Rarely has a ranking of the world’s greatest cities been released in the past few years without London at its top, or very near it.
PwC recently named the capital the world’s best city for opportunity, praising its economic clout, its attractiveness to foreign direct investment, its highly skilled workforce, and its status as a gateway to the globe. In September, London retained its crown as the leading city in Z/Yen Group’s respected Global Financial Centres Index.
“Unfortunately,” says John Dickie, director of strategy and policy at London First, “such rankings are backward looking.” And with the contours of Brexit as yet unclear, everything from access to talent and investment, to the UK’s trade relationships and future economic growth is under question, an innately unsettling situation for London and its businesses.
But Brexit uncertainty could also be an opportunity to re-energise the city’s essential competitiveness – particularly in the areas of housing and infrastructure – if we can shake off our prior complacency. “In the lifetime of most Londoners, the capital’s global position was assured,” says Dickie. “We thought we were fine and that led us to put off difficult decisions. But London is not fine anymore.”
“The competitive position of UK cities is fundamentally associated with whether or not you can provide the right environment in which to live, work and play,” says Bill Hughes, head of real assets at Legal & General Investment Management (LGIM). “Particularly with the UK leaving the EU, companies and people will make choices based on those sorts of issues.”
Across a range of metrics, the capital has not performed well. This is most obvious in the housing market. “Today’s 40 year-olds on average purchased their first home when they were in their 20s. Today’s 20 year-olds will purchase their first home when they’re in their 40s,” says Hughes. “There’s been a significant turnaround in the affordability of property.”
This has businesses worried. A 2013 survey of London First members found that 68 per cent were concerned about the impact high house prices were already having on their ability to recruit and retain staff. Seventy per cent felt the cost of housing threatened London’s future success. The UK also performs poorly in comparative measures of infrastructure competitiveness, coming in at 24th in the latest World Economic Forum Global Competitiveness Report.
With the capital’s population growing by 100,000 a year and new home completions running at about half the level required to meet demand, without action the situation is only likely to get worse. “All successful growing cities struggle with infrastructure strain,” says Hughes. “It’s inevitable.” What’s important is the response.
Beyond owner occupation
A range of bold solutions has been proposed to finally get a grip on the London housing crisis. Dickie cites the sacred political cow of the greenbelt. “It’s not always beautiful. Much of it isn’t green and pleasant.” And reclassifying sections of it could unlock enough land for hundreds of thousands of new homes within access of existing transport infrastructure, at the same time as creating new space with real environmental and civic value.
Dickie also wants the mayor to make greater use of his compulsory purchase and planning powers to get large schemes off the ground. “50,000 homes a year is not possible without radical action. We need the state’s assistance to hit targets in London. It needs to decide where we’re going to build, and build densely. Redundant public sector land needs to be released more enthusiastically, and channelled into building at scale and quickly.” He favours lifting restrictions on councils borrowing to construct new council housing.
Hughes and Dickie, who spoke on a panel at the Museum of London last week, agree that there is no silver bullet. But both say that the government has historically tied its hands by prioritising one particular form of housing – owner occupation – above all others. “The preoccupation with owner occupation has been an impediment,” says Hughes. To truly address the supply-side crisis, all tenures need to be firing on all cylinders.
LGIM thinks there is particular potential for institutional investment in rental housing – so-called build-to-rent. “The UK is an aberration,” says Hughes. Most other countries have vibrant build-to-rent sectors, where investors construct purpose-built properties at scale that can then be let out to tenants and provide a long-term return. In Britain, this barely exists, but he says it has the potential to add 17,000 new homes a year in London, about a third of the current 50,000 target.
Joining the dots with infrastructure
LGIM’s real assets division, which Hughes runs, differs from other real estate investors, in that it brings commercial and residential property together with infrastructure into a single coherent team.
Historically, the relationship between infrastructure and real estate has been underplayed, he argues. The key word is regeneration. “We take the view that the urban environment needs modernisation and investment. Regeneration implies a lot of things: better connectivity, intensification of usage, and we think redeveloping urban areas rather than building new towns.”
While there has already been significant investment in London’s transport system, we have a new port in London Gateway, and extra rail capacity will come on stream from 2017 with the East-West Elizabeth Line, more will always need to be done in a city growing at London’s pace. Extending the Bakerloo Line, Crossrail 2, new river crossings east of Tower Bridge, and better use of existing infrastructure (nudging people onto off-peak services, for example, or even more sophisticated road charging) are all increasingly urgent priorities, says Dickie.
Private and public capital
One of the issues is paying for all this. Historically, London has relied predominantly on central government funding for big schemes. “The last time I checked,” says Hughes, “the government was becoming more indebted, not less, by the tune of £2bn a week.”
So unlocking long-term institutional “slow money” will become increasingly important. Yet to incentivise it, government needs to derisk projects as far as possible. “Partnering with the public sector matters to us a lot,” says Hughes. “Releasing land or a more engaged planning system makes us more certain of a successful outcome.” This isn’t about providing ready-made easy bets, but about creating a predictable environment for investors. Hughes sees a particular opportunity post-Brexit in inventing a new regime for public-private partnerships.
Dickie is sceptical that private investors can fill the gap alone. “There are virtually no examples of projects where transport costs are fully borne by fare-payers. If you try to recover the cost from fare-payers alone, you deter people from using the service. You need public money.” There is also a case for taxpayer investment because of the wider macro benefits of having better transport systems.
That said, he thinks there is a strong argument for devolving both decision-making over what new infrastructure to build and who pays for it to a more local level. “You would align the benefits of growth a bit better with the costs of doing the activity. If you build Crossrail 2, that will increase economic growth, you can build lots of new homes along the route, lots of new wealth will be generated, and tax yields will rise. But you don’t get to keep it – it goes to central government. If we had devolution of tax receipts, you would have much better incentives for growth.” Under greater fiscal devolution, he argues, it is plausible that Londoners will also be more convinced of the need for infrastructure investment and will vote accordingly.
If the Brexit vote revealed anything, it was a gulf in attitudes between London and the rest of the country, particularly on sensitive issues like immigration. While there are occasionally complaints that the capital is prioritised versus other cities when it comes to political attention and government investment, it is also the most productive region of the country, contributing large amounts of tax revenue to fund public spending in other parts of the UK.
Its continuing success is therefore vital for the future prosperity of the whole United Kingdom – but that is far from assured. “London has been by any measure one of the most adaptive cities in history,” says Hughes. “But there is no room for complacency.”