This weekend George Osborne will be putting the finishing touches on what he hopes will be a Budget for business.
In January, the Office for National Statistics said that the public sector made a net repayment of its debts of £7.75bn, up from £5.2bn a year ago and higher than the £6.3bn predicted – prompting speculation that the chancellor could provide the economy with a small stimulus while still meeting borrowing targets.
Pressure is mounting on Osborne to produce a plan to kick-start the economy and bring growth back to the UK’s struggling regions, many of which are suffering from the impact of Osborne’s first two austerity budgets, which aimed to cut public spending from 47% of GDP in 2010-11 to less than 40% by 2015-16.
For property investors, how different parts of the country are affected and how quickly they are likely to bounce back is crucial to deciding where to invest.
With this in mind, Legal & General Property and Savills commissioned Oxford Economics to look at how Osborne’s 2010
Budget cuts were affecting different regions of the country on a local level, and which areas would benefit most from the chancellor’s help over time.
Researchers analysed 406 UK local authorities, their exposure to the cuts and their ability to respond. Key factors included local skills, the rate of entrepreneurship and business formation, and connections and transport links. The structure of economic activity, and export links, were also analysed.
Its results seem, at first, predictable – 19 out of the 20 local authorities best placed to recover are in London or the South East, with the exception of Edinburgh. The bottom 20 are based mostly in the North.
However, the research found that several other parts of the rest of the UK are also well placed to recover.
For example, Manchester’s young workforce and excellent transport links make it well placed to grow new sectors, and therefore bounce back from cuts to public sector employment over the medium term. Leeds’ financial and business services clusters mean its local workforce is well placed to benefit from growing demand at home and overseas. Similar cases can be made for Aberdeen and the M4 corridor, Swindon, Bristol, and Cardiff.
Meanwhile, in north-east Lincolnshire, the Derbyshire Dales, Stratford-upon-Avon and Monmouthshire, high rates of business formation bode well for private sector job creation.
Virtuous circle
The research predicts that recovery in these towns, cities and counties should, in time, help boost recovery in nearby areas, generating a “virtuous circle” of jobs and recovery.
Savills’ head of commercial research, Mat Oakley, says he is surprised by some of the findings. The fact that a city such as Cardiff is among locations set to recover the quickest, he says, “demonstrates signs of rejuvenation in the city and its increasing success in attracting private sector investment” and does much to dispel the notion that London and the South East are the regions weathering the recession well.
He adds that the driver for recovery in all cases comes down to strong private sector growth. But places with a strong public sector presence will not necessarily suffer from the cuts more than other areas, so long as the private sector is strong enough to support a recovery.
Oakley says: “Birmingham and Nottingham are still in the top third of recovery stories despite seeing strong public sector growth in the past. Generally, the recovery is about how good the private sector is, not how bad the public sector is.”
“The contraction of the state sector is being felt through two channels: the loss of public sector jobs and lower government spending on goods and services produced by the private sector,” says Neil Blake, director of economic analysis at Oxford Economics. “Both channels influence output and employment, and as household incomes in the areas affected fall, there are ‘multiplier’ effects on other sectors, such as retail and leisure.
“As labour markets adjust, workers retrain and relocate, and the economy recovers, it is hoped that regions that have been most dependent on the public sector for jobs will generate private sector activity. But with the UK economy set to endure a weak 2012, private sector employment looks likely to take time to recover.
“In the meantime, those parts where the public sector has provided the greatest share of job growth in recent years will be worst hit.”
Recovery index ranking for key UK cities
(1 highest, 406 lowest)
• London n/a*
• Edinburgh 17
• Manchester 30
• Bristol 37
• City 48
• Cardiff 51
• Leeds 67
• Birmingham 114
• Sheffield 118
• Newcastle 140
• Nottingham 151
• Liverpool 170
• Belfast 265
* London refers to the entire London region; the performing local authorities of the index are dominated by London boroughs
Robert Martin, head of research and strategy, Legal & General Property
Based on sluggish economic forecasts, from an investment perspective, it would be tempting to adopt an entirely defensive tilt for property portfolios: extending lease terms, selling off weaker covenants, buying secure yield at the expense of any growth potential.
This is likely to pay off in the short term, as the macro backdrop chokes off the embryonic recovery in risk appetite. But barring a slide into a debt/deflation spiral, the economy will improve over time.
So, one of our key investment themes is to structure the portfolios we manage to blend a foundation of defensive, low-risk assets with higher-risk/management-intensive assets that have growth potential to respond to rising hurdle rates. We view the phase of renewed risk aversion we expect to set in during 2012 as an excellent opportunity to acquire assets in the higher risk space – more aggressive discounting for weaker assets relative to core, stabilised positions will boost the premiums for taking on risk.
Investment pricing is already adjusting to apply a discount to assets outside the South East. It will be just these regional locations which are likely to offer some of the most compelling pricing over the next 18-24 months.
Managers seeking to acquire in these locations will need a genuine understanding of the local economic situation to be able to distinguish value from value trap.
