The New Capital of Capital

It’s not unusual for developers to throw up buildings without tenants locked in, but Broadgate Tower and the adjoining 201 Bishopsgate building are not your average speculative office project. This one is remarkable for its scope and ambition. When the tower opens for business next year plum in the middle of London’s financial district, the 35-story office property with 1,200 sq m of rentable space per floor will dwarf virtually all of its nearest neighbors. A decade in development and costing more than $570 million, Broadgate Tower and its matched 13-story Bishopsgate building come with all the conveniences, including double-decker elevators and easy access to nearby Liverpool Street Station. This, the biggest such office project in the history of the City — as London’s financial center is known — has it all. Everything, that is, except tenants.

But Paul Burgess, the head of London leasing for British Land, the company behind Broadgate Tower, isn’t worried. “We’re coming to market at the optimum time,” he says, as he prepares to sign up some of the legions of investment bankers, corporate lawyers and fund managers that make the City their home. The reason he’s bullish? Demand for office space is tied to the health of London’s financial-services sector and, by many measures, the City has never been fitter. The U.K. financial sector contributed 3.5% of Britain’s gdp in 2005, a leap from 2.4% in 2000. “You can sense growth taking place,” Burgess says. The project, he says, represents, in glass and steel, “confidence in London’s financial services.”

His faith seems well placed. Like its skyline, London’s profile as a financial hub is rising. While the U.S.’s mammoth $13 trillion economy provides a bigger market in domestic shares listed on Wall Street’s two major exchanges — nasdaq and the New York Stock Exchange (n.y.s.e.) — Britain’s more modest economy (it’s the fifth largest in the world) has forced London to transform itself into a more internationally minded financial center to stay competitive. That transformation has become so successful lately that it has led to widespread speculation over whether London or New York City will become the world’s supreme financial capital of the 21st century. While the n.y.s.e. and nasdaq threw swank cocktail parties during the annual gathering of the World Economic Forum in Davos, talk of London’s rise among business leaders was even more intoxicating. “London’s openness, to foreign capital, to trade, to immigration,” has helped it forge “a tremendous set of advantages,” Laura D. Tyson, a former chairman of the White House’s Council of Economic Advisers and ex-dean of the London Business School, told time.

It wasn’t always this way. A few decades ago, London’s three-centuries-old role as one of the world’s great business cities seemed threatened by overregulation. While the government dumped controls regulating foreign exchange in 1979, London continued to lose ground to other financial hubs because its equities market remained a closed shop. Long abolished in New York, minimum commissions on the London exchange killed price competition and risked turning the city’s securities market into a backwater as money managers went elsewhere for a better deal. But in 1986, sweeping deregulation known as the Big Bang finally blew things wide open. Out went the late starts, long lunches and cartel practices beloved of London’s fusty gents. In came U.S. investment bankers toiling for Goldman Sachs, Merrill Lynch and others, and, with them, a vital injection of talent and competitive instincts.

London’s pre-eminence wasn’t guaranteed by the Big Bang, however. More recently, the U.K.’s decision to opt out of the euro in the early ’90s stoked concern that Frankfurt — now home to the European Central Bank — would eclipse the City as Europe’s leading financial center. Those concerns have gone the way of the franc, lira and deutsche mark. Thanks to London’s ability to exploit its long-standing expertise in marketmaking and English’s position as one of Europe’s primary languages, there are now more euros traded for dollars, pounds and yen each day in London than in the euro-zone countries combined. The City’s share of the world’s foreign-exchange trading has risen to a third, more than any other city. But London’s dominance of Europe doesn’t end with currencies. According to the Centre for Economics and Business Research (cebr), a London-based consultancy, the U.K. accounted for 35% of the E.U.’s total institutional financial service business in 2005.Having cemented its leadership in Europe, London today is quickly gaining ground on New York City. While the combined market capitalizations of U.S. companies listed on the n.y.s.e. and nasdaq dwarf the City’s London Stock Exchange (lse), London has proved far better at attracting the new share listings that investment banks crave. In 2006, for example, 91 foreign companies chose to sell new shares on London’s stock exchanges — more than four times the number of overseas listings in New York, according to consultants PricewaterhouseCoopers. London’s smaller domestic business means that “if you’re going to flourish, you have to look around,” says Richard Lambert, director general of British business lobby group the cbi. Likewise, London is building on an already leading stake in international bank lending and over-the-counter derivatives, and foreign equity trading. Attention-getting statistics like that helped motivate nasdaq to launch a $5.3 billion hostile takeover bid for the lse in November. In a high-drama war that’s playing out in the British newspapers, the lse has consistently and indignantly rebuffed the approach.

London owes much of its recent success to its lighter regulatory touch. In 1997, Britain’s government brought an overdue end to a complicated and largely self-regulatory system with the creation of the Financial Services Authority (fsa). As lines between financial markets and firms blurred — telling a bank from a stockbroker was becoming more and more difficult — a one-stop regulatory authority, parliament concluded, appeared best suited to serving the industry. (For companies operating in the U.S. and much of Europe, no such single body exists.) The fsa‘s remit: working with firms to pinpoint potential risks long before things go wrong, rather than simply prescribing rules. While the U.K. watchdog listens, suggest industry representatives, U.S. regulators prefer to bark. The U.S. Sarbanes-Oxley Act, a 2002 response to the accounting scandals that toppled Enron and WorldCom, was intended to stiffen standards of corporate governance in public firms. In reality, the cumbersome auditing requirements — not to mention the cost and time involved in complying — have put many firms off listing on U.S. stock exchanges.

The headaches caused by Sarbox, as it is sometimes called, have worked to London’s benefit. From Russian Big Oil (Rosneft) to a Peruvian silver mining group (Hochschild), international businesses together raised $19.6 billion on London’s exchanges last year. The number of international firms on the lse‘s Alternative Investment Market (aim) — the lightly regulated bourse for small-cap companies — has doubled in the past two years to more than 300 (prompting accusations from the n.y.s.e. that aim lacks rigorous enough standards; the lse said the claims appeared “to indicate a misunderstanding about the operation and regulation of aim.”) The lse has intentionally concentrated its attention on companies from India, China and Russia. “We focus on countries where the domestic capital markets are relatively immature and not sufficiently developed to meet the capital needs of high-growth economies,” says Martin Graham, director of markets at the lse. But it’s not just over-reaching regulation bringing firms to London. The underwriting fees investment banks charge companies listing on the stock exchange are typically twice as high in New York than in London, according to a report published last June by Oxford-based Oxera Consulting.

This confluence of positive factors has helped the lse post record stats in a host of categories. The lse‘s operating profits for the nine months to 2007 more than doubled to $253 million, and the volume and value of shares traded on the exchange’s markets hit all-time highs last year. With its own share price more than tripling in the last three years to around $25.4, lse‘s board swatted away nasdaq‘s bid of $24.4 a share as “wholly inadequate.” nasdaq which has already built up a 28.8% stake in lse, has until Feb. 10 to persuade the lse‘s shareholders otherwise.

That will be a tricky prospect, considering the lse has seen off a succession of foreign takeover attempts in the past few years. Under ceo Clara Furse — the bourse’s first female boss in its 200-year history — the lse has knocked back offers from rival European operators like Deutsche Börse and Australian investment bank Macquarie. By “flushing out suitors and garnering shareholder support,” says Richard Hunter, London-based head of U.K. equities at Hargreaves Lansdown Stockbrokers, Furse and the management “have played the bid game very well indeed.” But the laws of capitalism dictate that the lse must have its price, and a handsome bid could yet win the day. That is, if it isn’t preparing to go on an acquisition tear of its own. Don’t rule out the exchange “becoming the predator, rather than the prey” sometime soon, says Hunter.London’s surging financial-sector fortunes go beyond just its booming stock markets. For evidence of that, take a look down the plush streets of Mayfair. Across town from the city’s traditional financial quarter, and nestling between the art dealers and high-end jewelers, London’s hedge-fund industry is quietly putting down roots. The city’s share of the $1.23 trillion global industry had climbed to around 26% by June last year, up from 21% a year earlier. (In France, Europe’s next largest market, assets came in at just 1.7% of the world total.) By clustering close to clients, rivals, support services (London is home to three of the world’s top four law firms) and all the resources of the City itself, London finance firms like hedge funds can pull in more business and squeeze costs further than if they were located outside that network. The economies of scale, scope and agglomeration, as these perks are known, are particularly acute in London. Without them, says the cebr, the E.U. would have lost out on $44 billion in investment banking-related business in 2003.

Agglomeration applies to labor talent as well. In a survey of international financial services execs published in 2005 by Z/Yen, a London consultancy, almost a third of those polled rated the availability of skilled labor in Paris and Frankfurt as poor. Three-quarters thought London’s was excellent. Hourly productivity among the U.K.’s financial-services workers is estimated to have climbed 3.6% per year between 1997 and 2001, according to a 2005 report, well above the 2% growth in the British economy as a whole over that period. No doubt, London’s captains of capital are handsomely paid for their efforts. City workers racked up $17.2 billion in bonuses last year, according to the cebr, 18% more than the previous year. (The windfalls have sent London house prices skyrocketing. Property valuations in the capital soared by around 10% in 2006.)

That’s not the end to London’s advantages. Not only does London have a “deep pool of talent,” says William J. Mills, ceo of Citigroup’s Corporate and Investment Banking division for Europe, the Middle East and Africa. But compared with its Continental rivals, it offers “the most flexible labor laws.” While the number of financial-sector staff in London rose 4.3% to 318,000 between 2002 and 2005, tough U.S. immigration rules applying to foreign talent helped New York’s head count slide by 0.7% over the same period, according to a report published late last month by McKinsey. London’s geographic position also allows it to start the day trading with Tokyo and end it trading with New York City.

London’s continued rise is by no means assured, of course. Efforts to unclog its congested transport network are long overdue, and Wall Street may be reenergized when proposals aimed at making it cheaper for firms to comply with Sarbanes-Oxley come into force, perhaps as early as this year. And consolidation among other exchanges — the New York Stock Exchange’s $14.3 billion deal with pan-European operator Euronext is just one of a string of mergers in recent months — could make it tougher for the lse to stay ahead. For now, though, with two dozen of Broadgate Tower’s floors already taking shape, it seems there’s little to spoil the view.