Rumours of headcount reductions in the Australian finance sector have quickly turned into formal job cut announcements following continued financial turbulence stemming from European sovereign debt issues. UBS reportedly predicts Australian banks are likely to shed 7,000 jobs over the next two years to offset the country’s weakest credit growth since World War Two. This would represent the largest downsize in the finance sector since the mid-90’s.

While these announcements grab the market’s attention and are a negative for sentiment, the headline figures, as well as the flow-on effects, are relatively benign. Let us assume that all job losses will be entirely limited to the major CBD office markets and apply a generous workspace ratio of 15 sqm per person. The total possible reduction in space occupation is only 105,000 sqm. This equates to a rise in vacancy of 0.65% across total CBD stock over two years. Pragmatically, this figure is likely to be much lower. Even if these losses are confined to Sydney and Melbourne CBD markets the impact on occupied space is only 1.1%.

Major banks are single tenants in a number of office buildings around Australia’s major finance centres. Anyone familiar with banks’ security measures would know that they are more likely to retain excess space and forego a small cost saving than they would be to compromise the integrity of their security by subleasing space to other tenants. Occupancy costs account for only around 10% of banks’ total operating costs, compared to nearly 60% for staff costs and 12% for IT. Therefore, any small occupancy cost saving would pale in significance to both the reduction in salary costs as well as the higher funding costs that banks are facing in 2012.Initial capital raisings from major banks show both nominal bond yields and spreads over swap rates have moved higher in January as bond investors seek higher returns in the non-government debt markets.

The banking sector faces a number of challenges in the year ahead; however, reported job losses are unlikely to significantly impact the domestic office markets. The poorer conditions in financial markets are likely to be short-lived. Continuing population growth, a forecast recovery in housing investment and a broad-based upturn in 2013/14 is likely to boost demand for credit. This in turn would have a positive impact on Finance & Insurance sector employment over the medium-term and could flow through to benefit Australia’s major financial centres.

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