Entrepreneurs Are Being Priced Out Of London

London’s housing crisis has united left and right in solidarity. And as
I explained yesterday, most sensible people agree that it’s principally a problem of restricted supply. But while the housing crisis steals the headlines, an adjacent crisis has so far slipped below the radar: the commercial property crisis.

These crises are two sides of the same coin. As Ben Southwood, Head of Research at the Adam Smith Institute explains: “It’s not just a case of there being less space for actual firm premises; it’s more profoundly pernicious. Think of all the firms that were started in garages, then think how few London properties can afford space for garages. Think also how prices must be higher to sustain the higher rents, and how wages must be higher to attract workers to undergo expensive and unpleasant commutes, or sky-high rents and mortgages.”

Following the election on May 5, the new Mayor of London will need to address both crises to avoid entrepreneurs getting priced out of Britain’s capital. As Sara Turnbull – Co-Chair of the Open Workspace Providers Group and the CEO of Bootstrap Company – points out: “the most recent Royal Institute of Chartered Surveyors UK Commercial Property Market Survey found that 81 per cent of contributors found commercial real estate in London to be overpriced”. Adding: “according to figures produced by Savills, serviced office providers at the top end of the West End market are achieving rental values of around £132.50 ($192.83) per square foot, pushing space out of the reach of new and growing companies in London”.

So why is this happening? The most cited problem is the office to residential permitted development rights, which allows developers to convert office space into residential space. Turnbull thinks “the next Mayor of London can play a role in supporting London Boroughs by securing exemptions from permitted development rights in areas that will help to protect existing office stock,” building on Mayor of London Boris Johnson’s Supplementary Planning Guidance to protect commercial space in London’s Central Activity Zone (CAZ).

And Turnbull thinks the next Mayor should “look to Business Rate Relief as a method of making commercial space more affordable. With the announcement in the Budget of an acceleration in Business Rates devolution to the Greater London Authority (GLA), the next Mayor has a golden opportunity to push for rates relief for open workspace providers, which would allow for the delivery of space at a cheaper rate than is currently possible. And consumers of open workspace are startup businesses as well as businesses operating out of space intensive sectors that have felt the squeeze in London in recent years.” However, although reducing business rates would cuts costs for business in the short term, in the long term this would benefit landlords rather than business owners as rents adjusted accordingly.

Turnbill suggests other levers through the delivery of a new London Plan which will likely come forward in the first year of the next Mayoralty: “Within this, the Mayor has the ability to shape policy that will deliver and intensify commercial space within the capital. For instance, the Mayor may use supplementary planning guidance calling for denser commercial developments in areas that already have clusters of commercial space. That may mean taller office buildings, or the encouragement of more retail space within mixed use developments to radically increase the supply of new space coming into the market place.”

Anita Rivera, Head of Planning at Mishcon de Reya suggests the new Mayor – in conjunction with London Boroughs – could create innovation districts on brownfield sites in London: “By exercising his development order powers he could deregulate planning control in these identified areas, allocate funds to secure free use of broadband and secure preferential tax treatments to help encourage, support and facilitate entrepreneurs.” Rivera suggests these areas could be subject to certain constrictions. Perhaps focusing on small business, start-ups and the provision of affordable commercial space, or themed around specific industries or sectors.

Entrepreneurs are attracted and repelled by London in equal measure. Director at PwC Gareth Lewis explains that “a recent report by the City of London found that small and medium sized enterprises (SMEs) place a high value on being based in the City of London. But the same report found that that the factor most likely to drive SMEs out of the City is increasing cost.”

Lewis also suggests that commercial space increasingly needs to reflect different workplace requirements: “Many private companies are already demanding real estate that meets these changing needs and real estate businesses are responding. For example, some property developers and managers are starting to provide end-of-trip infrastructure facilities (showers, secure bike parking) for the growing hordes of London’s active commuters. AXA’s planned 22 Broadgate development includes 1,500 bike spaces and 100 showers, along with bike hire, repairs, safety training, spinning classes, laundry and drying facilities.”

But Lewis acknowledges not all business, and especially entrepreneurs, can afford to build these types of facilities, or afford to rent the flashy office space that includes them. Lewis thinks “the next Mayor should look for ways to use its property assets to make these types of facilities more broadly accessible to SMEs and entrepreneurs – such as using public land to provide better community facilities – or perhaps incentivizing commercial businesses to do this through contributions of city-owned property.”

As with housing, there is a mammoth-sized elephant in the city. As Southwood explains: “More expensive land, and more expensive property, is often a result of business dynamism and commercial success, but in a city where the price is so overwhelmingly driven by limits on supply, it is depressing enterprise, investment and growth.” In other words, one priority trumps all others: we need to build and we need to do it sharpish.

This article first featured in Forbes.

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