are presenting a global challenge. Integrating sustainability considerations into the financial system can play an important role in meeting the objectives agreed upon in the United Nations’ Sustainable Development Goals (SDGs) and the Paris Climate agreement. Therefore, the inclusion of sustainability criteria in the financial sector are essential to address the future challenges – this also includes the establishment of financial market structures that create incentives for large-scale shifts in investments and a more future-friendly capital allocation.

As part of the growing awareness that a shift in the financial industry is needed, sustainable finance is increasingly gaining attention from global financial and political actors as well as the broad public. But what does it mean?

Sustainable Finance aims at integrating environmental, social or governance (ESG) criteria into financial services. Decisions about investments and capital expenditures should take those criteria into account, while being beneficial to both the investor and society at large. Moreover, the sustainability risks that may impact the stability of the financial system should be made transparent. However, the future-oriented investment strategies should be based on valid data as well as medium to long term risks and returns. While this previously was a niche investment strategy, the approach increasingly reaches the mainstream of international financial markets.

An important component of Sustainable Finance is Green Finance, which refers to raising capital and financial investments into companies, services, products and projects that accelerate the development of an environment friendly and climate-resilient economy – an undertaking to which technological innovation and digital finance are essential to. By using big data, artificial intelligence and the internet of things Green FinTechs present innovative and efficient opportunities to further the greening of the financial system while mainstreaming the green finance approach by making sustainable financial services more accessible.

No signs of slowing – strong first half year for Frankfurt Office Market

Following 2017’s record results, the office market in the Financial Centre Frankfurt continues to boom with take-up in the first half of 2018 reaching third highest level of the past ten years and the best first quarter since 2000. According to experts at BNP Paribas Real Estate, CBRE, Savills Investment Management and Jones Lang LaSalle, the high level of activity in Frankfurt is leading towards the lowest vacancy rate in 15 years which will continue to fall in the latter half of 2018.

As a result of Brexit, 25 financial services firms have declared intentions to expand or move operations to the Financial Centre Frankfurt. Frankfurt Main Finance expects about 2,000 Brexit related positions will be relocated to Frankfurt by the end of 2018 and still holds its estimate of up to 10,000 potential positions in the medium-term, which have yet to impact demand on the real estate market to their full-extent.

Financial services firms affected by Brexit can still expect to find ample, modern office space in the city centre. Frankfurt remains affordable in international comparison, despite the waning vacancy rate now at 8.3% and Prime Rents increasing to 43 EUR/m2/month, according to data published by BNP Paribas Real Estate. In fact, the Financial Centre Frankfurt is just a fraction of the price of London or Paris. In the second quarter, prime rents in London and Paris topped 118 and 71 EUR/m2/month, respectively. Both cities have a vacancy rate below 6%.

These developments are discussed in detail by the Managing Director and branch head of BNP Paribas Real Estate, José Martínez, and Carsten Ape, Managing Director of CBRE, Andreas Trumpp of Savills Investment Management and Markus Kullmann of Jones Lang LaSalle (JLL), as well as Managing Director of Frankfurt Main Finance, Hubertus Väth.

The deviations in the data concerning vacancy rate, take-up or prime rents between the participating real estate firms result from the varying collection methodoligies or populations. Frankfurt Main Finance does not weight or value the individual methods, but instead presents them transparently.

José Martínez, Managing Director of BNP Paribas Real Estate GmbH and Frankfurt Branch Manager

“The upward trend in the Frankfurt office market continues. With a take-up of 273,000 m2 in the first half of 2018, the result is just under 14% above the ten-year average. Compared nationwide, take-up was higher only in Munich and Berlin.

In no other city are the results distributed so evenly across the various industry groups as in Frankfurt. First place is taken by banks/financial services with a share of 14.5%. Second place is taken by co-working providers, which contribute just over 12 % and are gaining increasingly in importance as a demand group in Frankfurt as well. The top three is completed by the group media and advertising, which is responsible for 12%. Places four to six are filled by three industry groups, which each have a share in take-up of just under 11%. These are public administration, ICT firms and consultancies. This even distribution of the result underlines impressively the very broad demand base and lively market activity. Among the most important deals were the leases of 24,000 m² by the FAZ newspaper in Europaviertel, 8,300 m² by the German Finance Agency in Heddernheim/Mertonviertel and 8,000 m² by the Bethmann Bank in the Banking District.

The reduction in the amount of vacant space has continued and currently stands at 1.28 million m². This is the lowest volume in the last 15 years. Of the total vacancy, however, just under 48% (611,000 m²) has the modern quality preferred by occupiers. The vacancy rate in the overall market has fallen to 8.3%. The biggest problem remains the shortage of space in the central, highly-sought-after locations. Due to the strong demand and inadequate supply of high-quality space, construction activity has increased. A total of 592,000 m² is under construction, but only about half of it is available to the market; the rest is already pre-let. It also needs to be taken into account that most of the supply is only concentrated on a few projects, which in some cases will not be available until 2023. As a result of the relationship between supply and demand outlined above, the top rent has increased compared to the previous year by 12% to 43 €/m². A similar dynamic upward trend has also been recorded for average rents, which have risen by just over 8% to currently 18.30 €/m².

The strong demand situation and the supportive economic environment for the occupier markets will stimulate take-up in the second half-year. This will be even more the case, because the share of major deals should increase. Against this background, an above-average take-up is again expected for the year as a whole, which should exceed the 600,000-m² mark. As the reduction in the amount of vacant space will continue, albeit at a slower rate, a further increase in rents is expected.”

Carsten Ape, Managing Director, CBRE

“Thanks to the strong economy, Frankfurt is in a dynamic state. We are observing an unwaveringly high demand in the office market. With an office space take-up of 253,700 m2 the first half of the year was 13 % above the strong previous years. That strong momentum at the beginning of the year persists throughout the first half of the year.

While the first quarter of the year was dominated by single large-scale projects such as the Frankfurter Allgemeine Zeitung leasing around 24,000 m², the current growth in Frankfurt can mainly be attributed to the traditionally strong financial sector: in addition to banks, consulting firms and law firms, companies from the real estate industry are looking for space.

Moreover, the focus increasingly lies on small-scale objects of up to 1,500 m² – a segment which made up 53% of the 106,800 m2 take-up of the second quarters. Co-working is contributing to that upsurge: within just a few years take-up increased from 1,100 m² in 2015 to 24,800 m² in the first half of this year. Especially start-ups are causing a demand in shared offices – an innovative segment giving the Frankfurt office market an opportunity to grow and ensuring its flexibility.

The high demand, the repurposing and demolition of existing office space as well as a rather modest number of completed real estate projects, caused the vacancy rate to drop to 8.5%. However, construction activity remains to be high. The pipeline is well filled. By the end of 2018, 114,000 m² of office space is to be completed in Frankfurt, of which only about 16% is still available. While the number of available office space is becoming increasingly limited, there is still room on the market.

It is likely that Brexit will have an impact in the medium term. Currently, the political developments in Great Britain are unpredictable and thus, many market participants are awaiting the outcome of the negotiations. However, it can be predicted that Frankfurt will be one of the Brexit winners.

The strong momentum of the Frankfurt office market is likely to continue throughout the second half of the year. The persistently high demand and shortage in office space located at the city centre could lead to an increase in prime rents. Nonetheless, national and international investors are interested in attractive investment opportunities in the Rhine-Main area. Frankfurt continues to be a focal point.”

Andreas Trumpp MRICS, Head of Research Deutschland, Savills Investment Management

“The outcome of the negotiation process for Great Britain’s departure from the European Union will determine the future of other Financial Centres such as Frankfurt. In 2017, the Frankfurt Office Market was marked by record results, even without Brexit-related relocations. An upward trend that persists in the first half of this year. The dynamic of Frankfurt and the Rhein-Main-Region is beneficial to real estate investors, which is amongst the reasons of why Frankfurt moved up 4 places to the 17th most dynamic city in Europe in the recently published Savills IM Dynamic Cities Index. The Main metropolis benefits from its excellent international train and airport infrastructure, above average public transport system and digital network on the local, national and international level. Real estate investors will find investment opportunities in every size category, real estate segment and risk profile. The Financial Centre Frankfurt offers unique investment opportunities that other German cities can hardly provide.”

Markus Kullmann, Team Leader Office Leasing Frankfurt am Main, JLL

“The Frankfurt Office Market reached a strong sales momentum midyear. With a take-up of 260,000 m² a comparison to the previous year (+ 9%), and both the 5- and 10-year average (+ 28% bzw. + 14%.) highlights the outstanding performance. Frankfurt has reached its third-best half-year take-up volume in the past ten years. While large scale rentals of over 10,000 m², such as the rental by the FAZ in the first quarter, do not occur every quarter, we are highly confident that the second half of the year will yield some top lettings – at prime rates. Companies seeking to hire or keep high-calibre personnel are willing to pay prime rents for excellent properties in top locations. Since the dynamic of demand continues to be high, I am confident that take-up will reach 575,000 m² in 2018.

An issue with which actors will be confronted on Frankfurt’s real estate market: vacancy does not necessarily mean vacancy. Available space does not meet the requirements in location, amenities, leasing period and rent. Meanwhile, the vacancy rate is at 7.3 %, with tendency to decrease to 6.8% by the end of the year. As quick reminder: The highest quote was at 17.9 % in 2006. From 2011 (15%) onwards, it gradually declined.

The urgently needed vacant office space did not become available on the market in the second quarter. This is unlikely to have changed by the end of the year. The supply in completed office space of around about 10,000 m² that will become available on the market in the next months is rather modest. I expect a notable relief to hit the market in 2020. By then, 485,000 m² could be constructed.”

Hubertus Väth, Geschäftsführer, Frankfurt Main Finance e.V.

“The high level of leasing activity in Frankfurt and the sinking vacancy rate show that the real estate market in the Financial Centre is booming. The extraordinary quality of life, excellent infrastructure, high concentration of innovative companies and the strong global commercial network make Frankfurt and the Rhein-Main Region one of the most popular destinations international firms. Frankfurt is able and ready to accommodate the numerous financial services firms relocating to Frankfurt from London due to Brexit.”