by Ann Markwick
The property industry will feel significant repercussions from the Single European Market (SEM) after 1992. Some are obvious, such as the spur to activity from extra economic growth, but others are not so well appreciated. For instance UK public companies could be vulnerable to foreign acquisition, with a substantial knock-on effect on property needs. The South will benefit, but the whole country must overcome transport and planning problems and the disadvantages of a more peripheral position in greater Europe.
Business barriers estimated to cost $250bn a year will disappear under the SEM. This should create more than 5m jobs and boost annual growth from an average of 1.7% to between 4.2% and 6.4% a year. But detailed investigations by Gerald Eve and the City University(*) reveal that UK market weaknesses and potential corporate change could have a more negative influence. The study concludes that:
- Ownership is of key significance. Business will attempt to grow by acquisition rather than direct competition or economies of scale. UK companies will be vulnerable because of the relative ease with which they can be taken over. This could shift the focus of activity towards mainland Europe as headquarters are relocated by new owners.
- The South East and East Anglia will gain most from the SEM because of their proximity to mainland Europe. But even these regions could face problems because of the UK’s relatively peripheral geographic position unless more is invested in transport links. Regional inequalities will widen in the short term, with unification of Germany likely to further marginalise the UK.
- Legal and administrative inflexibility could count against the UK property industry. European and Japanese companies prefer freehold ownership to traditional British leases, while planners are inclined more towards constraint than growth.
Modern manufacturing systems favour economies of scope rather than of scale — that is across a range of products and enterprises, concentrating ownership rather than increasing output. UK companies are particularly vulnerable because of the relative freedom of our capital markets compared with other countries. It is relatively easy to take over a business listed on the Stock Exchange and a much cheaper way of expanding market share. This tends to work one way, however, as opposed bids are almost unheard of in Germany, for example.
Expansion of market share through acquisition is already showing up in the food and soft drinks industry, one of the sectors looked at in detail by this research (the others being brewing and telecommunications). Several pan-European companies are well placed to benefit from standardisation of controls.
This kind of restructuring will have an inevitable impact on property requirements, most obviously the likelihood of changing distribution patterns leading to development or concentration in some strategic centres and withdrawal from others. But headquarters will also be affected. They tend to focus on capital markets and production points, in “sunbelt” locations or cultural centres. London can compete on most levels, but there is a danger of decision-making centres drifting across the Channel if mainland Europeans take over control of companies. Branch networks would also be vulnerable, boasting little stability.
In the short term this could emphasise regional inequalities. Industries gaining most from the SEM are likely to be located in the South East and East Anglia. There is already evidence that international consumer electronics companies are restructuring to concentrate on these core areas. Industrial policies such as the reduction of subsidies to sectors like the steel industry would also have major regional consequences. Each sector must be judged according to circumstances such as production techniques, ownership and international competition.
At a basic level, a region dominated by a single industry is more liable to experience rapid change. But areas will be judged as a good location according to attributes such as labour skills and accessible land supply set against negative factors like high wages, poor housing and conservation pressures. The South East, for instance, has clear advantages in terms of highly skilled labour such as research and development staff, easily available capital and aglomeration economies, and favourable transport links with mainland Europe and the rest of the UK.
But it faces a balancing act when these are compared with limited and expensive land and housing plus planning policies, conservation pressure and environmental issues which severely restrict further growth and development. Wages are high and workers more difficult to find in conditions of near-zero unemployment. A company will choose the region only where the positive factors outweigh such costs. Meanwhile, existing firms may wind down or leave because they cannot compete with incoming Europe-focused concerns.
This indicates an increasing regional disparity under SEM. The South East and East Anglia will have an increasing international focus and concentrate on high-skill, high-linkage sectors such as professional services, hi-tech production and research. Peripheral regions will attract more domestic activities which cannot endure high land costs and overheads.
Better transport links will help more outlying areas, generating production centres like the Toyota factory in Derbyshire. A window of opportunity exists for this kind of investment from Japan and the US, which are using the UK as a “Trojan Horse” into Europe. But this may last for only about five years, so it is vital for the regions to grab what they can quickly. Where an industry has high growth potential the region may not necessarily benefit; segmented production and ownership may concentrate returns in the hands of “downstream” producers.
Even the more favoured South suffers from endemic structural problems which affect the whole UK and could cause problems after 1992. The institutional lease structure is not popular with overseas investors and tenants. The 1954 Landlord and Tenant Act Part II is also no longer appropriate. European companies traditionally aim for freehold purchases and so do the Japanese. The property industry will have to come to terms with companies who frequently operate outside its accepted rules.
Urgent investment in transport infrastructure is vital to offset the disadvantages of the UK’s marginal location, particularly in the provinces. Mainland links are underdeveloped. They also focus on London, which is an acute drawback for the regions. But even in the South East, congestion could prove a barrier to full exploitation of SEM benefits.
In conclusion, the research shows that the UK has many positive factors to build on within the SEM, including a skilled labour force, solid corporate sector, and strong business support and financial services sectors. But these are not being made full use of Political will is needed to overcome inflexible structural problems that may tip the balance in the other direction. Existing trends will be reinforced through extra demand for property in the South East and East Anglia, but which depends on transport links. If these are not improved, even the more favoured areas could suffer from severe locational disadvantages over their rivals in Europe.
In a more detailed study of three business sectors, the report shows that likelihood of major developments taking place through merger and acquisition has been confirmed in the brewing industry. It found the UK companies could benefit from rationalisation in Germany and opportunities in Spain. But the move towards SEM would have an insignificant effect on plant location.
Further significant structural change is unlikely in the food and soft drinks sector, where corporate strategy is more important than centralisation and increasing production. The industry requires a regional spread of food production close to sources and ports, with good access to markets. However, durable goods production may be attracted to the low labour costs of southern Europe.
Only two telecommunications suppliers are likely to survive in Europe during the long term and neither will be based in the UK. But this country will have an advantage in software and specialisation equipment. The industry is already concentrated in the South East along the M4 and in East Anglia, which are also the best positions for the SEM. Skilled labour will be more important than land and transport costs.
