We have a housing problem because our economy has become too dependent on London. The shortage and cost of housing in the UK are symptoms of a wider economic problem and have a negative impact on the commercial sector.
It is not a single issue that can be fixed by demand-led government initiatives and a reliance on for-profit developers. The former seem politically unsustainable while the latter are limited by the fact that they are required to create value rather than be socially motivated.
London dominates economic activity and growth, from graduate employment to infrastructure development. The self-fulfilling prophecy of London’s attractiveness limits regional economic demand so talent and growth are concentrated to London because promoting regional cities is harder to fund. So the cycle continues.
It is common knowledge that we need more affordable homes but, realistically, government policy to improve access for buyers, such as Help to Buy, is successful only if the locations are within commuting range of high-value areas.
Local power
Devolution of government power from Westminster, which is happening in Manchester and Birmingham, is putting power into the hands of local decision-makers so they can better meet the needs of their areas. This needs to continue throughout the regions.
By creating an environment in which economic centres other than London generate jobs and wage growth creates the link between local activity and commercial rental growth. The promotion of Hull and Liverpool as Cities of Culture has increased their attractiveness. However, their long-term commercial rental growth prospects still depend on improving transport links, affordable housing and media connectivity.
At present, high-speed broadband, Crossrail and HS2 (London-centric projects) will have a collateral positive impact for the regions, but even these will take time to produce results.
These trophy projects are decades in planning and execution, allowing government to point to action. Funding and planning are why these major projects take such a long time from inception to completion.
In the case of the former, a London component must be an undoubted attraction, while the latter is hamstrung by the time and cost required to achieve consensus in a multi-stakeholder negotiation.
Inner city living
Both prevent positive speculative development. It is imperative to find the balance between maintaining London’s pre-eminence as a global city, so long as it is not to the detriment of other regional cities’ growth. This will ensure that all the UK has an economy fit for a global audience.
At Palace Capital we have identified a genuine UK trend for inner city living and working. We have grown our portfolio accordingly and assembled a base to take advantage of this trend, including our £70m acquisition of the Warren Portfolio earlier this year, so the bulk of our portfolio is in university towns and city centres, specifically within easy reach of mainline rail networks.
In York, we have planning consent to redevelop our Hudson House site directly opposite York station. Even with the support of the local authority, this process has taken considerable management time and effort over four years. Once complete, it will comprise 34,000 sq ft of office space and 127 residential units.
Flaws in planning system
The draconian planning system is unhelpful in promoting regional growth. Time and cost play a considerable factor in getting schemes moving. In addition, it is common for planning authorities to require developer contributions in granting consent for residential as a form of planning gain.
Theoretically, the driver here is to ensure developers contribute to the sustainability of the immediate towns and cities. This has been successful in Manchester (Spinningfields) and Birmingham (Brindleyplace). However, the reality is most local authorities are prepared to accept a monetary payment in lieu, which doesn’t help to retain and recruit businesses, whose employees in turn support the residential development. The current compromise overlooks the fact that building houses should require buyers to be local.
Although we support the concept of permitted development, the early indications are that this has been helpful in high-value areas only. We argue that permitted development consents should be viewed in a long-term economic context such that they are granted conditionally on providing complementary commercial space. At Palace Capital we are taking advantage of this reduction in office supply as commercial rents increase.
Collateral benefits
We consider that regional towns and cities would see sustainable commercial rental growth if government policy matched the city centre working and living trends we have noted. At its heart, this is about changing behaviour.
We are not suggesting a wholesale diaspora from London, but more could be done to provide employment opportunities in the regions, not just the major cities. This would bring considerable collateral benefits, not least in terms of family cohesion, environmental impacts and social mobility.
Palace Capital is committed to playing its part. Our strategy of actively and sustainably managing our assets outside London is not just about our desire to generate value for our shareholders. We can do so in a way that reduces the regional economic disparity and benefits our shareholders as well as local communities.
