As North American and European markets continue to recover from the global financial crisis, the world’s economic centres of gravity are shifting. While the formidable financial reputations of New York and London remain unchanged, Hong Kong, Singapore and Tokyo have significantly narrowed the gap. Cities across Asia, Africa and South America are now vying to put themselves on the map as international financial centres (IFCs).
But how can the savvy investor identify emerging financial hubs? Five conditions are essential to large-scale financial activity, says Geoffrey Fink, head of investment at Dubai-based advisory firm Delta Partners. These include offering a reliable transport hub, excellent ICT infrastructure and connectivity, a good regulatory and tax environment, fit-for-purpose offices, and an attractive environment for families. So which locations are getting it right?
Through connectivity, reliable airlines and hassle-free visa regimes, easy and efficient travel is vital in developing an IFC. Singapore, Hong Kong and Dubai all get this right, according to Mr Fink. “You can get a visa on arrival [at these cities] with many passports, and can travel direct from most major cities,” he says.
IFCs in Africa and mainland China are still behind on this front. While Nigeria’s Lagos has seen massive inward investment, business travellers often lament its cumbersome visa processes and chaotic airport. Shanghai, Beijing and Shenzhen are all rapidly growing megacities ranked highly by the Global Financial Centres Index 2015, but many investors claim that relaxing visa restrictions would significantly improve their ease of doing business.
Tech and connectivity
Reliable ICT infrastructure is crucial for every function of banking and finance, particularly high-frequency trading where even nanoseconds are crucial. Power and fibre connectivity tends to be less reliable in locations across Africa than it is in Europe or eastern Asia. This does, however, present vast opportunity for telecoms and ICT investment.
“The technology sector continues to be a major driver of city momentum across the globe as the tech giants and start-ups invest in new technologies and infrastructure and generate jobs,” says property advisory firm JLL in its City Momentum Index 2015. Chinese finance hubs Shenzhen, Beijing and Shanghai all appear in the index’s top 20, despite China’s economic slowdown. Kenyan capital Nairobi also appears in the top 20 for the first time.
In April 2014, Nigeria overtook South Africa as the largest economy in Africa, and while its regulatory and logistic flaws make Nigeria a riskier choice for a hub, it benefits from a huge domestic market of 174 million people and a growing middle class. “The growing number of technology companies in Lagos is attracting financial institutions and banks,” says Paul Philipp Hermann, co-founder and managing director of property consulting firm Lamudi Global. “In turn, this attracts venture capitalists, investors and industry professionals from all over the world.”
“Putting up skyscrapers is the easy part of developing a world financial centre – having the right regulatory and compliance environment is the more difficult part,” says David Green-Morgan, head of capital markets research at JLL. “You can put a lot of infrastructure in place, but you need the global financial community to trust what they see.”
A finance hub needs a solid regulatory and judicial framework, as well as globally competitive tax rates. A case in point are courts in the Dubai International Financial Centre, which form an independent judicial system established to ensure objectivity and fair procedures for foreign businesses. “And just as important,” says Mr Fink, “is a regulatory regime accepted as competent by other jurisdictions. Regulators such as the Monetary Authority of Singapore or the Dubai Financial Services Authority are internationally viewed as legitimate and trustworthy, providing comfort to investors and clients.” As for attractive tax rates, Hong Kong is widely viewed as the model to follow – corporate tax is just 16.5% and there are no sales, VAT or capital taxes.
“It’s all about the movement of capital,” says Mr Green-Morgan. “People need to be able to get their money in and out very quickly and transparently, with no liquidity issues, and at a low cost.” Singapore thrives as a global centre largely because of its focus on compliance and governance issues. Of the world’s top financial centres, only Singapore appears in the top 10 countries listed in Transparency International’s 2014 Corruption Perception Index.
Work and play
The availability of reliable business infrastructure is key, according to Mr Fink. “This requires a partnership with the government setting up the right frameworks and preconditions, and private industry coming in and actually creating the infrastructure. [This means] airlines setting up good transport links, IT companies establishing data centres and fibre landing points to ensure good connectivity, office developers coming in to build the right kind of office stock in the market.”
On top of this, an often overlooked but absolutely critical factor, maintains Mr Fink, is offering an environment that is friendly to families. “If you want to attract world-class professionals, you need to be able to provide a place their families are happy to relocate to,” he says. This involves providing a safe city that is politically stable, contains good residential stock and offers a high-quality educational infrastructure. “Certain emerging hubs are still a way off from that,” says Mr Fink.
When it comes to identifying the most notable up-and-coming IFCs, Mr Fink says: “Kuala Lumpur offers many of the benefits of Singapore, but at a lower cost.” The Malaysian capital offers a very good transport hub, relaxed visa requirements, heavy ICT investment – the 'silicon corridor' between Kuala Lumpur and Singapore incentivises the establishment of technology companies – and the government is committed to maintaining a widely trusted regulatory environment. Broad office and residential development is under way, most of which has taken place in the past five to 10 years. And what sets Kuala Lumpur apart from its Asian counterparts is its expertise in Islamic banking. Malaysia also offers a more stable political and economic environment than many of its neighbouring countries.
Istanbul and Riyadh are two other rising IFCs identified by Claudio Sgobba, director of JLL’s Europe, Middle East and Africa debt advisory team. The former is a historical crossroads between east and west, and Turkey is aiming to make its economy one of the largest in the world by 2023. Integral to this is development of the Istanbul International Finance Centre, which is currently under construction. However, perceptions of corruption, a stagnant bureaucracy and political instability in the country may prove tough obstacles to overcome.
Riyadh has shown the most improvement of any financial centre in the past year, according to Mr Sgobba, as Saudi Arabia continues to take significant steps to liberalise its financial markets to foreigners and diversify its oil-based economy. The recently opened Saudi Arabia Stock Exchange and the planned King Abdullah Financial District are aimed at creating a regional financial hub, although the country’s narrow economy, strict visa laws, and highly conservative culture have the potential to put off would-be investors or foreign workers.
Elsewhere in the world
Latin America has a number of emerging IFCs, with São Paulo – and its metropolitan population of 19 million – viewed as a potential continental hub. São Paulo exceeds all other Latin American cities in a variety of areas, among them bank assets to stock market capitalisation, making it very attractive to new businesses, according to a report by EY. And according to research from financial association Brazil Investments & Business, Brazil accounts for 40% of Latin America’s GDP and 80% of its equity market volume. Security and political instability, however, are still a concern throughout the country.
Beyond Brazil, Santiago and Bogotá’s governments have focused on opening up their economies and facilitating the movement of capital. “We are definitely seeing increased interest in Chile and Colombia as inward investment destinations compared with Brazil and Argentina, as they look more favourable [economically and politically] at the moment,” says Mr Green-Morgan.
Away from Latin America, the Indian Ocean island of Mauritius is emerging as a highly transparent, business-friendly finance destination. Numerous African funds and business operations are being relocated to Mauritius, according to a recent JLL report, because of its “enhanced fiscal incentives, preferential market access, lack of exchange controls, stable government and uninterrupted power supply”. The country’s financial services sector is growing, and it is favourably located as an offshore hub for inter-African trade and financial flows. Long-term investment is going into airport and cargo terminal expansion, positioning Mauritius as a stepping stone between African and Asian markets.
On the mainland, while populous African cities Nairobi and Lagos face massive challenges in terms of infrastructure, regulatory environment and general ease of doing business, their locations and domestic markets make them natural centres of finance. “Nairobi and Lagos are certainly cities with scale, critical mass, banking centres and corporate occupying multinationals. Proctor & Gamble, Unilever, Huawei and Microsoft are all clustering their regional headquarters in these cities – and our clients are demanding our presence in these hubs,” says Anthony Lewis, head of sub-Saharan Africa capital markets at JLL. “There is still a long way to go before their markets mature, but the cost of not being in these hubs is greater than the perceived risk of being there.”
“You don’t become a global hub overnight; it takes decades,” says Mr Green-Morgan. “The number of relationships you have to develop with different countries takes time; the tax arrangements, dual-tax treaties, technology allowing 24/7 global trading – it is a very long process.” It is clear, however, that while cities such as London, New York, Hong Kong and Singapore will likely maintain their global financial dominance for many years to come, second-tier hubs have comparative advantages and, therefore, enormous potential. By capitalising on their nearby markets and adopting the policies that have made the leading global financial centres so successful, these emerging IFCs can begin to close the gap on their heavyweight counterparts.