We expect that the government’s flagship ‘levelling up’ policy will be further developed during 2022, after a series of announcements in 2021. This will hopefully start the evolution of turning rhetoric into tangible action geared towards ‘restoring local pride, growing the private sector, and improving living standards’1.
Outside of funding earmarked for specific community projects, two of the major initiatives undertaken so far are the creation of eight new freeports, and the well-publicised drive to shift governmental departments away from London.
The freeports will offer a range of tax relief measures for businesses, including tariff-free exporting and importing, stamp duty exemptions, national insurance relief and enhanced capital allowances2 but with much of the detail yet to be ironed out, the impact on key industrial markets is yet to be truly understood.
The government’s desire to move 22,000 civil service jobs out of London by the end of the decade3 through the GPA’s ‘Whitehall Campus’ programme is more long-standing. The programme seeks to consolidate London operations into fewer, core buildings and push public sector activity into 50 regional hubs, of which only 14 are currently in place – including the Department for Levelling Up’s move to Wolverhampton.
These two initiatives reflect the fundamental purpose of ‘levelling up’ insofar as the government is seeking to boost employment and economic value (and, by extension, prosperity) in areas of the country in need of impetus. This is happening directly through public sector job creation; and indirectly through creating amenable circumstances in which businesses are incentivised to expand.
There will of course be impacts on real estate from these policies alone. In the case of freeports, we should see an increased demand in a number of markets for industrial, manufacturing and storage space; while regional office markets will continue to benefit from the large quantum of demand for office space in ‘selected’ relocation markets. This is in addition to an increase in demand for housing and, to an extent, retail and leisure space at a local level.
Where there is disquiet is around the notion that central governmental largesse simply replaces local funding measures and the ability to raise debt directly. On top of which, the recent cancelling of the Leeds leg of HS2 and watering-down of the Northern Powerhouse Rail improvements seem to contradict the entire premise of the agenda.
Thinking of levelling up at a wider scale, for real estate impacts to be seen there needs to be a consideration on how best to geographically realign the UK’s knowledge economy so that the economic benefits of productive industries are better shared. This is not an ‘easy win’ – in some cases the government will likely need to incentivise heavily in order to secure private investment into physical real estate as part of the process for improving the attractiveness of places.
Longer-term, driving that realignment in parallel with the wider levelling-up measures will mean that a greater number of viable locations will emerge for real estate investors who may have ordinarily focused on London and the South East but are drawn elsewhere by organic market improvement following economic stimuli.
Fundamentally, the problem that the government is trying to solve is down to the concentrated geographical expansion4 of the country’s knowledge economy coinciding (to a degree) with declines in the manufacturing and retail sectors which historically supported entire communities.
Highlighted on the chart are component parts of that knowledge economy, which are the 1st, 2nd, 4th and 8th most productive industries nationwide in terms of output per hour.
OUTPUT PER HOUR (CvM, 2019)5
More than 25% of the registered businesses in the UK within those industry bands are based in London – far outstripping the overall share of business activity coming in the capital, which is 19.3%.
LONDON SHARE OF UK BUSINESS ACTIVITY
This concentration of high-output industry is a major contributing factor to London’s ability to attract domestic and international businesses, retain such a rich talent pool, and be the ‘anchor’ for a generally prosperous hinterland across the wider south east.
Recalibrating this business sector composition is what can truly move the dial on levelling up and enable other parts of the country to replicate at commensurate scale that which has occurred in the capital7. Within this context, the government will need to focus on holistically improving key regional business districts – as well as the infrastructure, living, retail and cultural offer supporting them - in a way which can facilitate the increased occupation and retention of service industries.
A critical part of this will be the provision of high-calibre office and laboratory space to help attract those businesses, and so we can expect increased collaboration between government and the private sector – through modern partnering - to embolden the process by which the recalibration of the knowledge economy takes place.
This process should also intersect with other areas of critical importance to real estate and the government alike – such as the push towards net zero carbon. When breaking down EPC certifications by local authority and rating band, we can see that London boroughs generally have higher performing office premises from an energy efficiency perspective than regional cities8 - partially as a result of the short-term development cycles that we have traditionally seen particularly within the City.
PROPORTION OF OFFICE PREMISES RATED LOWER THAN 'B' BY LOCAL AUTHORITY
Given the growing attention paid to ESG concerns by businesses, the need to decarbonise, and the looming obsolescence issue brought about by MEES regulations, we can expect to see significant intervention on this point to remove any unnecessary barriers to that much-needed private sector regional expansion.
As that process for recalibrating domestic industry unfolds over the medium to long term, there will be growth areas in locations that investors may not have historically considered viable but that end up representing better value propositions than London and the South East.
We can see from historic data that location is less of a barrier to investment when other important economic factors align.
For example, during the last two years, overseas acquisitions of industrial property in the regions have dramatically outstripped volumes in London and the South East. This is underpinned by a desire from investor groups to tap into an increasingly desirable asset class in parts of the UK which are priced more competitively than the capital.
CROSS-BORDER INDUSTRIAL ACQUISITIONS 2011-2021
Similar value-based judgements based on potential or emergent areas of economic growth, especially in sectors reliant on R&D, will underpin the impact the levelling up agenda on the shape of real estate investment going forward.
There is a certain symbiosis between the expected real estate impacts from levelling up and the wider success of the entire agenda.
At the very least, there will be localised impacts on real estate from the activities that the government is already pursuing – but if there is to be a genuinely successful wider prospectus for levelling up, then we will see noticeable improvements in demand across most property sectors in a greater variety of locations.
Within that context, we anticipate that the industry overall could well be an active participant in driving change as well as a spectator waiting for growth areas to emerge – particularly when it comes to facilitating the recalibration of the UK’s most productive business sectors.
1https://www.ft.com/content/eb56347b-42bb-4c56-906a-2ea24bd54632 2https://www.gov.uk/guidance/freeports 3https://www.gov.uk/government/news/business-department-and-home-office-to-open-up-almost-3000-civil-service-job-roles-outside-of-london 4https://www.centreforcities.org/publication/what-levelling-up-really-means/
8Avison Young analysis of EPC ratings by local authority.