Research article

Working Well

The UK’s capital is an economically successful city and strong in a wide variety of areas.

London is an economic powerhouse. It is the UK seat of government, with many associated civil service and public administration departments, a centre of finance, education, entertainment and the arts. A world leader in financial services, technology and media, it hosts a large number of company global headquarters and is a major global tourist centre.

London is a ‘polymath city’ strong in a wide variety of areas and quite unlike any other city bar New York in this respect.

Figure 7

FIGURE 7Polymath City Index

Source: Savills World Research

London owes its global competitive edge to this economic, social and cultural diversity. Tech firms benefit from proximity finance and a ready pool of talent from the city’s education institutions. Research universities are a catalyst for innovation in the capital’s private sector. The city’s unrivalled entertainment offer pulls tourists from around the world, and attracts skilled individuals who wish to make London a permanent home in which to live and work. In a world where business competes fiercely for talent in a global job market, being based in a globally desirable city can give 
a commercial edge.

The diversity of London’s economic offer means it makes 
a large contribution to the nation’s GDP. Figure 8 shows the city share (taken as the metro area) of national GDP across top-tier world cities. The London metro area (Greater London including its near commuter towns) contributes 33.6% of national GDP, but hosts just 22.7% of the total UK population.

Figure 8

FIGURE 8City metro area share of national GDP

Source: Oxford Economics

The dominance of London within the UK is comparable to that of Tokyo to Japan (33.7%), and Paris to France (30.8%). By contrast, New York, Berlin and Shanghai are one of many major economic centres in their respective countries, and all contribute under 10% to their national GDP.

The supremacy of London over the rest of the UK, as the economic and political hub, means that it puts a disproportionate pressure on a limited pool of resources (housing, physical and social infrastructure). Better regional transport connections, more cross-country business cooperation, and stronger links with UK suppliers would help to make London’s position as a global economic hub a catalyst for the entire country.

London’s diversified economy helped its job markets to bounce back quickly from the global economic downturn and have subsequently enjoyed rapid growth. Across the London metro area, more than one million jobs were added between 2004 and 2014.

Employment growth is forecast to slow in the next decade, but London will still generate new jobs at a faster pace than its major global rivals (Figure 9). London will see its workforce grow by 10% in the 10 years to 2024. Paris will see its workforce grow by 3.1%, while Hong Kong’s will fall by 0.8% over the same period.

Figure 9

FIGURE 9City metro area share of national GDP

Source: Oxford Economics

Impact on real estate

A rapidly expanding employment base is underpinning a new wave of expansion in London’s office markets. New records were set in the leasing markets in 2014, with 8.2m sq ft leased in the City of London. Reaffirming London’s status as one of the most important global centres for the creative, media, entertainment and tech industries, the capital has seen a general shift in occupier demand from west to east.

This in turn has been reflected in fast-rising office rents. The proportion of office take-up by creative and technology companies in the City of London was 17% in the year to June 2015, the same as the proportion taken by insurance and financial service companies.

However, it is worth noting that the banking sector has started to recover this year, and this means banking and finance companies currently account for 38% of current requirements across central London. A buoyant occupier market underpins record investment – London is the number one destination for cross-border investment into offices globally.

Rapid employment growth puts further pressure on London’s housing market. New housing supply has failed to meet the need and the pressure on living costs has continued to build. House prices in London have risen by 43%, and private sector rents by 19% over the last five years according to the ONS. Investment in transport improvements is essential to open up new parts of the city for housing development. Crossrail, an upgrade to Thameslink services and an extension to the Northern Line, is unlocking new development in the near term.

The focus of London government at present is ensuring that sufficient and affordable accommodation is provided to house London’s growing population. There is concern that a combination of high land prices, low industry capacity and a historic undersupply backlog will continue to thwart these intentions. 
In this case, it seems likely that London’s travel to work area will expand as the population seeks accommodation further afield.

Under these circumstances, pressure will mount on transport systems. If not acted on, this may mean a decanting of talent to other UK towns and cities, or to overseas competitors, especially of the most footloose citizens.

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