and JOHN WILLCOCK
Boom-time beckons in the City again as corporate finance departments power towards a bumper year on a surge of big deals, and the property market enjoys a spurt of activity as expanding firms compete for bigger and better offices.
A year ago the corporate finance departments of City investment banks were struggling to make a contribution to group earnings. Now the whirlwind of takeovers and mergers is producing fat fees and expectations of even fatter bonuses. "1995 is already a vintage year, the corporate finance side is making money faster than it can count,' one Rothschild excecutive said.
Acquisitions Monthly, the magazine, recently reported that the value of mergers and acquisitons deals this year is set to break the 1989 record.
"We are back to the pace of the late 1980s, and it is pretty sure to carry on for some while yet," says a Deutsche Morgan Grenfell executive. This dramatic recovery in investment banking from the trough of last year, together with a spurt of overseas banks moving to boost their representation in London, has knocked-on to renewed activity at the top end of the City property market.
Retail agents letting space in the City have just raised their top rents from pounds 32.50 to pounds 35 per square foot, while rent-free periods for top-quality developments are coming right back, according to Mark Lethbridge, an associate in Richard Ellis's City agency department.
The decision by Deutsche Bank to take 300,000sq ft next to its Morgan Grenfell investment bank subsidiary in Winchester House, has been followed by other smaller lettings. Allied Trust Bank has expanded its existing space in Cannon Bridge by 10,000sq ft, while Sanwa Bank has added 6,000sq ft at City Place House, Mr Lethbridge said.
All these deals have been for top-quality offices, reflecting the renewed confidence of investment banks boosted by better trading earnings and the big rewards for huge deals. In the just completed Lloyds-TSB merger, the two sets of main advisers, Baring Brothers and JP Morgan, are expected to earn over pounds 6m apiece. Barings, which was bankrupted earlier this year before being rescued by ING of the Netherlands, is likely to be among the M & A leaders in this year's league table, thanks to big deals like Lloyds and Glaxo-Wellcome.
Deal activity, which usually lags behind economic recovery, is now rapidly coming on stream. Unlike the late 1980s, which saw mainly leveraged bids powered by financial considerations, today's deals tend to be industrially driven, with consolidation across sectors, such as pharmaceuticals, food, the utilities and financial services. At pounds 40.34bn, M&A deals in the UK during the first nine months soared past pounds 13.65bn for the same period last year, and pounds 25.27bn for the whole of 1994.
This has meant organic growth by UK banks and overseas banks already here, according to George Gillon, City partner with the agents Drivers Jonas. "Since the summer there has been a surge of people in the financial sector - investment banks and overseas representative banks - who want more space," he said.
J Henry Schroder Wagg, the corporate finance arm of Schroders, had recently taken an additional 40,000sq ft in TSB's old head office in Milk Street, Mr Gillon said. The American investment bank JP Morgan had taken more space in its Ludgate offices while the UK merchant bank Close Brothers has moved to a new head office.
Mr Gillon said that information providers and medium-sized legal practices were also benefiting from the recovery in City business generally. Thomson Financial Services is taking more space in the Aldgate offices it moved to last year, while at least four law firms are looking for space.
The City of London Corporation is fearful that it will lose the large overseas investment banks currently looking for space at Canary Wharf, since there is an acute shortage of modern, large office buildings in the City. In particular, the investment banks seeking to move are looking for premises with football field-sized spaces for dealing floors.There is a surfeit of poor-grade buildings, which will probably never be let again and urgently need redeveloping.
Mr Lethbridge pointed out that there is 6.36 million square feet of vacant office space in the City, or 9.5 per cent of all existing office buildings. This compares to just 2 per cent in the boom years of the late 1980s and up to 16 per cent in the depths of the recession.
Less than half this vacant space consists of buildings that would be considered "grade A'', Mr Gillon said. Nevertheless the German banks that together have decided to make London the home of their investment banking operations are determined to stay in the City - even if this means building their own offices, he said.
The trailblazer was Deutsche Bank in the summer. It decided to build its own 300,000sq ft head office next to its recently acquired subsidiary Morgan Grenfell in Winchester Avenue. Its determined hiring to build up the investment banking operations - some 80 people have been taken on since the beginning of the year, many from Warburgs - has contributed to another phenomenon, a surge in pay.
Rival banks are beginning to complain vociferously of the way the rash of cheque-book poaching is helping to push up remuneration levels.Reuse content