While insurance firms take up plush new City office space, banks are considering subletting

Is it a sign of an industry in bullish form that an increasing amount of prime London office space is being taken up by insurance firms to house their expanding staff base? If so, what does it say now that an increasing number of investment banks are now considering sub-letting parts of their offices in Canary Wharf and the City?

Royal & Sun Alliance is the latest insurance firm to confirm a new City office, having opted for 70,000 sq ft across four levels of the “Walkie Talkie” tower, which is due to be completed in 2014. Other insurance firms likely to move into the building include Kiln Group, Markel and Ascot Underwriting.

The ‘Cheesegrater’ building at 122 Leadenhall is also set to house Aon once it’s completed in 2014, W.R Berkley is building a new sky-scraper in the City for its European HQ and insurance is generally the most active sector when it comes to taking up new London office space. Research by Knight Frank says that, in the first half of 2012, insurance firms had the largest proportion of City office space under offer, with Jardine Lloyd Thompson’s 294,030 sq ft office at 138 Houndsditch the biggest potential deal.

“There are a number of factors fuelling these moves,” says James Roberts, head of research at Knight Frank’s City desk. “Firstly, consolidation in the sector has benefited the bigger players and they’ve had to find larger offices for their staff and, secondly, most large insurers moved into their current offices in the 1990s and now want more modern, high specification offices.”

Insurance firms have generally been increasing headcount of late, and remain keen to recruit, but this could be restricted to the larger players. New figures from the City UK suggest that there are 70,700 people employed to June 2012 in insurance firms in London – a decline of 2.3% on the previous six months.

What’s more, figures from research firm IMAS suggest that only Lloyd’s brokers, reinsurance brokers, reinsurance firms, underwriting agents and wholesale brokers have increased the number of FSA approved people year-to-date, while 18 other sub-sectors have scaled back.

Investment banks are considering sub-letting

Nonetheless, Roberts suggests that the move is indicative of the health of the industry, which is in stark contrast to the investment banking sector.

“Investment banking is a very hire and fire industry anyway, but many are now suggesting that headcount will continue to decline and therefore the large firms no longer need such large offices,” he says. “There’s already a lot of ‘grey space’ as a result of recent redundancies and we’re expecting more banks to save money, and raise revenue, by subletting their offices.”

An example of this is Barclays, which has sublet 50,000 sq ft of its Canary Wharf offices to the Economist Group. J.P. Morgan, meanwhile, was in talks to sublet 140,000 sq ft of its Alban Gate office to City law firm Nabarro.

It wasn’t so long ago that research from BNP Paribas suggested that demand for office space would soar as financial services firms increase headcount by 11,000. Obviously, those days are long gone and there’s scope for viewing this expansion by insurance firms with a sceptical eye.

One example is the rapidly-retreating back to Japan Nomura. In the aftermath of its Lehman acquisition in 2008, it invested heavily in upgrading its office space, replete with a 220-seat auditorium and small TV recording studio and now it’s cutting back in London.

Then there’s RBS’s Gorgarburn office, built at the height of the financial crisis, boasting a staff club, leisure centre and nursery, completed just in time for the bank’s state bailout.