Colliers Radar Hong Kong Office Property 25 May Fintech: Strategies for the Surge

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1 Colliers Radar Hong Kong Office Property 25 May 2016 Fintech: Strategies for the Surge

2 By Yasas Wickramasinghe Analyst Research & Advisory With investment in the emerging fintech sector set at least to treble in Asia Pacific in 2016, we advise traditional financial groups to hold on to surplus office space and even look for new facilities in which to foster fintech operations. Existing fintech companies with local clients should search for space in the core and fringe CBD, while fintech businesses with regional clients should consider decentralised locations. Fintech start-ups should find serviced offices and coworking space suitable to their needs. Structural changes in the traditional banking sector and the demand for innovative financial services have created significant growth in the fintech industry. Global private and institutional fintech investments have increased around 30 times in the last five years, but continue to surge: aggregate investment in fintech in the Asia Pacific region this year looks set to increase 3.5x, or over 250%, from USD4.3bn in 2015 to USD15.2 billion. In our view, it is imperative for property occupiers to devise strategies to profit from this rapid expansion. In Hong Kong, the government is taking steps to promote fintech, which include the establishment of the The Steering Group on Financial Technologies and InvestHK s efforts to attract fintech talent and companies from around the world. We think changing business operations and service offerings due to fintech will have a significant impact on office property markets around the world, especially in Hong Kong, where the finance industry accounts for a large percentage of office occupiers. Overall, Hong Kong is well-placed to cater for a wide range of fintech occupiers ranging from companies planning to serve clients within the city to companies that intend to enter the growing Asian fintech market. The territory offers fitting conditions including prime office solutions, highquality technology infrastructure, skilled work force and a strategic location. Given Hong Kong s tight office space market, we recommend three strategies for different property market participants to profit from the growth of fintech: Traditional financial institutions should consider retaining their surplus space, seek new office facilities or build partnerships with alternative office space providers to accommodate fintech-related activities. Fintech companies with local operations should look for spaces in the core or fringe CBD, while companies with more regional operations could benefit from considering decentralised locations. Serviced offices primarily located in the core and fringe CBD are also suitable locations for these tenants. Start-ups and other small fintech operators should benefit by considering co-working spaces or lower-grade office buildings. Property occupiers which follow these strategies can hope to benefit materially from the rapid growth in the emerging fintech sector. This should partially mitigate the strong current pressures on traditional financial operations. 2 Colliers Radar May 2016 Office Colliers International

3 Contents Rise of fintech... 4 Is Hong Kong ready?... 6 Where is the demand?... 6 The best solutions Colliers Radar May 2016 Office Colliers International

4 Rise of fintech Financial technology or fintech has emerged as a way of using software and other technological innovations to complement, enhance or even replace traditional banking operations. The industry is now growing rapidly with increasing interest from private investors and established financial institutions alike. According to the report Fintech and the Evolving Landscape: Landing points for the industry structure (April 2016) by the consultancy Accenture, total global investments in fintech stood at USD22.3 billion in 2015, an elevenfold increase from The report also estimates that total fintech investments in the Asia Pacific region in 2015 amounted to USD4.3 billion, and in the first quarter of 2016 to USD2.7 billion. Moreover, Ant Financial Services Group, the operator of Alipay, a major online payments platform in China, raised USD4.5 billion in its second round of fintech funding in April this year. The amount raised is more than the combined fintech investments in Asia Pacific in the whole of In the traditional finance sector, a report entitled IT Spending in Banking: A Global Perspective (February 2015) by Celent, a research and consulting group, estimates that Asia Pacific banks total IT expenses, which stood at USD62.8 billion in 2013, will increase by 24% in To us, this is a strong sign that traditional banks are heavily focusing on improving their IT capabilities and integrating fintech solutions into their operations and services. Taking into account the 2016 Asia Pacific fintech investments so far, including a USD1.2 billion funding round by the Chinese online lending platform Lufax in January and last month s Alipay fundraising exercise that reached USD4.5 billion, we predict that aggregate fintech investments in the region in the first half of 2016 will reach USD7.7 billion, with 2Q alone accounting for USD5.0 billion. Looking into the second half, we expect to see investment volume of USD3.5 billion in 3Q. This would represent a 30% decrease from the arguably exceptional 2Q level, partly reflecting the Chinese government s current push to strengthen regulation of the online finance industry which may discourage increasing speculative investment in this area, including peer to peer lending. For 4Q 2016, we assume investment volume of USD4.0 billion. Hence, we estimate that total investment in Asia Pacific will increase by over 250% in 2016 to USD15.2 billion. Looking ahead beyond 2016, it is difficult for us to make precise projections about how fast the fintech sector may continue to grow. However, considering Global fintech investments Source: Accenture and CB Insights 4 Colliers Radar May 2016 Office Colliers International

5 APAC fintech investment forecast Source: Accenture; Colliers both the almost universally strong interest in digital and internet-based financial solutions and the potential for fintech to help streamline financial institutions cost bases, we are very confident about fintech s ongoing expansion potential. In addition, we have underlined the fact that substantial investment in fintech is taking place in China, where the internet sector and e- commerce in particular have achieved remarkable growth in recent years. In our opinion, the probability of a soft economic landing in China has increased recently, due in particular to significant growth in services and light industry. This growth is helping to mitigate well-known problems such as a high national debt/gdp ratio and overcapacity and margin compression in heavy industry. Assuming both continued significant expansion in the fintech industry per se and a soft economic landing in China, we tentatively predict growth in total fintech investment in Asia Pacific of 20% in 2017, to USD18.2 billion, and of a further 10% in 2018, to USD20.0 billion. The success of the fintech sector in Asia Pacific so far in 2016 might make these projections seem almost conservative. Conversely, they would be vulnerable to possibly very substantial downward revision in the event of a Chinese hard economic landing or still worse a renewed global economic slowdown. More generally, we believe that increasing investments in fintech and banks IT platforms should lead a growing number of fintech companies and traditional financial companies to redevelop their operations and services through technology in coming years. We expect this trend to have a profound impact on major office markets around the world and specifically in Asia. The growth of fintech has created new possibilities and challenges for traditional financial institutions, telecommunications companies, e-commerce industry and start-ups. Its impact on the traditional finance industry is twofold. On the one hand, fintech creates stiff competition through alternative financial services, such as peer-to-peer lenders, digital payment and remittances. On the other hand, fintech is set to help traditional banks automate and optimise operations, diversify service offerings and cut operating costs. As noted earlier, the fintech industry includes both companies that provide services to established financial institutions and ones that are attempting to disrupt traditional finance services. The disruptive kind is more prominent in emerging markets such as mainland China and India where traditional banking services are not easily accessible to much of the rural population. Fintech service providers to major financial institutions are more prominent in global financial hubs such as New York and London where an agglomeration of financial institutions exists. Therefore, given that Hong Kong is a major global financial hub with a mature consumer market that is also located within close proximity of a number of major emerging markets, we believe that Hong Kong will be an attractive office location for both types of fintech operators. With this premise, this report focuses on the potential implications for Hong Kong office market from this emerging fintech industry and 5 Colliers Radar May 2016 Office Colliers International

6 Hong Kong London New York Singapore suitable office solutions for prospective fintech occupiers. Several developments attest to the increasing prominence of fintech in the APAC region. The participation of major banks in Accenture s FinTech Innovation Lab increased from 12 last year to 20 this year. Major banks in APAC, such as DBS of Singapore and Standard Chartered, are investing in emerging fintech companies. Traditional financial institutions are seeking to open fintech incubation programmes and innovation centres on their own or through partnerships with alternative office service providers and other organisations. Is Hong Kong ready? Hong Kong currently lags behind in financial technology innovation compared to other global financial hubs. According to a report titled UK FinTech: On the cutting edge (February 2016) by Ernst & Young, a Londonbased global consultancy firm, Hong Kong saw only USD66 million in fintech investments in 2015 compared to USD755 million and the USD2.02 billion in London and New York respectively. In terms of staff, the fintech sector in Hong Kong employed only 8,000 people in 2015 compared to 61,000 and 57,000 in London and New York. In addition, the presence of global fintech service providers is limited in Hong Kong compared to other major financial hubs. An analysis of the company office locations of the top 20 fintech companies in the 2015 American Banker Fintech 100 rankings found that only 11 of those companies have offices in Hong Kong. Singapore had 15 offices whereas London and New York had 19 offices each. Hong Kong thus lags behind other major financial hubs in terms of fintech development. The Hong Kong government is taking significant steps to increase Hong Kong s fintech competitiveness. It has set up the Steering Group on Financial Technologies to look into the promotion of the fintech industry. Last year it outlined a plan to establish the first Innovation and Technological Bureau and set up a HKD2 billion fund to encourage technology and innovation. InvestHK, a government-sponsored organisation, is playing a major role in trying to attract fintech startups and established companies, particularly from New York and London. In the private sector, according to InvestHK, there were 86 fintech startups in 2015, a 16% increase from the level of the previous year. In addition, several major banks such as DBS and Standard Chartered have begun their own fintech programmes or partnered with technology or investment firms to foster fintech innovations. Global coverage of top fintech companies Top 20 companies from 2015 American Banker Fintech 100 Tata Consultancy Services Limited (TCS) Y Y Y Y FIS Y Y Y Fiserv, Inc. Y Y Y Cognizant Technology Solutions Y Y Y Y NCR Corporation Y Y Y Infosys Limited Y Y Y Y SunGard Y Y Y Y Diebold, Incorporated Y Y Y Y Nomura Research Institute, Ltd. Y Y Y Y Total System Services, Inc. (TSYS) Y Wincor Nixdorf Inc. Y Y Y Y CA Technologies Y Y Y Y Equifax Y Y Jack Henry & Associates, Inc. Y SAS Institute Y Y Y Y CoreLogic Y Y ACI Worldwide, Inc. Y Y Y DST Systems Y Y Y Genpact Y Y Y Misys Y Y Y Y Source: Colliers Given that Hong Kong is a global finance centre in a similar league to London and New York, and taking account of both the growing enthusiasm for fintech in Asia Pacific and ongoing structural changes in the traditional banking sector, we believe that the number of fintech employees in Hong Kong could easily double or triple in coming years. Where is the office demand? We believe that the growth of fintech has numerous implications for the office property market. We identify these impacts based on three fintech development sectors: conventional financial institutions, established companies and start-ups. We expect that more and more conventional financial institutions will look to establish their own fintech 6 Colliers Radar May 2016 Office Colliers International

7 incubation operations ( incubators ), i.e. business units which allow them to identify and invest in potential fintech innovations, or to expand their technology staff. In Singapore, the credit card company Visa has just opened a 7,000 sq ft Innovation Centre to promote collaborative solutions to issues in digital and mobile commerce. This month in Hong Kong, Thomson Reuters, the financial information provider, has partnered with the fintech accelerator SuperCharger, a programme that provides mentorship, work space and capital to selected fintech startups, to provide market data and technology access to firms undergoing training. In addition, recent months have seen new partnerships formed between co-working space providers and major banks to establish fintech accelerator or incubator programmes. For example, last year, Standard Chartered Bank partnered with the co-working space provider TusPark Global Network to open a fintech accelerator programme in Kwun Tong. This trend will add to the increasing demand for co-working spaces in Hong Kong. The bulk of this demand is likely to be in Hong Kong s core and fringe CBD, including Central, Admiralty, Wan Chai, Causeway Bay and Sheung Wan, with some trickledown effect into decentralised locations, particularly from incubator programmes. Established fintech companies, such as SunGard, CA Technologies and Temenos Group AG are predominantly located in Central and Wan Chai with a smaller presence in decentralised locations such as Island East and Tsim Sha Tsui. We have found that a considerable number of these companies use serviced office spaces in Central and Causeway Bay. The major reasons for a considerable number of fintech companies to use serviced offices include reduced capital expenses, flexibility in office size and lease term, networking opportunities, the sense of community created through agglomeration of similar industries and the prospect of a prime location at a competitive price. Fintech company offices by office type Source: Colliers Looking forward, we believe these companies will create demand for office spaces in core and fringe CBD areas together with decentralised locations. While we expect companies that mainly service Hong Kong s finance industry to attempt to locate in the core or fringe CBD, i.e., as mentioned earlier, Central, Admiralty, Wan Chai, Causeway Bay and Sheung Wan, the demand for decentralised locations is likely to come primarily from companies with more regional operations. For example, major global fintech service providers with regional operations such as Tata Consultancy Services Limited and SAS Institute Inc. are located in Island East while Wincor Nixdorf Inc. is located in Kwun Tong. Fintech start-ups rely mainly on co-working spaces and other low-cost office solutions. Currently, some of Hong Kong s prominent fintech start-ups such as Investable, an equity crowdfunding platform which allows companies to offer equity securities online to potential investors, and AMP Credit Technologies, a credit scoring and loan servicing platform aimed at small businesses, have their offices in Sheung Wan and Causeway Bay respectively. Therefore, with growing interest in promoting fintech innovations, fintech start-ups could well become a primary demand driver for co-working Fintech landscape 7 Colliers Radar May 2016 Office Colliers International

8 Distribution of fintech company offices across Hong Kong Source: Colliers analysis of American Banker 2015 Fintech 100 Ranking spaces and non-prime buildings in the core and fringe CBD in coming years. The best solutions Given the needs of potential fintech occupiers we draw various conclusions from this analysis. To stay competitive in the financial market, in our opinion it is essential that traditional financial institutions invest in the fintech industry. Therefore, despite general pressure to rationalise their operations in the face of volatile financial markets and more stringent regulatory and capital requirements, we think such occupiers should consider holding on to surplus space or even look for additional facilities in which to establish incubator programmes, accelerator programmes or to accommodate their own fintech staff in the future. If traditional financial institutions are looking for extra space to develop incubator programmes or other fintechrelated activities, decentralised office locations such as Island East, Kwun Tong and Wong Chuk Hang ought to offer great value for money due to lower rents and wider choice of spaces. At present it is a prominent industry trend to open incubator programmes together with coworking or serviced office space providers. The type of space and locations may vary depending on the partnership and the nature of the programme. Through these partnerships financial institutions should be able to reduce costs involved in establishing their own programmes. In addition, alternative office space providers are experienced in managing and servicing start-up type tenants. They also have spaces such as co-working spaces that provide suitable environments for operations such as incubator programs. For established fintech occupiers, if the bulk of the client base is located in the CBD, then spaces in the core or fringe CBD will be the most appropriate. Given current market dynamics, we see serviced offices as a suitable solution due to their flexibility in lease terms and space allocation, high-quality tech infrastructure, and the agglomeration benefits from similar tenants. However, if the company has a heavy focus on regional operations, decentralised locations such as Island East and East Kowloon will provide the best value, with significantly lower rents than in the core CBD at a wellconnected location. Decentralized locations also have the ability to provide large open floorplates at a relatively lower price that could suit the needs of many fintech companies. Companies that require a presence in the CBD and a large space can consider split operations as an option. Start-ups should look into co-working spaces and lower grade office spaces in the core and fringe CBD to benefit from the agglomeration of talent, seed capital and mentors in the CBD. A number of co-working spaces have sprung up during last several years, which provide a wide variety of choices in terms of location, space type, pricing, and infrastructure. 8 Colliers Radar May 2016 Office Colliers International

9 554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112 For further information, please contact: Andrew Haskins Executive Director Research & Advisory Asia Direct andrew.haskins@colliers.com Daniel Shih Director Research & Advisory Hong Kong Direct daniel.shih@colliers.com Yasas Wickramasinghe Analyst Research & Advisory Hong Kong yasas.wick@colliers.com $2.5 billion in annual revenue 2 billion square feet under management 16,000 professionals and staff Colliers International (Hong Kong) Limited Suite 5701 Central Plaza 18 Harbour Road, Wanchai Hong Kong TEL About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is an industry leading global real estate services company with more than 16,000 skilled professionals operating in 66 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice that help clients accelerate their success. Colliers has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 11 consecutive years, more than any other real estate services firm. colliers.com Copyright 2016 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.