Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The property game is so lucrative that even bankers are having a go.

British lender Barclays is said to be in talks to sublease office space in London's Canary Wharf financial district to Her Majesty's Government, part of a drive to generate "tremendous savings" as it cuts about 1,200 investment-bank jobs and retrenches after a bruising 2015 loss. Subleasing is not new but fresh financial-sector interest in striking more deals is part of a wider industry trend. With fewer traders stalking the halls of pharaonic offices designed during the boom times, why not invite healthier tenants to fray the carpet?

Setting aside the delicious irony of Barclays offering shelter to a Government that only last year slapped it with the biggest bank fine related to financial crime imposed by U.K. regulators, the agreement looks shrewd. With a possible surface area of 300,000 square feet and a prime market price of 45 pounds ($64) per square foot, a deal could save the bank anywhere up to 13.5 million pounds per year in rent payments.

In fact, the landlord game looks more enticing than investment banking itself, given recent losses at Barclays, Deutsche Bank and Credit Suisse. Banking was a drag for Barclays last year (group return on tangible shareholder equity was a negative 1.9 percent in the fourth quarter). Prime office rental yields in London were 4 percent, according to estate agent Savills.

On The Up
London office rents have risen on the back of low supply and increased demand from the tech sector
Source: Cushman & Wakefield

Of course, Barclays is looking to save money rather than make money from this deal. The bigger story here is the obvious mismatch between the profits (or losses) generated by banking behemoths and the pricey real estate they love so much. The banking industry accounted for 8 percent of total take-up of City of London offices last year, according to Savills, even as rents hit a record. That may be a lower proportion than the tech sector's 14 percent, which is the more obvious engine of real-estate demand right now, but it's still double the year before.

A 2014 CBRE valuation report for Canary Wharf Group put yearly gross rental income for 10 of its buildings -- featuring tenants including Barclays, Morgan Stanley and Bank of New York-Mellon -- at 229 million pounds. These are the kinds of overheads and fixed costs that banks need to tackle. Even beyond rents, top European banks already have more than $100 billion of capital tied up in property, plant and equipment, according to Bloomberg data. It's impossible to tell exactly how much they're paying for rented digs -- some of these deals were signed in the early 2000s and stretch far into the future -- but if there was ever a time to unlock savings from them, now is it.

Property Bank
European banks have billions tied up in real estate and equipment assets
Source: Bloomberg data

Obviously, real estate valuations and rents are not risk-proof. Fears over a possible British vote to leave the EU have already hit sterling; a survey last month suggested property investors would see it as a negative. And while almost a decade of rock-bottom interest rates has pushed investors into the safety of bricks and mortar, any quicker-than-expected exit from years of cheap credit might throw the market into disarray.

But supply-demand dynamics for now remain on the side of the landlord. Vacancy rates in the City are below 5 percent. Relief from more supply will take a good few years to work its way through the market. If they want to overcome the widespread loss of investor confidence in their industry, banks will have to take a more flexible approach to their office space and trade down if they are overpaying or play landlord if they are underpaying.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net