The City must wake up - or become a theme park

WE ARE seeing the end of the City of London as we know it today. The official boundaries of the world's most valuable Square Mile of real estate is now little more than a historic hangover. The great financial services cluster with which it is indelibly associated has expanded like an overgrown jelly, spilling out of its mould to points as far west as Marylebone and east into the Canary Wharf satellite.

Even the Corporation of London admits that 'the City's official boundary is pretty artificial - the key growth is on the fringe'.

London's position as the world's biggest international financial centre may be far more secure than it was a few years ago with the virtually complete removal of the - always exaggerated - threat from continental rivals such as Finanzplatz Deutschland in Frankfurt.

Yet at the same time the City itself is losing out within London. Employment in the Square Mile has never regained the peak of more than 400,000 that it reached in the 1920s - it is now below 300,000 and falling - but there are well over 400,000 workers in the newly defined 'City', including up to 100,000 in Canary Wharf alone.

Is the City facing the same fate as Wall Street after so many of its major financial institutions moved uptown? The JP Morgan building on Wall Street, once the centre of global finance, is being converted into apartments. Could the same future be in store for the Bank of England?

Yet the City authorities are unwilling to address the threat. A recent study for the Corporation, Financial Services Clustering and its Significance for London, talks blithely of the credibility imparted by a City address. It says this 'turns a law firm into a City Law Firm' - although one of the biggest, Clifford Chance, has moved most of its staff to Canary Wharf.

The study says, rightly, that if an investment bank 'wishes to be credible as a global institution, it has to be in London'. But that is not the same as the City.

The clearing banks, the heart of the Old City, symbolise the shift. HSBC has moved to Canary Wharf, Barclays, is due to relocate there within a couple of years and a new headquarters for Royal Bank of Scotland is being built just outside Edinburgh. An even more potent symbol is the move of the Financial Services Authority to Canary Wharf.

From Paddington to Stratford

FRENCH bank BNP Paribas has moved west to Marylebone, St James's houses most of London's hedge fund businesses and private fund managers are largely based in Mayfair. Some of the trendier small brokers are now moving into lofts on the eastern fringe of the City, competing with artists' studios for space between Spitalfields and Banglatown in Brick Lane.

Within a few years, the City could spread to Paddington, King's Cross or even Stratford, which will be just two hours from Paris within four years with the completion of the Channel Tunnel Rail Link.

The pressure from Canary Wharf is reinforced by the fact that half the vacant property in the City is in the hands of tenants, not landlords. Many of them are likely to accept any rental, however minimal, to reduce their liabilities at a time when virtually no major deals are being struck.

Swiss Re is now offering up to half the space in its 41-storey 'erotic gherkin' but the timing is unfortunate. Deals are down to 10-year lows and rents bumping along at about £35 a square foot, if you allow for the lengthy rent-free deals on offer.

The lower rents provide smaller businesses with their opportunity. The new 'City' houses thousands of businesses and, even though half the employment is with the top 200 companies, four out of five firms are mere boutiques with fewer than 10 employees. They can afford to move to the City, especially from the West End.

For while the Corporation of the City of London responded to the threat from Canary Wharf by allowing an unprecedented growth in office building in the 1990s, the City of Westminster clamped down on development - or banished it, notably to Paddington.

Shortage of hotels

SO THE West End is not suffering the extreme softness of the City market. In the last recession, there was a spate of conversions to flats, mostly on what were then called City fringes' such as Clerkenwell and Shoreditch.

This could creep nearer to the centre. However, the re-creation of an old-style City community depends also on hotels and retail outlets and not just on a broader range of corporate head offices. Crucially, Canary Wharf, unlike the City, is now a major shopping centre, crowded even at weekends. Of course, the City is acquiring a few more hotels but there is still a shortage near the Square Mile.

The corporation would like to see more retail space, and a department store being built by House of Fraser at the north end of London Bridge.

Yet the enthusiasm shown until recently by retailers to re-establish department stores - the last, Gamages in Holborn, was knocked down in the 1970s - has cooled as the whole sector has been in a state of seemingly endless upheaval. Worse, the City's present shops tend to be deserted at the weekends, and even after working hours. The corporation also continues to set itself against major residential development in the City.

Nevertheless, Richard Damestick of Insignia Richard Ellis believes that 'we're moving slowly towards a more mixed use community, the City is no longer dead in the evenings with all the pubs shutting at 8pm. He admits, however, that 'the City needs to be more like the West End' and requires a full complement of the many amenities, such as gyms, required by its workers.

It also needs better transport. Even though travel in the heart of London is much improved since the introduction of the congestion charge, the City desperately needs Crossrail - announced today - and Thameslink.

US banks tripled

SUPPORTERS of the status quo could retort that 'we must be doing something right to have lasted 800 years'. Moreover, there are still clusters in the Square Mile such as the insurance market centred on Lloyd's, surrounded by its community of agents, brokers and lawyers.

And there are always newer tenants - the number of foreign banks has tripled to more than 500 in the past 50 years. The latest arrivals are expansion-minded American law firms - Skadden Arps is already a tenant at Canary Wharf while the only major deal done this year in the City itself was a let to another, White & Case, also of the US.

However, if the City does not want to end up as part of theme-park London, a tourist destination to be done between the Tower of London and St Paul's, it needs to wake up fast to the new needs - and realities - of the capital's ever-changing financial services industry.