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FinTech and the decline of the office sector

So much has been presented about the positives of FinTech — short for financial technology — that the opening statement of a recent report by business consultancy Capgemini stated that it might be “both the most over-hyped and under-estimated” term that the industry has seen in decades.” Probably similar in stature to the term “dotcom” around the turn of the century.

If each of the local and foreign banks with Qualifying Full Bank licences decides to close an average of 10 branches, this will translate to a reduction of demand for about 200,000sqf of retail space. TODAY file photo

If each of the local and foreign banks with Qualifying Full Bank licences decides to close an average of 10 branches, this will translate to a reduction of demand for about 200,000sqf of retail space. TODAY file photo

So much has been presented about the positives of FinTech — short for financial technology — that the opening statement of a recent report by business consultancy Capgemini stated that it might be “both the most over-hyped and under-estimated” term that the industry has seen in decades.” Probably similar in stature to the term “dotcom” around the turn of the century.

While there are thousands of articles about the benefits that this revolution will bring to the business world, one can hardly find any write-ups about what the aftermath of a FinTech tsunami might look like.

Every bank talks about what it intends to do with FinTech; few banks talk about what FinTech will do to bankers.

Save for a small number of high-profile predictions about the impact on jobs and the closure of bank branches, there are no serious analyses on the number of employees who will be made redundant, and the total floor area that will be given up by financial services firms, accounting firms, stockbroking houses and trading companies, etc.

REDUCTION OF BANKS’ RETAIL BRANCHES

In a speech last November titled “Approaching the Uber Moment in Financial Services: How Technology Will Radically Disrupt the Sector”, Mr Antony Jenkins, former group CEO of Barclays Bank, predicted that “the number of branches and people employed in the financial services sector, as we view it today, may decline by as much as 50 per cent over the next 10 years”.

Citi Research agreed with the forecast, noting that Nordic banks have already halved their number of branches since the peak in 2009. In a report published in April titled “Digital Disruption: How FinTech is Forcing Banking to a Tipping Point”, Citi Research analysts said they “believe that there could be another approximately 30 per cent reduction in staff during 2015 to 2025”.

If these predictions come to pass in Singapore and each of the local and foreign banks with Qualifying Full Bank licences decides to close an average of 10 branches, we will see a reduction of about 100 branches across Singapore.

This translates to a reduction of demand for about 200,000sqf of retail space and perhaps a redeployment of up to 3,000 branch level bankers.

OFFICE AND BUSINESS PARK SPACE

The bigger impact will be felt in the office property sector. Earlier this year, Morgan Stanley reported that blockchain technology, a component of FinTech, will make its biggest impact from year 2020 onwards. When blockchain technology is adopted extensively by banks and corporate users, post-trade settlement jobs, trade finance positions and custodial services roles will suffer the most.

Other analysts have commented that with blockchain, the number of middle-office and back office jobs in banks will be reduced by 30 to 50 per cent. It is not just the banks. Financial services firms and the insurance industry will be early beneficiaries of FinTech and are likely to follow the banks by taking advantage of technology to improve efficiency, streamline jobs and cut costs. The need for auditors and accountants will also be significantly reduced.

Estimating the numbers on the back of an envelope, financial services firms including insurance, fund management, stockbroking, audit and accounting services, take up more than 20 million sqf of office and business park space across Singapore.

In the next 10 years, if FinTech delivers all the positives that are being touted today and 30 per cent of the jobs disappear, we might see banks and financial services firms reduce their office and business park space by 30 per cent, or 6 million sqf.

The current 8.6 million sqf of vacant office space, equivalent to 8.6 blocks of Vivocity, is causing office rentals to slide as landlords compete for tenants in a weak economy. The upcoming supply of 10.7 million sqf in the next three years will add further pressure.

CANNIBALISATION FROM INDUSTRIAL SPACE

Adding further pressure on the office sector are the trend of co-working spaces and the massive supply overhang of industrial space.

The Multiple-User Factory segment has 14.5 million sq ft of vacant space (equivalent to 12.9 per cent vacancy rate) and landlords desperate to secure tenants are competing hard with office landlords, offering light industrial space for less than half the rental value per sq ft.

Many FinTech companies qualify to rent light industrial space, and those who prefer cheaper locations often do. However, the competition for commercial tenants does not just stop with FinTech companies.

Since the end of 2011, Multiple-User Factory space increased by 20 per cent, or almost 20 million sq ft, and that has resulted in a wide variety of tenants, some not compliant with intended light industrial purposes, such as travel agencies, health spas, geomancy services, retailers, places of worship, etc.

Today’s office sector is weighed down by increasing vacancies, declining rentals and an onslaught of 10.7 million sq ft of new offices that will be completed within the next three years. With FinTech’s revolution in Singapore, vacancies and rentals are likely to worsen. Cannibalisation from the 19 million sqf of vacant and 18 million sqf of soon-to-be-completed Multi-User Factory and Business Park spaces will further weaken the demand for office space.

We should take immediate action in reviewing the sector’s challenges and needs before releasing more land for office development.

ABOUT THE AUTHORS: Ku Swee Yong is a licensed real estate agent and the CEO of International Property Advisor. Justina Joseph Steven is a research intern in the same company.

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