Centre for Cities

Bang in the middle - the re-emergence of the city centre

The city centre is re-emerging as the preferred location for office space, away from out-of-town locations and business parks.

The 1980s and 1990s saw the rise of the business park, offering large floorplates and vast amounts of car parking space. However, Centre for Cities research in 2011 suggests that there has been a shift back towards the city centre as a preferred location for offices, and particularly for higher skilled jobs. Employers located in city centres benefit from proximity, as well as finding it easier to attract and retain employees.

Offering a range of modern office space within mixed-use areas, which include other amenities such as restaurants, shops and gyms and are well served by public transport, is likely to become ever more important as high skilled jobs and businesses increasingly concentrate within city centres. It also supports city centres to become more diverse, as over-reliance on the retail sector is not good for long term growth.

Making the Grade highlights this shift and shows how Cambridge appears to be responding to the challenge of the increased attractiveness of the city centre.

The city’s response to increasing requests from businesses to be located close to historic centre, which has limited site availability, has been to prioritise new development to the east. This means that the existing railway station will now sit at the heart of an expanded commercial and residential area; a move that has attracted Microsoft to relocate from its out-of-town site.

The fast rail links from Cambridge to London Kings Cross, combined with a large amount of land available for development within a ‘new’ city centre, provides an excellent base for one of the UK’s top performing cities to build on its success and drive economic growth.

Map of Cambridge

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Size apparently does matter - smaller cities could be a better bet for office developers & investors

Office market developers and investors tend to focus on the UK’s largest cities as their key markets and often miss the opportunities that other smaller, dynamic cities offer.

Globalisation has meant that, as the UK has moved from a principally manufacturing based economy to a services based one, the country’s comparative advantage now lies within the office and knowledge based sectors. This makes the provision of office space extremely important for city growth.

As shown in our latest report, Making the Grade, however, the problem is that despite strong demand, some of our most economically successful cities are not seeing large increases in floorspace growth. Conversely, cities with weaker office markets, such as Bolton and Blackburn, have seen large increases in floorspace.

Average rateable value of office space in 2000 with annual average growth in office floorspace between 2000 and 2008

The reasons for this mismatch in supply and demand are different for different cities and include:

1. Land supply and planning restrictions - which can restrict development and push up prices, meaning it is potentially too expensive for some productive firms to locate there;
2. Public sector driven investment and relocation – where the public sector has built office space and is either subsidising its use or is no longer using it, leading to an increase in supply and pushing down prices. This can have a negative effect on the built environment and could deter business;
3. Employee density - some cities have seen an increase to employee density because more flexible office arrangements and modern office space has been designed so there may not be an increase in floorspace and;
4. Domestic business relocation - a firm upgrading and/or consolidating many offices in to one means office floorspace hasn’t necessarily increased and/or can lead to an increasing amount of obsolete space.

But more significant to determining development is the size of the city. Larger cities have high aggregate demand and a higher occupancy churn and are therefore less risky for an investor – hardly surprising then that they choose to develop here – whilst smaller cities often have very specific demand for office space and can suffer from infrastructure issues.

Development models for small and large cities

In order to maximise choice for developers and investors and benefit from economies of scale, smaller cities should work closely with their neighbouring authorities on issues such as infrastructure, housing and planning.

Cities also need to understand the demand from their existing business base, as well as what they could need in the future, and tie this with a good knowledge of their current office provision. This should be communicated to agents in order to boost the city’s national profile.

Supporting some of the strongest performing cities by ensuring office space responds to high levels of demand will have substantial benefits both for these cities and the UK economy in our quest to move out of recession.

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What’s good for Reading may also be good for Burnley - reflections on local government finance reform

The government’s latest thinking on the Local Government Finance Bill has prompted lots of reflections and commentary – much of it demonstrating little understanding of economics or the basic trade-offs that the new local government system has to consider. 

While we would welcome a Bill that had stronger incentives for growth including enabling local authorities to keep more than 50% of their business rate, we also recognise that legislation is devised in the context of a whole system and trade-offs have to be made.

It would be nice to be able to devise a local government funding system that maximises the incentive to pursue growth for some places whilst simultaneously providing an equitable system of redistribution and security for others. But with no additional funding on the table, this simply is not possible. 

Local authorities, pressure groups and other commentators could make a more useful contribution to the debate if they weighed up the pros and cons a bit more and evaluated their position in the context of the balance the whole system is trying to strike.  My reflections on the trade-offs involved within the proposed system are set out below.

Growing the size of the pie vs redistributing the existing pie

Much of the debate has been about winners and losers and who will get what under the new local government funding system. This downplays the real issue which is how to structure the new system in order to maximise growth and thus increase the total amount of money within the system so that everyone can get potentially get more. For example, if the incentive is sufficiently large so that Reading is encouraged to increase its business rates growth, then it will get to keep 50% of its resulting larger business rates pot. But Reading will also send 50% of this larger pot back to the centre to be reallocated to less successful places such as Burnley. The opposite is therefore also true.

Our research suggests that allowing authorities to retain a greater share of their business rate growth will create net economic benefits for the UK. If this plays out then there will be more money available via the central pot to redistribute to those places that are less able to grow their business bases. So what’s good for Reading should also be good for Burnley.

Safety nets vs growth incentives

For an incentive to work most effectively there must be a downside. In fact avoidance of the downside may provide a more effective incentive than the benefits of the upside. Therefore any safety net acts as a disincentive. If it is overly large or kicks-in very early it will reduce the effects of any growth incentive, particularly for those authorities that sit around the line between being top-up and tariff authorities. The system must work so that it always makes more sense for a city to go for growth than to rely on redistributive handouts.

Pooling vs competition

While much of the discussion has focused on the 50% retention rate, the government has also missed an opportunity in not providing incentives for pooling at the level of the functional economy. One of the likely effects of this will be increased tax competition between authorities as they vie to retain their existing businesses and attract new ones to their area. In some places this could result in a ‘race to the bottom’. If you’re in any doubt that this increased competition could happen, have a look at how authorities in the USA use their variable tax-system to do just this. If we want less competition, then we need to encourage more pooling. The new local government finance system should do more to encourage this – even if this is simply through explaining the benefits more clearly.

Because of the competing interests within this Bill — cities with stronger and weaker economies, central and local government, growth incentives and equitable redistribution — it was never going to make everyone happy. Understanding and respecting the notion of trade-offs is the framework in which discussion of the most effective local government system should be placed.

Land grab: will the release of HCA assets boost economic activity?

The Homes and Communities Agency published their Land development and disposal plan which presents how it will use and release their land to boost economic activity.

Over 40% of the allocated land area listed for commercial, residential or mixed use is found in local authorities within cities. Furthermore, around 15% of land is within ‘buoyant’ or ‘robust’ cities (using the city typologies from Private Sector Cities) which includes 43 hectares in Crawley and 14 hectares in Milton Keynes. This is a good sign as these cities are often hampered by planning restrictions and land supply which restricts economic growth.

HCA allocated sites in Crawley

Source: Contains Ordnance Survey data © Crown copyright and database right 2012, sites from HCA Land Development and Disposal Plan 2012/3 (April 2012)

At the other end of the spectrum, ‘struggling’ cities have around 1% of the land listed for release. It will be important for these cities to manage their commercial and residential stock in order to promote realistic levels of economic growth and improve standards of living for residents.

Allocated land within cities

Note: This is the land allocated for commercial, residential and mixed use. The analysis excludes land for community areas and open space. It also excludes allocated sites with unconfirmed area size.

Interestingly, the HCA have said they will dispose of landholdings on a single site basis with the exception of neighbouring sites potentially being sold as a package. The key issue here is whether this means buyers will hold out only for the desirable areas leaving other areas lagging.

Perhaps an alternative method would be to group sites together to form a portfolio across the risk spectrum. This would reduce the possibility of only cherry-picking the best sites and would allow riskier sites to be developed.

It will be interesting to see when and how often the sites become available to buy, the procurement approach for the various sites as well as who steps forwards to invest.

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Great Expectations: where next for London?

London is a growing city with a population likely to reach 8.57 million by 2026, a level not seen since the eve of the Second World War.  Everyone agrees that to maintain its status as the motor of the UK economy and a global centre, the capital needs to accommodate ever-increasing demands on housing, transport and services.  To do so, it must deliver more housing, offices and shops.

And that’s where the consensus ends.  Everyone expects major development to happen between now and 2022, but while developers prefer the established markets of the centre and the west, the GLA expects the greatest change to happen where the most land is available, in the east.  With policy and the market pulling in opposite directions, which parts of London will really see significant change over the next ten years?  What should and could local government do to attract development, and where should the private sector take risks? 

Centre for Cities, working with GVA, has researched development potential in London between now and 2022.  Evolving London: The Future Shape of the Capital looks at prospects for office, retail and residential, and creates a new index to compare boroughs.  The report aims to reconcile the complex influences of past, present and future market trends, long-term policy ambitions, short-term policy direction and major public investments like Crossrail.

The report also looks at six places that could see change if barriers to growth can be overcome:

- Deptford Creek, the Royal Docks and White City: places that have already seen some change, and have the potential to attract development on a larger scale

- Park Royal and Old Oak Common: where HS2 could act as a catalyst for significant change

- Croydon town centre and Tottenham Hale/White Hart Lane: places with major post-riot barriers to overcome, but also potential to attract investment.

Evolving London fills the gap between the 20-year view of the Mayor’s London Plan and the short-term horizons of everyday debate.  It highlights the need for the public and private sectors to develop shared objectives to deliver on the scale needed if London is to continue to be an economic powerhouse.   

Predicting the future is never an exact science, but fulfilling London’s economic potential requires perspective.  Evolving London combines policy and market insight to show which boroughs could see major change, and what they need to do to make it happen.  Our research aims to help the public sector think about what’s needed to create the conditions for development. 

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A place for industrial policy

Last week I attended the event "Developing an Industrial Strategy for the UK" hosted by the IPPR, the Resolution Foundation and New Economics Foundation.

The key point to come out of the event is that politicians are looking for potentially new ways to respond to the economic challenges the UK is facing and industrial policy could be an area for development.

After the shortcomings and problems industrial policy faced in the 60s and 70s and its abandonment over the coming decades, politicians and academics were invited to the event to discuss both the broader remit of industrial policy as well as the specific recommendations for its implementation.

The debate was far less polarised than in previous decades. Most of the speakers recognised that key innovation and research are not going to be undertaken purely by the private sector especially in such a de-risking financial climate. But there was also a recognition by the panellists that the state, and indeed the rhetoric, should move away from the notion of "picking winners" and understand how other factors, such as competition, the regulatory framework and skills, can improve productivity.

Therefore, the speakers suggested that whilst “horizontal” policies (i.e. those policies which are not sector specific such as education, tax, regulation etc) should be used, the Government should also support the strongest sectors and have a strategy for “vertical” policies. Support, presumably in the form of procurement or investment, could be a reward for firms who are delivering on key long-term objectives such as research and development, employee training and up-skilling or long-term investment growth plans.

A key rhetoric change to come from the event was the recognition that 21st century industrial policy needs to be more spatially aware if it is to be successful – there is no industrial policy without regional policy.

Any future development of industrial policy needs to combine both vertical and horizontal policies with a spatial awareness that understands and recognises the strengths of different places. With a lot of activity across the cities agenda - LEPs, City Deals, mayors to name a few – it is imperative that industrial policy development does not ignore the role that cities can play.

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Pay for delay: The “delay incentive” in the draft Local Government Finance Bill

Just when the news is aflutter with stories of challenges with the planning system, Government’s proposed business rates retention system could introduce a new planning problem.

Andrew Carter and I have been paying close attention to the Local Government Finance Bill. My latest report, Urban Outliers, dives into the deep abyss of the Bill to explore two small issues which can have big implications for economic growth. I discuss one here.

It starts with the fact that business rates will now be the funding source for local social care, so the amount of business rates local authorities retain needs to be kept in line with local need. To do this, Government will ‘reset’ the amount of funding local Government retains in the proposed business rates retention system every 10 years.

At the same time, though, the retained business rates revenues have another goal of incentivising more development. Thus, the reset creates unhelpful uncertainty, as local government does not know how much of their rates they will retain after each reset to the system. This means that, for any given development, local government will only fully benefit from business rates retention before a reset, as any growth after that has the potential to be stripped out and sent to central Government.

In plain English: local government faces an incentive to delay developments until the beginning of a reset cycle. The benefits of pushing completion of a development back two years from year 8 in a cycle can be quite large, as local government is only guaranteed a portion of the business rates increase for 2 years, rather than 10 (if completed in the first year of a cycle).

The daunting part is that, if the incentive works, we could see waves of developments delayed across the country. This could bring instability to local government finance, treasury intakes, and businesses alike. These are not insignificant incentives authorities face; there is a real benefit to delaying development and business growth.

We do not argue that social need should be ignored at the expense of business growth. Rather, we argue that the mechanisms created by the resets to the system will create negative incentives for local government, business and the community at large, and they should be addressed. Now is the time to put our thinking caps on and work together to come up with clear and innovative solutions to these problems. Who’s with me?

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Framing the Statistics: A work in progress with the New Homes Bonus

 Housing Minister Grant Shapps announced the second round of New Homes Bonus allocations, and the numbers are neither surprising nor telling. Analysis shows that it is too early to know whether the incentive scheme will bring forward more homes in Britain. More importantly, there is no evidence yet that those places which need the incentive the most are building more.

Our previous work on the NHB in Room for Improvement set out the key issues with the incentive. We estimate that the NHB will increase the housing supply by 6 to 16 percent (see figure below). This is not enough to raise house building to the level needed or to deliver enough homes in the places with the highest level of demand.

 

Figure: Estimated impact of the New Homes Bonus

Local government, though, hasn’t yet had a chance to respond to the incentive. The NHB only came into effect in February of 2011. This is not enough time for local authorities to create new planning schemes, housing builders to bring forward new developments, and the houses to be finished. Despite payments going out to local authorities, the earliest we should expect to see a noticeable impact of the NHB will be next year’s payout.

Just over half of the UK’s cities saw an increase in their NHB allocation for 2012. That means that many cities (like Birkenhead, Portsmouth and Preston) increased the rate at which they built new housing, even before the incentives of the scheme have had an impact. However, half of cities (including Bradford, Nottingham and Brighton) saw declining house building rates. When the incentive’s effects can be seen, it will likely be in those cities on the margin (such as Sunderland, Leeds and Reading) which have steady house building rates since the NHB was announced.

We are keeping one eye on the NHB to see what might come out of it. While we wait, we reiterate that the NHB it is not big enough to encourage local decision makers to address housing affordability issues and build more housing. Specifically, the incentive is not strong enough to target those places that need to grow the most—with the highest housing prices and which are most resistant to development. Additionally, its small size relative to business rates retention could encourage commercial development over residential. Looking forward, we have to manage expectations of what the NHB will deliver.

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Hammering TIF Home: Where is TIF a year from its announcement?

One year ago, the Government made the latest in a long line of announcements spanning more than a decade that local authorities would have a new tool at their disposal to unlock economic growth - Tax Increment Financing, or TIF.  Our new research, A Taxing Journey­, looks at what this Government is doing to bring TIF into practice.

Nick Clegg, in making the announcement on TIF, stated that it would be “the first step to breathing life back into our greatest cities.” Since then, TIF has become entangled in a much wider and more complicated debate concerning the future of local government finance – the Local Government Resource Review (LGRR). Because of the competing objectives with the LGRR about how to reconcile a more inventive-based system with the current redistributive system, the future for TIF remains uncertain. Currently, Government is deciding how business property taxes will be retained locally, and it is likely to introduce a complex system of top-ups, tariffs, rebasing and resetting. All of this adds up to a lot of uncertainty that could render TIF useless in some cases.

To make TIF work, Government needs to keep it as simple as possible. If they make the system in which TIF will operate too complicated, it will create uncertainty and confusion that will deter investors and developers.

Our research also points out that TIF will not be the answer to growth for all places. It will only work in buoyant property markets and places which need new infrastructure to unlock demand. TIF requires adequate long-term demand for business property, so local authorities and investors need to be relatively certain that property tax revenues will come in to pay back the loan.  TIF works when there is a real need for infrastructure to unlock economic potential. Not all places lack the infrastructure to grow.

With this in mind, Government needs to design TIF in a way that introduces as much certainty and clarity as possible so that each city is able to determine whether it’s right for them.  Failure to do this will result in a very useful new tool becoming a rusty lever at the bottom of the policy toolbox.

Regional Growth Fund – keeping track of the numbers

Just to update on yesterdays blog, the Cabinet Office have released information about three fund that have been through due diligence in the North East.  So there are now seven confirmed grants, the latest being:

• Proctor and Gamble in Newcastle, which has received £5.3 million to create a UK research centre aimed at developing greener and more efficient cleaning products. The company is investing a further £8.4 million into the project and intends to create 53 new jobs.
• Chirton Engineering in North Shields, which has received £75,000 of RGF funding to buy new equipment for the plant. The company is investing a further £175,000 in the project and intends to create 23 new jobs.
• Alnmaritec, a boat design and building company in Blyth, has received £63,000 to buy a 100-tonne marine travel lift, allowing them to expand into the boat repairs market. The company has invested a further £187,000 in the project and hopes to create 15 new jobs.

These are all very welcome jobs for the North East. 

We’ve updated table that analyses the cost per job to the public purse for all seven confirmed funds. 

 

 

 

 

 

 

 

 

 

 

This draws from the information currently in the public domain which is not clear as to whether this relates to direct or indirect jobs created, or both.  It raises a few obvious questions:

• What are the outputs or outcomes for the Proctor and Gamble grant, as its seems fair to assume its not just jobs (at a cost of £100,000 each)? So perhaps there are more medium term economic growth benefits to expect.
• What happened to the minimum grant of £1m, or are the smaller grants the first of a number of installments?
• Also these confirm a lower gearing ratio than anticipated at bid stage.

We’ll keep updating as we find out more.