Savills World Research UK Commercial

London and the World: Chinese financial institutions

Overview Chinese financial occupiers and the Central London office market

■ Chinese financial institutions are ■ The continuing internationalisation amongst the largest in the world, of Chinese financial institutions, along and over the last decade they have with the increasing opportunities they “If we want to reach out to become increasingly integrated with have to capitalise on business in the the rest of the world and the global economy. west, will lead many to launch large requirements in the City of London - become further integrated with ■ Since the global financial crisis of we estimate they could take in excess 2008 Chinese investment into the of 2 million sq ft in the City over the the global economy, London west has risen, resulting in a great next decade. should be the first port of call.” deal of business from which Chinese financial institutions can capitalise. ■ This research paper examines Liqun Jin, Chairman of China Investment This investment is forecast to continue Chinese financial institutions, their Corporation's board of supervisors, 2010 increasing, and could reach in excess reasons for expanding into London, of US$1 trillion by 2020. and the kind of space they are likely to take.

savills.co.uk/research 01 London and the World | Chinese Financial Institutions

Who are China’s financial institutions? “China's financial sector grew from 472% Four of the ten largest banks in the world are Chinese: the Industrial and of GDP in 2008 to 612% in 2011, and this Commercial Bank of China, China number is expected to reach almost 800% Construction Bank, Agricultural Bank of China and Bank of China. in 2016.” These banks are known as the "big four" and, together with the Bank of Communications, they control around promote innovation in a financial are to benefit from their expansion half the total assets in China’s banking system long-dominated by state- into western financial centres, it is industry, with the next biggest players owned institutions. Unlike banking and important to have an understanding - 12 joint-equity banks and three policy insurance, this sector is not dominated of factors shaping the locational banks - controlling around 24% of by a small number of large firms (the preferences of financial sector total assets. ten largest account for just 44% of the occupiers at home. total net profits in the industry). But in Insurers are also big players in China’s common with banking and insurance, Shanghai and financial system. Like banking, the the potential for growth is huge - the On the mainland, Shanghai makes insurance market is concentrated, amount of assets under management the most convincing global financial with the largest three firms – namely grew from RMB 380 billion in 2006 to a centre. The city ranks at number 16 Ping An, China Life Insurance and the reported RMB 7.5 trillion in 2013, and on the Global Financial Centres Index, People’s Insurance Company of China the sector could soon overtake the it has the highest concentration of - holding more than 70% of the market insurance industry in size. foreign banks on the Mainland and in both life and property insurance. a range of equities and commodities Another growing industry is that markets, which include the largest Chinese insurance companies hold of asset management. Like the stock exchange in China, commodities US$1.2 trillion in assets, making insurance and trust industry, this is exchanges in gold and metals, a the industry smaller than those in an underdeveloped part of China’s futures exchange and the China countries with more developed financial system (it was reported Foreign Exchange Centre. So perhaps financial systems. But, despite being in January 2013 that assets under it is surprising that most of China’s under-developed, the expansion management in China are equivalent to financial institutions prefer to have their of the Chinese economy and the just 5.1% of GDP, this is compared to headquarters in Beijing. rapidly growing amount of insurable 240% in the US). However, the number exposures mean China’s insurance of funds has been increasing markedly Beijing’s most significant advantage industry is expanding quickly. since the emergence of the industry lies in its role as the capital of in the late-1990s, and is forecast to China and home to the institutions After banks and insurance firms, trust continue growing. responsible for managing and companies are the biggest financial determining the economic and sector. In China, trust companies are As a whole, China’s financial sector political life of the country: the National asset managers for high net worth grew from 472% of GDP in 2008 to People's Congress, the State Council individuals and companies as well 612% in 2011, and this number is and the Central Bank, as well as as being a source of credit for firms expected to reach almost 800% in all other agencies that regulate the in need of funding. As such, they 2016. If landlords and developers financial industry are based here.

GRAPH 1 GRAPH 2 China's continuing growth China's financial institutions

Graph source: Focus Economics Graph source: Forbes

02 November 2013

The government not only regulates What can we ascertain from Chinese Goldman Sachs, for example, meant these institutions, it is an intrinsic financial institutions’ locational the US investment bank was able to part of them. The five largest Chinese preferences at home? The most provide expertise on lines of business banks are majority owned by the state, pertinent fact is this: although these including asset management, corporate and there are significant government institutions are intrinsically linked to and investment banking. stakes in many other financial the state, their choice of location can institutions, meaning executives at be based on the emphasis given to Furthermore, while in Kong, state-owned financial institutions are commercial lines of business. Chinese financial institutions have been also likely to be high-level government required to operate by international officials. Beijing therefore exerts great If London’s landlords and developers standards, with shareholders and influence. wish to ascertain the likelihood of investors able to push for corporate increasingly commercial-led decisions governance improvement, greater Shanghai’s status as a global financial bringing Chinese banks, insurers, transparency and higher operating hub is down to its financial centre, asset managers and trusts to financial efficiency. Pudong, being designated as a centres in the west, they should look to special economic zone by the Chinese Hong Kong. As a result of this process, Chinese government two decades ago. As such financial institutions have grown (in Pudong has been granted liberties - Hong Kong 1996 total assets of Mainland banks largely concerning foreign business With no controls on capital inflows in Hong Kong amounted to HK$870 – which have been restricted in other and outflows and access to virtually all billion, and in 2009, this figure had parts of China. Most significantly, complex financial products available risen to HK$2 trillion) and have become foreign banks have been able to in the west, Hong Kong’s market is as increasingly international. The growth operate from there since the early free as that under any jurisdiction in of these institutions in Hong Kong, and 1990s. the world. the resultant escalation in international and commercial-led decisions has The differences between Shanghai and Chinese financial institutions entered not only benefitted the state-owned Beijing which have become apparent Hong Kong upon the transformation of behemoths, it has benefitted Hong since then are best explained by the the state-owned banks into joint-stock Kong’s landlords and developers, with dual HQ strategy of China’s financial commercial banks and the listing of Chinese financial institutions currently institutions. People’s Bank of China those banks on the Hong Kong Stock occupying around 4 million sq ft of is a good example. PBOC has Exchange. Bank of China, China office space in Hong Kong. headquarters in both Shanghai, and Construction Bank and Industrial and Beijing, and while the Beijing office Commercial Bank of China were the Occupational runs policy-oriented operations relating first to list between 2005 and 2006 preferences in China to monetary policy, financial research, and, by doing so, they were able to Historically, property has been one of note issuance, statistical data and access foreign equity capital, add to the best investment options open to anti-money laundering, the Shanghai their capital base and form strategic Chinese financial institutions. Equity office focuses on market-oriented alliances with some of the world’s markets in China are volatile, bond and international activities. Indeed, biggest banks. markets are thin, and the secondary any organisation making commercial- bond market is in its nascent stages. based decisions related to the global Chinese financial institutions have However, Mainland entities of Chinese economy is more likely to operate from evolved through these strategic banks are currently unable to acquire Shanghai than Beijing. alliances; ICBC’s alliance with real estate for investment purposes,

GRAPH 3 GRAPH 4 State ownership of China’s equitised commercial Economic freedom banks

Graph source: Congressional Research Service Graph source: World Federation of Exchanges, 2013 Index of Economic Freedom

savills.co.uk/research 03 London and the World | Chinese Financial Institutions

“Chinese financial institutions are willing to Moving pay a premium, on the Mainland they have outward been known to pay 30-50% over market Case study: ICBC's rates to secure suitable premises.” path to Hong Kong and insurance companies were only China Merchants Bank acquired a granted limited permissions to diversify site with a buildable area of 614,000 ■ Prior to 2005, ICBC was fully investments into real estate in 2010. sq ft on Beijing’s Financial Street for financed by the state through the RMB 3.9 billion (£400 million) and Ministry of Finance. To improve Despite this, China Taiping, China in 2009, Agricultural Bank of China corporate governance in the Merchants Bank, Ping An, Taikang took 916,000 sq ft at the then under- finance sector the state had to Life, Bank of China and Bank of construction first phase of CITIC relinquish part of the ownership to Communications have been amongst Pacific’s Shipyard project in Pudong non-state investors in exchange for the biggest buyers of office units for RMB 3.8 billion (£390 million). more efficient monitoring. across Shanghai and Beijing in recent It follows that Chinese financial years, and Agricultural Bank of China institutions are willing to pay a ■ In 2005, ICBC was restructured and China Construction Bank have premium and, on the Mainland, there to a joint-stock limited company, been the top buyers in Hong Kong - have been instances where they have with the Ministry of Finance and meaning buying-for-occupation has paid 30-50% over market rates to Huijin each holding 50%. In 2006, become a means of investment. secure suitable premises. ICBC brought in Goldman Sachs, Allianz and American Express The nature of the property markets Due to limited supply in the centre as strategic investors, and in in these Far-Eastern financial centres of China’s financial districts, some 2007, ICBC further diversified its also contributes to the preference banks and insurers have acquired ownership through simultaneous for purchasing. Rents in Beijing and large buildings in fringe areas - IPOs in Shanghai and Hong Hong Kong are amongst the highest primarily because it enables them to Kong. As a result, state ownership in the world, lease lengths are short, consolidate staff and factor in future was diversified and corporate and the market can change very growth. However, these buildings are governance improved. quickly. When taken in conjunction usually taken in conjunction with the with the expectation that they will be in ownership of existing buildings, or the ■ By introducing new investors China forever – and the ample coffers acquisition of smaller units, in the heart ICBC strengthened its objective available to them - it is clear that of the financial . of maximising and changing its purchasing for occupation has been service culture. By listing on the a prudent option for Chinese financial It is therefore clear, whether in Finance institutions. Street, Pudong, or Hong Kong Central, and by means of leasing, buying, or in separately, the bank was required Offices taken by the biggest conjunction with a fringe office, being to operate by international institutions tend to be large, new in the centre of the financial district standards, which brought in and centrally located. In June 2013 remains a must. international auditors and added compliance rules. GRAPH 5 China's volatile bond and equity markets ■ The public monitoring and outside control by international investors reduced risk, improved Capital Adequacy Ratio, brand value and market value and disclosure. With more disclosure and transparency, ICBC opened the door for international expansion and cooperation.

Graph source: Focus Economics

04 November 2013

China, as well as providing a platform “Today we agree the next big step, by from which it can serve its Chinese client base, and Agricultural Bank of laying the ground for London to become China's UK subsidiary focuses on providing financial solutions to Chinese a major global centre for the investment companies investing in the UK, as well of RMB back into China.” George Osborne, as to British companies investing in Chancellor, in an October 2013 announcement meaning China. Chinese banks could set up branches in the UK Since the economic downturn, UK regulators have been tougher on financial institutions. But where Why London? billion in the past five years and, last restrictions are tight, Chinese banks Chinese financial institutions have a year, Britain was ranked fourth as a have put pressure on UK regulatory huge presence at home, where they destination for Chinese investment - bodies to loosen them, reflecting their have been insulated from recent behind only Hong Kong, the US and desire to operate more freely from economic downturns. They have Kazakhstan. London. been able to interact globally from subsidiaries in Hong Kong, where their Many of China’s biggest financial An October 2012 letter to the UK assets are growing. So why would they institutions have already begun to Treasury, for instance, highlighted locate HQs in London? capitalise on increasing investment Chinese banks' discontentment at both to, and from, the west. Bank not being allowed to set up branches The primary reason for the location of of China’s UK business funds and in London (at present, their UK HQs in London is the level of business advises Chinese corporates seeking subsidiaries are regulated in the and investment the Chinese have in to expand in the UK and Europe. Its same way as local banks – with tight western Europe. Research from the investment banking arm, Bank of standards on transparency, capital Rhodium Group shows Europe was China International, focuses on equity cushions and liquidity buffers. In the destination for 33% of China's broking for securities listed on the contrast, branches constitute extended foreign direct investment last year, that Hong Kong stock exchange to UK and arms of overseas banks, meaning annual investment from China to the European institutional investors. control is limited) a year later, in October EU grew from less than US$1 billion 2013, George Osborne announced annually before 2008 to more than Industrial and Commercial Bank of plans to allow Chinese banks to set up US$10 billion in the past two years, China's UK subsidiary focuses on wholesale branches in the UK. and that investment by China can be financing trade with China, and on projected to reach in excess of US$1 companies with strong China-UK links. Banks already located here have had trillion by 2020. It also plans to operate as a regional a limited impact on the central London hub for new offices being opened by office market: Bank of China purchased According to the Heritage Foundation its parent bank in continental Europe, One Lothbury (118,000 sq ft) in 2009 for there has been US$17.8 billion of Latin America and the Middle East. £82 million, Industrial and Commercial Chinese investment in Britain since Bank of China acquired 81 King William 2005, with US$6 billion in 2012 and China International Capital Street (39,000 sq ft) in 2010 for £16.5 US$2.5 billion this year. British exports Corporation's UK arm serves European million, and China International Capital to China have doubled to £15.9 clients looking to do business with

GRAPH 6 GRAPH 7 Purchases for occupation by Chinese Chinese investment into Europe financial institutions

Graph source: Savills Graph source: The Heritage Foundation, RCA

savills.co.uk/research 05 London and the World | Chinese Financial Institutions

Corporation currently leases 11,000 of prime units in the financial district insurers preferring close proximity to sq ft at 125 Old Broad Street. is set to continue as institutions the Lloyds Building. These tenants already located here, but yet to will be a good source of demand for Smaller occupiers include purchase HQs, do so. landlords marketing units within newly Agricultural Bank of China and refurbished and developed premises in Bank of Communications, who ■ This means China Construction the financial and insurance district. each lease sub-10,000 sq ft units at Bank, China International Capital One Bartholomew Lane, and China Corporation, Agricultural Bank of ■ Chinese financial occupiers are used Construction Bank, who lease a sub- China and Bank of Communications to short leases at home, and a number 10,000 sq ft unit at Canary Wharf. are likely to be the next organisations of institutions initially leasing space in to purchase office units in the City - the City will have a longer term plan to Although these institutions are not these big banks will be followed by purchase. This means landlords who major occupiers at present, the smaller institutions, and those from are willing to be flexible could benefit in building blocks are in place for their China's less developed financial the short term. global expansion and - as investment sectors. into western Europe increases - it ■ Rents and purchase prices paid is inevitable that the presence of ■ The largest businesses will seek by Chinese financial institutions are Chinese financial institutions in the freehold opportunities and buildings likely to be high. China Merchants City will grow. chosen by them will be new, or Bank recently acquired a development substantially refurbished. Landlords in Beijing’s Financial Street for RMB Conclusion willing to tailor turnkey developments 3.9 billion (£400m). A sum that would ■ Total Chinese investment into to meet the requirements of Chinese have bought 30 Gresham Street Europe, including investment into real financial institutions will be in a (£335 million), 5 Canada Square (£383 estate, is projected to reach more particularly good position to benefit, million) or the Lloyds Building (£260 than US$1 trillion by 2020. and limited options to buy in the City million). core could create demand in fringe ■ We estimate Chinese financial locations. ■ Furthermore, in Hong Kong, Chinese institutions could take in excess of financial institutions are amongst those 2 million sq ft in the City of London ■ Less developed institutions not paying the highest rents in the world - during this period. currently occupying space in the meaning occupation of high floors in City will initially lease units at high the City of London's most prestigious ■ Two of China’s largest banks have specification premises. Target buildings is a likely possibility. already purchased HQs close to the buildings are likely to be located Bank of England, and the purchasing around the Bank of England, with

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Rasheed Hassan Sophy Moffat Simon Smith Cross Border Investment Research Research London London Hong Kong 020 7409 8836 020 7409 8791 +852 2842 4573 [email protected] [email protected] [email protected]

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