Madrid seeks to spring a surprise on European rivals

The news that UBS is considering moving 300 investment bankers from London to Madrid over fears Brexit will cost them passporting rights is a clear sign the Spanish capital is now on the radar of global financial institutions seeking a new base on the continent, from which to sell their services to the European Union.

 “We are advising financial firms about Brexit every day,” confirms Luis de la Peña, partner at international law firm Garrigues, which has created an internal ad-hoc group to face such demand. “These are global firms, mainly American and Japanese, and we are busy with these types of transactions at the moment.” He gives the example of Mitsuho Bank, the Japanese heavyweight, which has an office in London, but has recently upgraded its representative office in Madrid to a subsidiary, to be able to serve countries across Europe after Brexit.

In addition to the tax regime and labour laws, time to market and regulation dominate clients’ discussions, say Garrigues lawyers.

CNMV, the Spanish regulatory authority for the securities market, chaired by its outgoing, recently-appointed president Sebastián Albella Amigo, launched concrete measures in December to attract UK and EU financial firms. In its Welcome to Spain programme, the regulator commits to grant financial firms looking to relocate a formal authorisation within two months via its fast-track authorisation process, after a pre-authorisation period of two weeks.

“As a result of Brexit, competition among financial markets is becoming more intense than ever, and a good supervisory body may be a differentiating factor,” says Mr Albella, pledging to strengthen the ability of his staff to work in English on a daily basis.

He explains the “delicate balance needed between the responsibility of supervising sensibly but with determination, and being flexible enough to attract business,” especially referring to outsourcing agreements, or when it comes to sophisticated areas such as that of solvency internal models.

Investment banks and broker dealer businesses are key targets to attract, as well as asset management companies, including private equity managers. Attracting fintech firms is also on the agenda. And the presence of Google and Amazon in Madrid is a promising start.

Unknown entity

Brexit has been a catalyst in strengthening regulators’ and financial centres’ capabilities, says Mr Albella. And the home of The Prado Museum could well benefit from a ‘surprise effect’.

“Unlike Paris and Frankfurt, Madrid is not yet fully in the public debate as an alternative financial centre, and this position could play to its advantage,” believes Jordi Sevilla, former minister of public administration and head of the economic department at consulting firm Llorente & Cuenca. “A much worked out plan, resulting from a national effort for making Madrid a valid alternative will draw people’s attention.”

While unemployment remains high at 19 per cent, with a public debt at 100 per cent of GDP, sweeping banking and labour market reforms jump-started growth after the deep financial crisis.

After huge consolidation, re-capitalised banks have been able to support GDP growth of more than 3 per cent over the past two years, twice the speed of the European Union.

In an improved political environment, “another key differentiating factor” is the absence of extremist populist forces with an anti-European stance, even within the left-wing Podemos party, which leads the local government, the Ayuntamiento de Madrid.

A skilled financial workforce, “talent and creativity at very good price” is also a strength, says Luis Cueto, COO at the Ayuntamiento de Madrid. The city ranked sixth in the global city talent competitiveness index, based on “cities’ reputation and growing footprint in attracting, growing, and retaining global talent,” in a recent study from Insead, Adecco and HCLI.

Around 46 per cent of Madrid’s active population has a university degree, versus 26 per cent in the EU, according to Eurostat. The Spanish city hosts 15 universities and three major business schools, including leading Instituto de Impresa.

In order to promote so-called “administrative highways”, the Ayuntamiento de Madrid recently launched “the telematic desk”, aimed at speeding up the licensing process for any new private economic activity.

Renters’ market

In terms of rental levels, Madrid is the cheapest compared to other EU cities, with prime rents of €27/sqm/month ($29), versus Frankfurt (€40/sqm/month), and Paris (€67/sqm/month) – see chart.

Construction projects planned to complete in 2017 will add significant office space, the third largest supply of new stock in the EU, after London and Dublin, according to a study from JP Morgan published last July. 

A potential game changer in the medium term could be the renovation of Castellana Norte, the “biggest urban regeneration project in Europe,” recently revived after two decades of debate. 

Driven by BBVA, requiring the collaboration of the regional and local government and private firms, the plan involves €6bn investment to build offices, houses and shops north of Paseo de la Castellana, and also create new transport infrastructure to improve access to this congested area, which is already occupied by the BBVA HQ, with its iconic oval tower, and Telefonica.

“The area will be able to host 40,000 people, in attractive offices, at a very good price,” states Mr Cueto. “Before the summer I expect the negotiation will be closed. This will be a very important offer for Madrid as a financial centre.” 

Yet for real estate investors, this will not necessarily be the key opportunity in Madrid, according to Antonio Roncero, transactions manager for Iberia at CBRE Global Investors. “Where I see the opportunity to grow is the renovation of the stock in Madrid’s prime central business district, along Castellana, Serrano and Recoletos.”

While capital values are not yet at peak levels, rental growth provides solid return expectations, thanks to better economic prospects and higher political stability.

Infrastructure boost

Barajas International Airport, the fifth largest in Europe, is just 12km from the city centre. The world’s second most extensive high speed rail network after China, with its 3,100 km, connects Madrid to all major cities in the country. Served by an excellent metro system, the city is at the centre of a modern network of highways.

The Reforma laboral approved in 2012 has provided badly needed flexibility. “The reform has made the professional world more flexible and active, making Madrid more attractive,” says Carolina Martínez-Caro, head Iberia at Bank Julius Baer. While the labour market is still not as flexible as in the UK, Switzerland or the US, it brings a crucial advantage compared to Paris or Frankfurt.

Madrid is the only comunidad in Spain, out of the 17 different comunidades autonomas or regions, where residents pay no wealth tax, and almost zero inheritance and gift tax.

The pool of wealth, mainly domestic, may increase as a result of Brexit, with Spaniards in the city coming back to Madrid, believes Ms Martínez-Caro. Also, an increasing number of South American clients are moving their residency to Madrid, having bought properties in the past real estate crisis. Madrid is a natural bridge between Europe and Latin America, thanks to a common language, and centuries-long cultural and commercial bonds, and solid political relations.

However, the private banking market remains largely a domestic business, serving wealthy Spanish clients.

All foreign banks are established in the city, and have recently been adding resources, to benefit from country’s economic recovery. But they are finding tougher competition from local banks, says Victor Allende, head of private banking at CaixaBank. “Since the financial crisis, with consolidation, domestic private banks have much matured and today offer a much better proposition to clients, as they benefit from more resources and technology. Foreign banks come and go, in a seven year cycle.”

In a market dominated by small and medium enterprises, having a large number of banks, people on the ground and close connections to the group’s corporate bank is a key advantage.

However, while London, Hong Kong or London are cosmopolitan cities, where wealthy clients want to go to see their banker, Madrid is a tier two city for clients, believes Manuel Sánchez del Valle, CFO at Popular Banca Privada. International wealthy clients would have to have a favourable taxation rules for non-residents to move to Madrid. This was the case in the past with the “Beckham law”, which was capped in 2015. Expats enjoy a flat rate income tax of 24 per cent as maximum rate, but only if they earn up to €600,000 per year.

For different businesses, such as investment banking or euro-clearing, the story may be different. However, Madrid does not host international regulators such as the ECB in Frankfurt or ESMA in Paris. And it does not have strong relations with the Anglo-Saxon eco-system, with Hong Kong, Johannesburg or Hong Kong, although business relations with Asia are rapidly increasing.

“It is difficult to imagine London losing its main business and source of wealth,” says Javier Estrada, head of Altium and investment strategy at CaixaBank Banca Privada. “But if one of those big firms move here, that could create a snowball effect.”