BRITAIN'S PROPERTY CREDENTIALS

TOSCAFUND January 2016

BRITAIN’S PROPERTY CREDENTIALS

A British Property Federation commissioned report prepared by TOSCAFUND

Authors: Dr Savvas Savouri, Toscafund Chief Economist, and Professor Richard Jackman, London School of Economics

Research Assistants: Nas Christodoulopoulos, Boris But, Katie Orlandi and Vikram Lopez Y Royo

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS

The report was commissioned by the British Property Federation (BPF) and prepared by Toscafund Asset Management LLP (Toscafund).

The BPF is the membership organisation for the UK real estate industry. It represents all those involved in real estate ownership and investment. It works with Government and regulatory bodies to help the real estate industry grow and thrive, to the benefit of its members and the economy as a whole.

Toscafund, founded by Martin Hughes in 2000 and based in London, is a multi-asset fund manager. Funds managed for a broad investor base include global equities, hedge funds, commercial and residential property funds, activist funds, debt capital and UCITS funds.

Authors Dr Savvas P. Savouri Chief Economist – Toscafund Asset Management Since 2008 Savvas Savouri has been a partner and chief economist at Toscafund Asset Management, having headed economics and strategy departments at a number of investment banks. Before entering financial services Savvas taught at the LSE, Oxford University and Moscow State University. Savvas was awarded a doctorate in Econometrics and Mathematical Economics from the LSE where he also obtained masters and bachelor degrees in the same discipline.

Professor Emeritus Richard Jackman Professor of Economics – London School of Economics and Political Science Professor Richard Jackman joined the LSE teaching staff in 1968 after his MA in Economics from Cambridge University. Richard has co-authored four books and has over 80 articles in refereed journals. During his time at the LSE, Richard has also been a visitor Professor in Economics at the University of Iowa and worked as a consultant with the World Bank. He has worked with the London Boroughs’ Association (now known as London Councils) and the Department of the Environment in connection with its studies on local government finance.

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Executive Summary

Commercial Real Estate (CRE) is an essential component of the UK’s economy and its prosperity. This report highlights the contribution made by CRE and argues that its full scale and impact are often not fully recognised, partly because of its breadth and complexity. We also argue that CRE’s contribution to Britain’s economy, its environment and to the well-being of its people could, and should be greater. The report identifies some factors hindering CRE from achieving its full potential, in particular fiscal arrangements that can discourage investment and thereby limit its contribution to economic activity and growth.

What is CRE?

In this report, we adopt a broad definition of CRE which we define as any property whose main function is to generate income for its owner. Therefore the Private Rental Sector as well as other buildings such as airports, are seen as an integral part of CRE. Conversely, we argue that without income generation real estate cannot be defined as ‘commercial’.

Part 1 of this research paper includes a series of vignettes relating to CRE, presenting ideas surrounding its often overlooked contribution to our lives and how exactly it impacts us. It also exposes some misunderstandings which often arise concerning the contribution of CRE. Section 1 is intended to be illustrative. We illustrate CRE’s contribution with some striking examples taken from different sectors, some better known, such as the great developments in retail, hotels and leisure, but also many less obvious where CRE has played a crucial role, including transport and infrastructure, professional services and IT, universities and private rented housing. From this wide range of examples we draw out a number of themes, for example flexibility, allowing buildings designed for one purpose to be easily converted into another and areas to be transformed, to take into account changing trends in demographics and lifestyle, technology etc.

Overall, our conclusion is that the current external view of the industry often misses the significance of the CRE sector and responsible property investment, its inextricable link to the physical fabric of our lives, and the contribution that the industry makes to the wider environment and the creation of social capital.

The economic contribution

We estimate the current market value of CRE in 2014 as £1,662bn, which is just over 20% of net wealth. In Part 2, we show how we establish quantitative values for what CRE means to the economy, and the ‘economic value’ of CRE is examined extensively as a provider of balance sheet wealth and income. We provide detailed information and sources for the estimates and claims made for CRE. We set out our definition of CRE and show how it can be measured using Valuation Office Agency data on rateable values and housing data, and indicate why it differs from measures used elsewhere (for example the Office for National Statistics’ Blue Book category of ‘non-residential buildings’). We derive estimates of the asset value of CRE from these rental values. We note that the value of CRE has lagged behind that of other assets such as residential dwellings.

According to conventional national income accounting procedures, the contribution of CRE to GDP is measured by the rent (actually paid or implicit) generated by such properties. This amounts to around £94bn or 5.4% of GDP in 2014, or around one-quarter of the contribution of ‘non-human’ inputs to national output, with the P RS contributing £42bn market rent. Whilst this income trickles down to households, this story is not often told. For example, pension funds are invariably heavily invested in equities, whose value can be traced to deriving to a large extent from the CRE that they finance or with CRE as an essential factor input to creating the value they represent. Often commercial development is financed through debt, equity or other financial instruments that are themselves held by pension funds, banks or other intermediaries, so the claims on the income generated by CRE are much more widely dispersed than might otherwise be expected.

UK CRE had a market value of £1,662bn in 2014 and contributed £94bn to GDP.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS The broader impact

Whilst income generation is hugely important and the most tangible output from CRE, we demonstrate in the report that CRE brings value in many other ways. Our towns and cities have CRE at their heart, it drives their health and vitality and it can deliver a range of benefits for the wider community. These ‘externalities’ and their importance to the UK are explored in detail in this report. We also argue that there are other parallel benefits on the wider economy – for example the conception, construction, maintenance and stewardship of CRE provides a wide range of high quality employment opportunities.

In addition to the contribution of CRE to GDP, it makes a significant its contribution to the built environment, to employment and to development and regeneration.

Challenges for the sector

CRE also contributes a substantial amount of tax revenue. At the end of the report we investigate the burden of taxation on commercial property and argue that, being immobile, CRE is an easy target for taxation and in consequence is overtaxed relative to other factors of production. The tax system is unbalanced and imposes higher rates of taxation on commercial property than other forms of investment, in particular owner-occupied housing (which constitutes the bulk of the nation’s stock of wealth). This leads to a correspondingly enormous misallocation of savings, which is poured into domestic housing rather than productive investment.

The growth of real wages depends on the growth of capital investment (of which CRE forms a large part) at least keeping pace with the growth of population. This requires substantial investment in CRE over the coming years. However this investment can be jeopardised by a restrictive investment climate and in particular through excessive taxation.

January 2016

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Contents Introduction 7 Part 1. Evolution of Britain’s CRE sector 8

1.1 The externalities (social benefits) of Britain’s CRE 8 1.1.1 The ‘direct’ externalities of CRE 8

1.2 Infrastructure and transport 9 1.2.1 Construction and the Growth of GDP 9 1.2.2 Bringing derelict CRE back to economic life 10 1.2.3 Britain’s CRE is better connected 12 1.2.4 King’s Cross Central: A case study in inclusive regeneration 14 1.2.5 CRE: Walking on water 16 1.2.6 CRE flying high 17

1.3 Offices and IT 18 1.3.1 CRE in the clouds 18 1.3.2 CRE and the internet 18 1.3.3 Google: search for a real presence 19 1.3.4 Sometimes developing Britain's CRE does not quite reach The Pinnacle 19 1.3.5 Global purpose and competitiveness 20 1.3.6 A real second home in Britain 21 1.3.7 A Central Point: CRE unchanging on the outside but evolving within 22

1.4 Educating CRE 23 1.4.1 British universities 23 1.4.2 An educated CRE case study: The University of Buckingham 23 1.4.3 Britain's real commercial education industry 24 1.4.4 Education, Education and Education 26 1.4.5 Case Study: Students, UNITE-d 26

1.5 Great retail developments 27 1.5.1 The Amazon story: Reading between the real estate lines 27 1.5.2 C-REacting commercial space in a flash 28 1.5.3 All change: The moving story of Aldwych Station 28 1.5.4 CREating new markets from old 29 1.5.5 Gateshead's MetroCentre: A Real development turning point 29 1.5.6 Ring in positive change: Birmingham's Bull Ring Centre story 30 1.5.7 High street real estate, the butcher, and baker and... 31 1.5.8 Betting on a continued real estate need 32

1.6 Hospitality and leisure 33 1.6.1 Center Parcs building its fifth British resort, creating 2,700 jobs 33 1.6.2 Licensed to change 33 1.6.3 Hotels: A home from home 33 1.6.4 Who could have accurately pictured that? 34 1.6.5 Britain's built reCREational space 35 1.6.6 A real Olympian effort 35

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1.6.7 Giving CRE a sporting chance 37 1.6.8 Britain’s winning CREw 38

1.7 Private rental sector 40 1.7.1 Britain's modern work houses 40 1.7.2 The welcome growth of commercial residential (née private rental) 41

1.8 Manufacturing CREativity 42 1.8.1 Real estate’s food for thought 42

1.9 Flexibility 43 1.9.1 Property arriving from above 43 1.9.2 Protean property 44 1.9.3 Our future is in the clouds but still very real 44 1.9.4 The regeneration of Nine Elms and Battersea: a case study in regeneration and relocation 45 1.9.5 Time to open up Britain's CRE 46 1.9.6 Mixed and change of use property: all for the better 46 1.9.7 Productive property 47 1.9.8 Self-contained property 47 1.9.9 Moving buildings: It's elementary 48 1.9.10 Britain's sustainably eco-friendly built-scape 49

Part 2. Analytics of Britain’s CRE sector: concepts and numbers 50 2.1 Definition and value 50

2.1.1 Definition 50 2.1.2 Some taxing concerns over CRE taxonomy 51 2.1.3 Valuation 53

2.2 Rental value (contribution to GDP) 55 2.2.1 The value of ‘non-domestic’ CRE 55 2.2.2 The Value of private rental housing 57 2.2.3 CRE and the generation of household income 58

2.3 The asset value of CRE (CRE as an investment class) 60 2.3.1 The value of Britain's CRE: AcCREdited and AcCREtive 60 2.3.2 The asset value of CRE 61 2.3.3 CRE as a proportion of national wealth 63 2.3.4 Who owns Britain’s CRE? 65 2.3.5 Ownership – the significance of foreign capital 66 2.3.6 Understanding the reason for foreign capital 67

2.4 Employment 69 2.4.1 A CREator of jobs 69 2.4.2 ‘Multiplier’ externalities 70 2.4.3 The employment value Britain's CRE construction 72

2.5 CRE and taxation 73 2.5.1 The burden of taxation on CRE relative to other factors of production 73

Appendix 1 – England and Wales rating list, VOA, as of Sept 2014 75 Appendix 2 – England and Wales top 5 sectors by category, VOA 86

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Introduction In this report, we argue that commercial real estate (CRE) makes a great, if not always fully recognised, contribution to Britain’s economy, its environment and to the well-being of its people. But that contribution could, and should be greater. The report identifies some factors hindering CRE from achieving its full potential, in particular fiscal arrangements that discourage investment and thereby reduce its contribution to economic activity and growth.

Part 1 of this research paper covers an assortment of topics, issues and themes relating to Britain’s Commercial Real Estate. This first section is made up of vignettes relating to CRE, presenting ideas surrounding its often overlooked contribution to our lives and how exactly it impacts us. It also tries to expose misunderstandings which often arise concerning the contribution of CRE. Section 1 is in no way exhaustive of these, simply illustrative. We illustrate CRE’s contribution with some striking examples taken from different sectors, some better known, such as the great developments in retail, hotels and leisure, but also many less obvious where CRE has played a crucial role, including transport and infrastructure, professional services and IT, universities and private rented housing. From this wide range of examples we draw out a number of themes, for example flexibility, allowing buildings designed for one purpose to be easily converted into another.

In Part 2, an orderly sequence is followed as we establish quantitative values for what CRE means to the economy, and the ‘economic value’ of CRE is examined as a provider of balance sheet wealth and income extensively. We provide detailed information and sources for the estimates and claims made in this introduction. We set out our definition of CRE and show how it can be measured using Valuation Office Agency data on rateable values and housing data, and indicate why it differs from measures used elsewhere (for example the Office for National Statistics’ Blue Book category of ‘non-residential buildings’). We derive estimates of the asset value of CRE from these rental values. We note that despite all this, remarkably, the value of CRE has lagged behind that of other assets such as dwellings. So lastly in this section we investigate the burden of taxation on commercial property. In Britain, the tax system is somewhat unbalanced and imposes higher rates of taxation on commercial property than on other forms of investment, in particular owner-occupied housing (which now constitutes the bulk of the nation’s stock of wealth).

We define CRE as property that generates income for its owner. This is not, however, the only function – on the contrary, CRE makes an important contribution to the environment, to employment and to economic development – but we suggest that without income generation, real estate cannot be defined as ‘commercial’. This definition, based on function, is wider than those sometimes used and includes, for example, property such as airports and buy-to-let housing. We argue that the best measure of the contribution of CRE to GDP is the market rent generated by commercial property. In 2014, this amounted to just over £94bn in the UK – about 5.4% of GDP, or around one-quarter of the contribution of ‘non-human’ inputs to national output.

But the economic value of CRE is not just an input to current production; it also constitutes a significant component of marketable wealth. We estimate the current market value of CRE at around £1,662bn, which represents 20.6% of total net wealth. Often, commercial development is financed through debt, equity or other financial instruments that are themselves held by pension funds, banks or other intermediaries, so the claims on the income generated by CRE are much more widely dispersed than might otherwise be expected.

Whilst income generation is a crucial part of the puzzle, CRE brings value in other ways too. Our towns and cities are largely made of CRE, and confer wider benefits on the community. These wider benefits are, known as ‘externalities’. There are other effects on the wider economy too. The construction and maintenance of CRE is a significant sector of economic activity that contributes to the range of employment opportunities. CRE also contributes a substantial amount of tax revenue. Indeed this report argues that, being immobile, CRE is an easy target for taxation and in consequence is overtaxed relative to other factors of production.

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Part 1. Evolution of Britain’s CRE sector 1.1 The externalities (social benefits) of Britain’s CRE Let us begin by considering forms of property that, whilst only existing to facilitate the flow of people and materials – bridges and tunnels – are a crucial built part of Britain’s commercial economy. After all, there can be no denying these built features contribute towards GDP and that without them GDP would be materially lower, but by how much? The answer lies in the realm of measurement of which good Jeremy Bentham termed felitous calculus. Before we begin our attempt to quantify the value of property, we must illustrate its essential worth.

1.1.1 The ‘direct’ externalities of CRE Whilst the concept of externality is widely recognised, there are disputes as to what should be included, and how such elements should be measured. Our focus in this section is on the latent economic value of built infrastructure, and in particular, the role of CRE. There is considerable debate surrounding the cost-benefits of HS2. Whilst its critics argue that HS2 cannot possibly justify the economic and environmental costs, its supporters present an argument based on the benefits of improved connectivity and capacity, externalities which, whilst impossible to precisely measure, will prove considerable all the same. The argument behind HS2 is that the whole rail link, including new stations, will produce both a direct commercial return along with much more important externality benefits. We will look at the HS2 project later in Part 1.2.3. Externalities exist where some activity leads to direct benefits to some third party from which the person providing the activity cannot or does not receive any payment, such as a silencer fitted to a car exhaust where the manufacturer cannot recoup the cost from all the people who experience the less noisy environment. When considering CRE, there are two major types of externality, which might be termed ‘amenity’ externalities and agglomeration externalities. Amenity externalities exist when CRE creates a more pleasant built environment and thus enhances the quality of life for people living and working in that area. These externalities are difficult to measure but clearly important: every developer knows that local planning committees require a high quality of design in any new development and indeed the visual impact of new buildings can play an important role in the regeneration of an area. Of course, the developer can hope for a higher price for a more attractive building, but much of the benefit accrues to local residents and those working in the area, who cannot be made to pay for it. In Part 1 of this report we describe many examples of commercial development leading to the regeneration of an area, from the refurbishment of the Victorian station hotels at King’s Cross and St Pancras to Birmingham’s Bullring. Externalities can also be created through relationships between firms rather than from firms to consumers. These are known as ‘agglomeration economies’, they exist when the productivity of one enterprise is increased by the proximity of others. An example near to hand is London’s ‘silicon roundabout’, at the junction of Old Street and City Road. As with California’s ‘silicon valley’, having a large number of small firms enables each to benefit from the ideas and developments of others, so that all are more productive but none is able to charge for the benefits it provides for the others. London contains many examples of agglomeration of more traditional professional services, such as the lawyers in the Inns of Court. We can also identify ‘co-ordination externalities’, which arise when businesses provide complementary services near to each other, for example coffee shops and cafes located in shopping streets or in retail parks. Each contributes to the overall experience; the cafes benefit from the trade brought in by shoppers, while at the same time providing rest and refreshment to enable the shoppers to keep going for longer. In all these cases, the economic contribution of the particular property may exceed the rent the landlord can charge. Large-scale developments can sometimes ‘internalise’ a part of these externalities; most often however, it is not feasible. In some cases, there will be insufficient investment by the developer in activities generating positive externalities because much of the benefit goes to third parties. With commercial developments, much of the potential development gain in land values can be effectively taxed away by planning authorities wanting to ensure as large as possible benefit to the community as a whole from the commercial investment. While specific examples can convey the importance of these effects, actual measures are more difficult to obtain. One approach is to measure the appreciation of local property prices, in particular of housing, on the basis that if a development improves an area, people are willing to pay more to live there. Again this has to be done on a case study basis.

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1.2 Infrastructure and transport Before looking at examples of CRE, we must look at the physical and organisational structure of the UK. Without investment in this key area, there will be bottlenecks, as the growth of UK’s production and distribution of goods and services increases. In this section, we consider transport hubs and their networks.

1.2.1 Construction and the Growth of GDP Economic growth depends on investment but investment takes many forms, not only physical capital but also research and development and the education and training of the workforce. Within tangible physical capital we see investment in plant and machinery, vehicles and infrastructure, as well as into commercial and residential property. After years of stagnation following the financial crash of 2008, growth has returned to the UK economy and with it, we will argue, the need for greatly increased investment in CRE. Consider just one example: airports. Most major airports in the UK are now privately owned (albeit heavily regulated) and generate profits for their owners. The VOA rateable values for England and Wales for airports come to £0.5bn (0.8% of the total, current prices, as of September 2014). According to our definitions we have characterised Britain’s airports as elements of its CRE asset base. The gross income they generate derives from charging airlines for landing slots (and in charging retailers for retail sites in the terminals) and their contribution to GDP consists of these rents or charges less any material input costs (such as heating and lighting). In all these respects they are equivalent to other commercial companies and thus properly part of CRE.

And clearly airports play a crucial role in economic growth. Every day we hear from business leaders how economic growth is being held back by lack of airport capacity and this is even though passenger figures for Heathrow and Gatwick, for instance, are regularly breaking new highs. In fact, between them these airports catered for well over 110m passengers in 2014. Whilst terminals have enjoyed considerable investment, runway capacity has been slow to increase. Rising passenger numbers are edging Britain’s main airports towards their capacity, with the Department for Transport forecasting that London’s main airports could be “full” by 2025.

Keenly-interested observers such as the CBI suggest that lack of investment in runway capacity has restricted growth in, for instance, Heathrow (53%) to one-third the rate enjoyed by Paris Charles de Gaulle (142%) over the past 20 years, and slower also that the 84% recorded by Frankfurt. The inference is that failure to increase airport capacity damages Britain’s competitiveness. The CBI cited a survey of large multinationals in which 85% considered air connections to both established and emerging markets a significant factor in their decision over where to invest.

The 2014 CBI report which examined airport activity warned “Our network offers spare capacity where there is little demand [for flights to emergent nations] and no capacity where demand is greatest”. It concluded that “a hub airport with spare capacity offers the greatest chance of new routes to emerging markets. UK businesses want to see additional hub capacity prioritised as the best prospect for supporting new trade”. The CBI was categorical in its statement that once the Davies Commission had published its report, “it is imperative that the government of the day acts immediately to create the necessary planning policy statement and statutory instruments to get building by the end of the parliament”. Addressing the Commission directly, the CBI report pleaded “it must balance the economic imperative with environmental considerations and logistical realities to serve the government with a politically deliverable solution”.

For an open-economy capitalising on mobility into and out of it by people and goods, airports have, in our view, to be considered crucial factor in economic growth. In the UK, investment in terminals must now make way for investment in infrastructure, i.e. runways, to raise capacity for international travel.

While airports are a clear example of the importance of one type of CRE to economic growth, the commercial sector as a whole is sometimes characterised as being rather less exciting. Of course people need buildings to work in, but some say new technologies can manage without it, or at least diminish its importance. In our view this conclusion is misleading. This report includes examples, from cloud technology to the Post Office, where technological change has led not to a reduced demand for CRE, but to a change in the way we use it, the technology leading to new services and different types of use and with them a demand for different types of CRE.

But nor should one ignore the continuing demand for traditional types of CRE such as offices, shops and hotels. We have already seen that CRE accounts for a large proportion (more than a quarter) of the capital stock, and leaving aside dwellings, non-residential CRE accounts for an even larger proportion (close on 30%) of

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS ‘commercial capital’. As the quantity and quality of CRE improves, work will become more productive and job opportunities, and wages, will increase. The UK economy is expected to experience growth in the labour force over the medium term; only if this is matched by a more rapid growth in other inputs, including CRE, can wages grow and employment opportunities improve.

Our leading example though carries a warning sign. The growth of airports has been restricted largely by planning controls, which are of course understandable in the case of airports because of their adverse environmental effects (noise and air pollution). Equally for many other types of CRE, the environmental effects are positive and indeed a major part of the contribution a new development makes to economic welfare.

1.2.2 Bringing derelict CRE back to economic life Its new name is no accident, for the St Pancras Renaissance Hotel (which opened its doors in 2011) has delivered an economic boost to an area blighted for decades because large parts of its real estate remained derelict. Whilst this particular Renaissance is one of many which have been seen over time, Britain is still home to a great deal of once economically active real estate that is now moribund. There is great potential for such assets to be brought back to commercial life and to deliver economic benefits through restoration and then subsequent operation.

The Renaissance has been an impressive restoration of The Midland Grand Hotel designed by George Gilbert Scott and which fully opened in 1873, only to close in 1935. From 1935 until work began on its revival, the building was largely derelict and if anything an economic liability. Now with its 211 rooms, 34 suites, numerous restaurants and bars, it is an impressive and economically-enhancing asset.

In close proximity, at neighbouring King’s Cross station, stands The Great Northern Hotel, designed by Lewis Cubitt, a building which pre-dates The Midland Grand Hotel, opening for business in 1854. Like its neighbour and indeed other grand and more modest station hotels across Britain, the fortunes of the Midland Grand suffered during the period in which rail passenger numbers fell. The consequences of this decline would ripple out to all those businesses which had come to rely in some way on its guests.

Having been closed for 12 years – but fallen into a state of near dereliction for a period before – The Midland Grand has recently re-opened its doors and come back to commercial life and generating considerable economic multipliers. Just as its fortunes had previously moved in tandem with rail travel, so it is again, now benefiting moreover from its proximity to the Eurostar.

Chart 1: Rail passenger miles on franchised operators’ services, quarterly

Source: ONS (Office of Rail Regulation), Toscafund

Over in Holborn is the Rosewood London Hotel, boasting 262 rooms, 44 suites, three restaurants and a handful of bars. Originally completed in 1914 to a design by Percy Monckton, the building was not intended to be a

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hotel, but rather as the headquarters of Pearl Assurance Company. In 1989, Pearl relocated their HQ from Chancery Court to Peterborough, leaving the building unoccupied and economically idle. This idleness would end as redevelopment began in earnest in the late 1990s and the building’s opening as a hotel in 2000. Then in 2013, after £85mn of investment, the Grade II listed building re-opened as a luxury five star hotel.

Not far away from the Rosewood Hotel is the now idle Bow Street Magistrates Court, a building finished in 1881. Over time, high profile defendants have passed through the doors, including the Pankhurst sisters, Oscar Wilde and Dr Crippen. The building was finally vacated in 2006, having been sold to Irish developers hoping to convert it into a boutique hotel, the plan derailed by events of 2008. As long as it remains economically inactive, the opportunity costs of its idleness increase. Those unsure of the practicalities in converting a court house to a hotel need only look across from Covent Garden to Soho, where the Grade II listed building which was once Great Marlborough Street Magistrates Court – where Oscar Wilde was also a defendant, as were John Lennon and Mick Jagger – is now a 112-room hotel.

We could go on and map the locations across the length and breadth of Britain of imposing buildings that once provided employment and economic multipliers but which now lie inactive. One wonders whether the economic benefits of a commercial revival of dormant or idle real estate are appreciated, or whether the mounting opportunity cost of real estate inactivity is fully understood.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.2.3 Britain’s CRE is better connected In an age of rapidly-advancing technology, it might seem that the commercial benefits of businesses locating in proximity to one another are lessening. After all, where once front, mid- and back-office functions demanded closeness, now the ability to communicate and transmit information instantaneously over large distances has allowed these roles to be unshackled. Indeed, even in areas of modern engineering, the importance of research and development has lessened the need to actually move goods physically along supply chains. For Britain’s CRE, this unshackling does not make an easy tale.

For a period, off-shoring was as familiar a sign of the country’s loss of purpose as it was contentious; from call centres to manufacturing, it seemed as though Britain was it being evacuated (spurred on by differentials in cost). However, whilst instances still exist of service providers and manufacturers opting to shift operations from Britain, these are now being overshadowed by a combination of growing capacity elsewhere as a form of expansion, not substitution. Interestingly, we are witnessing the return of off-shore capacity, and looking ahead, we can anticipate continued ‘near-shoring’ with firms locating in Britain’s regions, rather than the capital, as cost differentials that are actually favourable to Britain are exploited. There is also the added benefit of familiar legal and regulatory environments and general infrastructure, very often absent with once popular off-shore locations. This process is already occurring – for example, Deutsche Bank’s offices in Birmingham (April 2014), whilst Santander has relocated its call centres to Leeds from India. All this accepted, one can still argue a pressing need to improve how Britain’s real estate connects across a raft of geographic dimensions; connecting people with work and businesses with one another.

There are economic benefits of improving links across the Pennines, bringing Leeds ‘closer’ to Liverpool and opening up mid and north Wales. Trains between Liverpool and Leeds travel at an average speed half that of the existing service between London and Leeds, suggesting to us that the former needs attention not the latter. Those travelling between Wrexham and Manchester do so at an average speed almost one-fifth of travellers between London and Manchester.

Figure 1: ‘Tube map’ of commuter zones, 1hr each way Figure 2: Commuter zones 2013 (1hr travel – direct train)

Source: Office of Rail Regulation, Highways Agency, Toscafund

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Figure 3: HS2 and HS3 plans Table 1: Statistics for selective rail journey across Britain

Time (hr:min)

Average Speed (mph)

HS2 Av Speed

London Manchester 02:07 90.3 169 London Leeds 02:12 84.4 134 London Sheffield 02:05 77.7 123 London Birmingham 01:22 76.3 128 London Nottingham 01:44 72.9 111

Birmingham Bristol 01:21 69.3 Newcastle Manchester 02:23 65.1 London Southampton 01:14 63.2 Middlesbrough Sheffield* 01:56 52.8 Manchester Sheffield 00:48 52.4 Manchester Leeds 00:49 51.9 Birmingham Swansea* 03:01 51.8 Cardiff Liverpool* 03:16 50.6 Glasgow Inverness 03:50 48.4 Manchester Nottingham 01:49 46.7 Edinburgh Aberdeen 02:50 46.0 Middlesbrough Liverpool* 03:36 43.7 Leeds Liverpool 01:50 41.0 Lincoln Manchester* 02:20 39.8 Birmingham Wrexham* 02:09 34.0 Manchester Wrexham* 02:37 21.9

Source: HS2 website, Toscafund. Note: Black line signifies 70mph – National Speed Limit applies - *No direct trains, 1 or 2 stops required.

The table above highlights marked differences in average train travel speeds between regional hubs, some journeys all the slower because they require passengers to change train. Of course, plans exist to improve the rail network independently from HS2. The Chancellor, as recently as March 2015, has championed a HS3 high-speed rail link between Manchester and Leeds, which he argued would reduce the travel time between these cities from 50 to 30 minutes and help create a “northern global powerhouse”. Following on from George Osborne’s encouragement for improved links across the Pennines, five cities across the North of England – Leeds, Liverpool, Manchester, Newcastle and Sheffield – issued a joint report entitled ‘One North’ making the case for major investment in both rail and road links east to west to improve the economic fortunes of the north by better connecting them. The reality is that the better connection being encouraged is between commercial centres, and therefore CRE.

Some will throw back at us the argument made earlier that with mobile technology there should be no such thing as ‘idle’ travelling time. Others will point to ‘speedy’ road links between locations otherwise poorly served by rail. Some will claim there is no ‘commercial’ need for rail upgrades to the routes, for example between Wrexham and Manchester. The argument is that these centres do not have much in the way of a ‘commercial connection’. Our response is: “forge a reliable and speedy rail link between these, and their commercial connection will become real enough, by far better commercially connecting their CRE”.

If Britain is to become a truly connected national economy, then it demands 21st century links across its length and breadth, boasting average travel speeds broadly in line across all its regional dimensions. This achievable ambition should be the foremost aim of spending on transport infrastructure.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.2.4 King’s Cross Central: A case study in inclusive regeneration From the middle of the 19th century, the Great Northern Railway (GNR) began to develop an east coast mainline service, with the King’s Cross area of Camden the embarkation point from London. In 1852, the Lewis Cubitt designed King’s Cross station began operating and two years later the Great Northern Hotel opened its doors. In 1873, the George Gilbert Scott designed Midland Grand Hotel opened a mile or so from the Great Northern Hotel. The Midland Grand complemented the newly built St Pancras Station which was the London terminus for the Midland Railway (MR) which had opened in 1868, boasting the largest single-span roof in the world at the time.

As it was for all their rivals developing railway lines fanning out of London, GNR and MR became voracious buyers of land to develop real estate assets close to their termini. Both, after all, required goods yards and engine depots and the other assorted buildings essential for carrying passenger and freight in volumes that seemed destined to only increase with time. Coal was key to the freight business, arriving into London by rail and then being distributed around London using the canal network which ran past King’s Cross and not far from St Pancras stations. A gas works was added to the area’s real estate. At their height the stations, hotels and related CRE provided the working class neighbourhoods around them with employment and the ability to earn from the freight and people coming into them. What had seemed to some as an unrelenting increase in rail traffic was, however, not to be the case.

From its halcyon days in the early part of the 20th century, the neighbouring stations fell into decline, as passengers and freight were increasingly drawn to roads and as Britain’s industrial activity waned. By the 1980s, the areas around King’s Cross and St Pancras had become notorious crime spots with stubbornly high rates of unemployment and social dysfunction, blighting not only the area itself but neighbouring areas.

Figure 4: King’s Cross redevelopment

Source: Wiki Commons license

Into the 1990s, momentum began to build (sic) towards regenerating the King’s Cross and St Pancras areas. In 1997, after years of delay, the British Library opened, the largest public building to be constructed in Britain in the 20th century. Soon after the opening of the British Library on one side of St Pancras Station, efforts began at the other to create the new London terminus for Eurostar. Work on HS1 began in 2000 and the London terminus of Eurostar moved to St Pancras from Waterloo in November 2007, ushering in the revival of the whole of the station and triggering efforts to redevelop more widely, not least spurring on efforts to regenerate the neighbouring King’s Cross station and its environs.

The University of the Arts has become notable as the first occupier of King’s Cross Central where its Central Saint Martins campus is located (unifying a number of formerly disparate buildings into a single, purpose-built and state-of-the-art college site). The ongoing redevelopment is proving one of the largest construction

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projects in an already frenetically building London. A landmark announcement for King’s Cross Central was a 1m square foot pre-let by Google.

More widely across the 65 acres of brownfield regeneration, office, residential, retail and recreational real estate will be delivered. On completion, King’s Cross Central will boast five new squares and connect via the canal to such areas as Camden Market, Upper Street in Islington, Regent’s Park and London Zoo. As discussed earlier, the grandeur of the Great Northern and of the Midland Hotel have already been restored, and an area long blighted by its inactive real estate has come alive again with its redevelopment.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.2.5 CRE: Walking on water It is unlikely that many of those walking along the Thames Embankment will be aware it was once marsh land. For it was only in 1862, after a great many previous attempts had been thwarted, that the Sir Joseph Bazalgette project began.

On the completion of the Embankment, it had reclaimed a total of 22 acres of land from the Thames. Reclaimed too were the Victoria – again along the north bank of the Thames – and Albert – along its south – Embankments. The embanking of the Thames was, of course, far from the only way its natural landscape has been complemented over time by man-built landscape.

We argue that a bridge or a tunnel should be considered Commercial Real Estate. Let us consider this with some actual instances.

Over the years, bridges and tunnels have been added to connect the north and south sides of a rapidly expanding London. Along the stretch where the Thames passes through the capital, the first fixed crossing was built by the Romans, where London Bridge now straddles the river.

More bridges have been added to the London stretch of the Thames quite recently, the Millennium and Jubilee pedestrian bridges in 2002. There is even talk of a Garden Bridge beginning near Temple Station linked to the Southbank Centre. In a moment, we will consider another scheme being hotly debated, but before we do, let us return to those bridges added in the 19th century.

A railway bridge across the Thames was opened in 1864 by St Paul’s (later renamed Blackfriars). This carried trains of the London, Chatham and Dover Railway line. Alongside this bridge, a second St Paul’s bridge would open in 1886, becoming Blackfriars Bridge in 1937. The original St Paul’s bridge would however be removed in 1985 with its rail traffic taken instead by Waterloo Station. Its southern abutment and a series of imposing piers would remain testament to its existence, and from 1985 until 2009 the piers would remain curiosities to those walking across – the second – Blackfriars Bridge. They were reclaimed by the railway when a state of the art station was opened in 2012.

The piers of the original Blackfriars (née St Paul’s) Bridge now support the world’s first station with platforms that span a river. It is also the world’s largest solar bridge, providing 50% of the station’s energy needs. Whilst we can debate whether railways stations and tracks constitute CRE, many of those travelling to, through or from Blackfriars Station will be doing so for commercial good. It is also instructive to reflect on how bridges across the Thames were once lined by shops and homes with tolls commonly levied on those crossing them.

This section began by reflecting on a particular instance where marsh land has been reclaimed to create London’s impressive Embankment. We suggested that few of those walking or driving along it would know it was not ‘natural’, just as many today may be unaware of other instances of land reclamation around us; for instance the Fenns. With this in mind, and in wondering where else land will be reclaimed, it is impossible not to think of the Thames Estuary Airport, which is part of a far larger reclamation plan for the Thames Gateway.

Much like the Embankment before it, the Estuary Airport idea has been talked about for some time, the first proposals dating to the 1970s. Most recently those supporting the idea of an island airport point to successful precedents: the airports in Osaka, Japan and Hong Kong. Proponents also present figures suggesting the value of the economic and commercial benefits to areas in and around the new airport, bringing windfalls first in its construction and then operation.

What cannot be in any doubt is the very real London Gateway development at Thurrock in Essex. This ambitious project is forecast to last another 10 years and generate tens of thousands of jobs as DP World invests upwards of £1.5bn in the scheme to create 2,700 metres of quay. Alongside the port infrastructure will sit considerable commercial real estate, the distribution part alone occupying a 300 hectare site with planning permission for 10m square feet of developed space across its logistics park. The project comprises, amongst other elements, one of the world’s largest deep-water ports to handle the biggest container ships, a port complemented by one of Europe’s largest logistics parks and another instance of overseas capital (in this instance from the UAE) entering the UK and targeting commercial infrastructure projects.

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1.2.6 CRE flying high As affordable air travel took off, so too did an increasing number of holidaying Britons, and as the airports swelled with those opting to travel abroad, the effects were felt at home. From coastal guest houses and holiday camps, to the restaurants, bars and entertainment venues which relied heavily on seasonable tourism, a section of British commercial real estate fell into decline, property which by its nature was regionally concentrated, blighting entire towns.

Although Britons continue to travel abroad with growing frequency and rising numbers, Britain’s tourist industry has more recently enjoyed a renaissance, doing so as both Britons themselves opt to spend part of their leisure time on their own shores and as a rising number of international tourists enter the country. Indeed, Britain is now the world’s eighth most popular destination, with a historic high of 33 million visits1 in 2013, this growth being spurred on by arrivals from emerging markets.

Tourists coming to Britain bring with them considerable windfalls to the economy, not least to our external account in delivering valuable foreign income. Improved CRE has been a major contributor to this revival, bringing improvements to hotel and recreational real estate but also to the transport network, including the development of regional airports.

Indeed the budget airline model, which at first proved so damaging to the fortunes of Britain’s domestic holiday sector, is now contributing strongly to its revival. For along with road and rail travel, affordable internal air travel is allowing visitors to spend their time in Britain in a variety of different locations.

Budget airlines are also allowing Britons to travel around their country more affordably for both leisure and work. Indeed, entirely new commuter classes have been created and so too inventive new acronyms; notably WILLIE – Work In London, Live In Edinburgh. As we have already emphasised, such mobility can only help improve the growth mix across Britain, and improvements to CRE is the structural element that makes this possible.

1 The figures relate to the number of completed visits, not the number of visitors. Anyone entering or leaving more than once in the same period is counted on each visit. The count of visits relates to UK residents returning to this country and to overseas residents leaving it.

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1.3 Offices and IT Despite the impact of technology in creating a virtual economic dimension, built space remains essential not only for ‘traditional’ activity but for the virtual world to function effectively. Offices currently account for a quarter of all commercial real estate.

1.3.1 CRE in the clouds As its traditional manufacturing has made way for a wide range of services, Britain’s CRE has been filled less and less by plant and machinery and more and more by telephonic equipment, computers and all the servers and IT backups essential to their operations. At first, the spatial demands of this kit was considerable; noisy ‘comms’ rooms, which whilst sometimes relatively small, often take up a not insignificant share of scarce and costly office space. However, as equipment became more powerful, it began to shrink, and improved software required smaller hardware. More recently, cloud computing has proven transformational, growing at 50% annually. By utilising ‘The Cloud’, an ever growing number of businesses across Britain are able to do away with a large amount of their individual computing infrastructure, thus releasing them from hardware that is expensive in both monetary and floor-space terms. Whilst these changes within offices are relatively small, they are just one of a great many changes seen across Britain’s CRE, and consequently lead us to another, the growth of data centres. Across Britain, there are now 210 data centres. These provide their clients with a range of services including data storage, security and business continuity. The choice of location for these relies on a range of requirements, including proximity to power grids and telecommunication infrastructure. Furthermore, there has to be consideration of transport links and closeness of emergency services, since these will affect risk and security. In terms of their management, whilst data centres are labour un-intensive, what staffing is demanded is highly specialist and carefully selected. Just as the internet is altering how we shop, so too does virtual data storage and management. Just as the internet is far from eliminating the need for retail CRE across Britain but instead changing the precise configuration of property required to deal with ‘click and collect’ spending, so too with virtual data storage. In place of its proliferated ‘comms rooms’, Britain, faster than almost any other economy, is seeing the development of a relatively new type of CRE, data centres. Whilst some may carry the title ‘Cloud Centres’, these are all very much real estate that the modern British economy could not possibly function without.

1.3.2 CRE and the internet To satisfy their durable, consumable and particularly food needs, Britons once almost exclusively visited stores to scan shelves from which they would pick the goods that they would then transport home. Now we are increasingly scanning websites to simply click for delivery. The implications of this behavioural change are proving as profound on the CRE market as they are being misinterpreted. Whilst the nature of the ongoing shift is unprecedented, it is wrong to imagine that the built landscape for retail is being altered for the first time, or necessarily for ‘the worse’. The ongoing migration of footfall retail custom to the internet is having a profound influence on Britain’s CRE. However, far from reducing the precise floor space required by the grocery and non-food sectors, it is altering the nature of the property needed, where it is needed to be and what form it needs to be in. In place of CRE to display wares for shoppers to consider, Britain has a growing need for large central sheds from which to distribute goods clicked from websites. In some cases these act as large hubs for more local distribution centres. Behavioural shifts in retail are far from unknown, the superstores and retail parks that we are now so familiar with date (for the most part) from the 1990s, and just as the development of these formats required an entirely new property profile, so too do the new generation with the rise of internet-based sales and home delivery. British households are changing their patterns of consumption and the impact on its CRE has not been confined to goods but services. Consider the travel agents that were once ubiquitous on high streets. Whilst still present, their numbers have fallen markedly. There has been a migration of the sector’s property requirement, rather than its total elimination. Where staff occupied relatively small high street travel agencies, they now sit in large call centres, and where once bookings were almost entirely for travel abroad, Britain is seeing a growth in vacationing on its own shores, ushering yet more change to its CRE landscape as holiday parks expand to meet this need.

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1.3.3 Google: search for a real presence Google has dramatically altered how we behave and is a service that we can connect to practically everywhere; two million searches are made in Britain. With £3.4bn and £70.8m in UK revenue and profit respectively, Google directly employs 52,069 workers around the world and only 1,835 in Britain.

For a time, Google became the symbol of all the threats to Britain’s CRE. Many saw a business so dominant across virtual space that it would confine itself to only a modest physical presence, and concerns over the real estate take-up of Google and the growing numbers of other web-accessed businesses led to talk of a paradigm shift in the need for CRE across Britain. This idea was summarily quashed when, on 17 January 2013, it was revealed that Google had pre-let a staggering one million square feet of space at London’s King’s Cross.

The Google/King’s Cross letting announcement was made all the more remarkable by the fact that Argent, the developer behind the area’s 2.4-acre regeneration, planned on restricting any single occupier to one tenth of what will be delivered to Google. From being the epitome all the challenges to Britain’s CRE, Google was recast as a role model for all the benefits that the virtual world can offer the real estate world.

1.3.4 Sometimes developing Britain’s CRE does not quite reach The Pinnacle The development of The Shard and redevelopment of King’s Cross Central in London and Birmingham’s Bullring Centre stand up as examples of Britain’s modern CRE being enhanced by perseverance and innovative design, combined with capital and even occupiers from overseas. However, not all planned developments have progressed as relatively smoothly as these.

Plans for The Bishopsgate Tower were submitted in June 2005 and approved within a year, with demolition of existing property beginning 12 months later. Preparation for construction started in May 2008, and within six months it was announced that the originally speculative building had won two pre-lets, one for 80,000 square feet of office space and the other for the restaurant intended to top the 945 foot, 63-floor tower (scaled down from 1,007 feet because of Civil Aviation Authority concerns). Even at its reduced height the building, on being topped out, would be the highest in the City of London and second tallest across the EU. Funding for the project was sourced from Saudi Arabia’s Economic Development Corporation and Arab Investments.

Even after the financial crisis struck, work continued on what had by this time been renamed The Pinnacle, but whose curling design led to it more fondly becoming known as The Helter Skelter. By the beginning of 2012, The Pinnacle’s core had reached the sixth floor and even uncertainty over continued funding seemed to have ended. Then work stopped, for reasons, so it was suggested, ranging from a funding shortfall to problems with pre-lets because of the building’s unconventional and impractical interior specifications. Construction has been suspended since, with speculation at one point that the part-built structure would be levelled and a less ambitious scheme undertaken. More recent talk has suggested that when the project does resume, following approval of its re-design, it will be with the same eye-catching exterior but much altered interior floor plans.

The experience of The Bishopgate Tower/The Pinnacle/Helter Skelter, blends a great many themes covered in this report. The ambition was to upgrade ‘underbuilt’ office CRE with a mixed-use skyscraper funded from overseas, built speculatively and with a wholly unusual and controversial design. It also perfectly illustrates how ‘events’ over the inevitable drawn-out development time line which large projects demand, can derail and delay. The reality all the same is that this unfinished building happens to be located at the heart of the City of London’s thriving commercial underwriting and insurance district, where other proximate schemes, 20 Fenchurch Street (the ‘Walkie-Talkie’) and 122 Leadenhall Street (The ‘Cheesegrater’) having both proven that it is always possible to deal successfully with ‘events’.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.3.5 Global purpose and competitiveness To ensure its success, a large part of Britain’s commercial real estate has to compete with international rivals. In this brief section, we explain why Britain’s commercial real estate holds a privileged position explained by a range of factors. Some are exogenous to the real estate per se, such as Britain occupying a time zone positioned favourably for round the clock activity for those in the Americas as much as those across Asia. In addition, Britain’s real estate is located in an English-speaking economy with a long tradition of being home, for some an adopted home, to a highly educated and skilled work force. Other factors are, however, very much endogenous, such as quality of build and provenance of ownership. Most important of all, has been the pragmatism needed to deliver the type of property essential for success, even if this has meant a degree of development upheaval, and nowhere has this been more in evidence than in London and in particular the ‘Square Mile’.

Around the City, one can identify place names that trace the gates that once allowed access through the defensive ‘London Wall’, and within the historic City of London, there are institutions that have occupied the same ‘premises’ for centuries. From the imposing Bank of England on Threadneedle Street, to the seemingly timeless George and Vulture chop house in Castle Court, many date from the 18th century and some from long before. The idea, however, that the City of London is unchanging is not something one familiar at close quarters with it would accept. For all its apparent timelessness, the City of London has in fact been in constant evolution, with its buildings replaced with almost indecent haste according to some.

Few aspects of the City’s architecture have seemed beyond limits: a large part of the original Bank of England styled by Sir John Soane was demolished to make way for the Sir Herbert Baker creation present today. Even the ‘City institution’ that is the George and Vulture restaurant has come close to demolition. The reality is that whilst the names of its streets have become timeless symbols of its position in global finance, the City of London’s architecture has not simply matched contemporary design, but defined it. From the ‘Nat West Tower’ opened in 1980, to the Lloyds Building first unveiled in 1986, to the ‘Gherkin’, 18 years later, London’s skyline has been in constant flux, a rate of change which has only accelerated over time, creating a sense, in some cases, of architectural disposability. With each new construction comes a new group of tenants, often including those who could not have been anticipated even a handful of years earlier, hence, there is a natural evolution in the occupational character of London’s office space.

London is in the throes of delivering noticeable improvements to its transport infrastructure. It can look forward to Crossrail and other upgrades to under and over-ground rail systems. By 2020, London will boast a number of impressive new business districts, centred on the transport hubs of Paddington, London Bridge and King’s Cross, the latter being the embarkation and disembarkation point for Eurostar.

The delivery of HS2, Crossrail, the Northern Line extension and other transport improvements are all part of London’s future. Returning our focus to its past, one could chronicle the City of London’s history in global finance back many centuries, over which the nature and origin of its occupiers has changed and changed again, and so too its property estate.

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1.3.6 A real second home in Britain The off-shoring of Britain’s economic activities, initially across a range of manufacturing industries and then its services, cast for a time a long shadow over the occupational future for Britain’s CRE. More recently, and for a number of reasons, it has been suggested that Britain is enjoying re-shoring, as activities formerly migrated overseas are returned and occupying CRE anew.

It is not, however, this re-shoring phenomenon on which we wish to focus, but an entirely different flow of businesses set to arrive in Britain, specifically those looking to use it as their main overseas hub. These will be drawn across a range of business service sectors.

We will argue that Britain’s cities are set to host operations which complement those already established and growing quickly in the central business districts (CBDs) of Shanghai, Singapore, Sydney and Sao Paolo. The motivation for seeking an overseas hub can be understood in terms of timing.

For all the efforts to develop CRE in CBDs across Asia and South America, its operation will follow the norm of using business hours. Whereas it is common in a number of industries for businesses to occupy their CRE without interruption by running up to three shifts, this is not the norm in business services and extremely uncommon in financial services. For this reason, the desire to operate through the day will demand that those with operations across the CBDs of the emerging world have as a matter of urgency to establish complementary operations overseas.

Figure 5: Working 9 to 5, London’s prime location

Source: UTC standard, Toscafund

Candidates to be host CBD have to be in a complementary time-zone and offer a capacity in CRE, a suitably skilled labour force and appropriate infrastructure to be credible. A cursory inspection reveals that Britain sits in an extremely suitable time-zone, doing as much for economies across the Americas as it does for nations across Asia.

Language too favours Britain. Indeed, one can draw upon a tradition of already being a proven host to those looking for overseas hubs. It was no coincidence that China Construction Bank acquired the 127,000 square feet of office space at 111 Old Broad Street soon after it was nominated by the monetary authorities in Beijing to provide settlement services in the Yuan from London. China Construction Bank should in reality be seen as the vanguard of the arrival of other banks, not simply from China, but widely across the emerging world, and

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS indeed the resource-rich developed world. Banks will not be alone in establishing a presence in Britain, insurers are also likely to do so and businesses across a raft of service sectors.

London will most likely host the front-office operations for those creating an overseas business footprint in Britain. This accepted, cities across Britain could easily play host to mid- and-back-office activities, even attracting front-offices in time, and this diffusion will help narrow regional imbalances.

The reality is that Britain stands poised to be chosen as the preferred overseas hub for many businesses from across the emerging world. These promise to deliver wide ranging wealth benefits and generate considerable economic multipliers. For Britain to welcome such arrivals, an expansion in its CRE capacity will be crucial, not simply in London but widely across all its cities.

1.3.7 A Central Point: CRE unchanging on the outside but evolving within One of the first skyscrapers in London, Centre Point has slid down the list to become the city’s joint 27th tallest building. This said, it dominates the skyline from much of central London, and since 1995 can boast Grade II listed status. Centre Point is an intriguing example of how so much has changed since its completion in 1966. The 385-ft office tower, designed by Richard Seifert, stood empty for five years having been built speculatively. Its developer, the controversial Harry Hyams, hoped for a single occupier for Centre Point, and stubbornly rejected offers to lease individual floors. On finally receiving tenants, it has seen an evolution in occupiers that illustrates the changing nature of Britain’s economy.

From July 1980 to March 2014, the building was the headquarters of the Confederation of British Industry (CBI). Occupiers now in the building include US talent agency William Morris Agency; the state-owned national oil company of Saudi Arabia, Aramco; Chinese oil company Petrochina; and electronic gaming company EA Games, a range of tenants who are notable for being multinational, as much as multi-sector.

As well as a varied group of office occupiers, Centre Point is home to Paramount, which opened in 2008. Initially operating as a private members club, this was changed in 2010 with Paramount opening to the general public. Occupying the top three floors of the building, Paramount includes event space on the 31st floor, a bar and restaurant on 32nd and a 360-degree viewing gallery on the 33rd floor – the top floor of the building.

In February 2013, the global members club for creative industries, ‘Apartment 58’, launched APT58 at Centre Point. The members club, on the lower floors of the building, features a night club, meeting rooms, a locker and mail service and a lounge. The venue also includes a late-license ground floor street-food concept restaurant.

Having passed through a series of owners since Hyams, Centre Point is now in the hands of Almacantar. It has received planning permission to further refurbish the building. Its occupancy profile will change again, with plans for its redevelopment into 82 luxury apartments, a pool, spa and gymnasium and 42,000 square feet of retail and restaurant space.

With Centre Point, we have another example of British CRE unchanging on the outside and for periods economically inactive on the inside, and whose occupation has evolved rapidly over recent years, spurred on by overseas tenants and their capital, producing positive economic multipliers and externalities to commercial and indeed residential real estate around it. These changes have been spurred on too by improvements to transport infrastructure in the vicinity of the real estate.

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1.4 Educating CRE Education is one of the UK’s most property hungry ‘commercial’ sectors, so we reflect on the recent and prospective growth.

1.4.1 British universities There may be some curiosity why Britain still has a predominance of non-profit making universities and other institutions of higher education, which we have identified as quasi-CRE. After all, the enhancement they provide to the human capital of their students will associate in general with a long-term gain, which should attract commercial and entrepreneurial interest. The reality is that there are many privately and very commercially operated colleges across Britain serving the needs of students originating mostly from overseas. Their reputations are, almost without exception, inferior, precisely because of suspicions over their motivation. There is certain to be a suspicion that the motivation behind the college is less about improving the human capital of students than about raising the financial capital of its operators. It is for this reason, where reputation concerns are either real or imagined, that so many higher education institutions (HEIs) remain stubbornly within the realms of quasi CRE rather than morphing into its direct form.

The University of Buckingham is an institution holding a Royal Charter and has a strong reputational standing, but it operates with a funding structure outside the norm; a HEI which could rightly be considered to be in the private sector. The University of Buckingham operates with charitable status, but its model is nonetheless commercial. Looking ahead, we would not be surprised if established HEIs begin to alter their models to move closer to the funding practice of the University of Buckingham, and so overcoming reputational risk as they become ‘more commercial’.

1.4.2 An educated CRE case study: The University of Buckingham The University of Buckingham’s size should not distract from the growth that it has achieved and the potential it promises, more than doubling its student body in five years, and investing generously to maintain this momentum. Whilst it may operate with charitable status as a non-profit making body dedicated to education and research, it can boast being Britain’s first independently funded university holding a Royal Charter. It is also unique in offering two year full-time degree programmes. Its behaviour and experiences perfectly capture how refurbishing existing and building entirely new CRE is at the core of successful ‘business’ growth.

Whilst we have illustrated elsewhere how a bridge can be economically empowering (in Part 1.2.5), and so be very commercial indeed, The University of Buckingham has only quite recently shown just how this illustration can be made very real.

Consider this extract from its annual report and financial statement for the year to December 31st 2012: “we will be building a bridge this year over the river to link the six acres of the right bank that we now own, to the main campus. We are applying for planning permission to start the development of the right bank.”

Here we have evidence of investing in property infrastructure being at the forefront of the development of revenue generating CRE.

We have also reflected on the power of Britain’s CRE to generate foreign earnings. With one-third of the student body originating outside the EU and absolute numbers growing, here again The University of Buckingham provides a real instance of this favourable trend.

Consider also the idea that refurbishment and refocusing can bring property back into economic life. Let us draw again from The University of Buckingham’s most recent annual report, where the Vice-Chancellor reflects on property:

“We have refurbished all of the Tanlaw Mill, from top to bottom, and it has been transformed as students’ building and as a Students Union. And to further improve the recreational spaces for the students, we are completing the refurbishment of the cellars in the Franciscan Building. Meanwhile the newly-refurbished Radcliffe Centre, a converted church which provides a 150-seat venue for lectures, performances and community events, has added significantly to the capacities of the University. The refurbishment of Prebend House and of its gardens has now been completed [which we] are using as the postgraduate centre of the School of Humanities, which speaks of our general commitment to upgrading research within the University.”

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS In this one passage, we see evidence of a church conversion, cellars being made useful as ‘recreational spaces’ and evidence further of investment to attract undergraduates by improving the quality of their experience, whilst also capitalising on how postgraduates can engage (often very commercially) with academics in research. On this note, the Vice-Chancellor was keen to that that “much of the growth of the University can be attributed to the growth of the Business School, which now has twice as many students as four years ago. We continue to be proud of our Business Enterprise programme, which currently has students running a number of intriguing businesses”.

The following extract gives some idea of the University of Buckingham’s growth ambition: “we are working with the Milton Keynes Hospital NHS Trust over the possible creation of an undergraduate medical school”.

1.4.3 Britain’s real commercial education industry Even though they are not motivated by profit, we have characterised Britain’s HEIs holding Royal Charters as quasi-commercial, and identified their real estate accordingly. Whilst some will contest this intermediate designation even for the independently funded University of Buckingham (considered elsewhere), they cannot deny Britain’s fully commercial and growing further education industry.

Chart 2: UK HEIs income from tuition fees and education contracts Chart 3: Long term migration to the UK by reason given

Source: HESA, ONS, Toscafund (*2015 to June)

Britain is home to at least 670 private colleges, almost all run on commercial lines. Whilst mainly concentrated in and around London, often specialising as English language schools, 50% of these colleges are peppered across the country, almost invariably in proximity to HEIs carrying a Royal Charter. Indeed, outside of normal term-time there is a trend amongst the latter to open their doors to foreign students, most notably by operating summer schools functioning literally and financially on commercial grounds.

The reality is that even if we were to exclude Royal Charter-holding HEIs, educating fee-paying foreign students is proving a growth market across Britain, and one where its real estate is playing an essential role. True distance learning is a feature of modern education. The number of overseas students enrolled on fee-paying tertiary courses per annum across Britain has increased by about 70% since 2002, and is still trending upwards. The reality is that face to face tutorials, delphic learning and the travel experience to other countries all have considerable chargeable value. A few nations hold a more sought after Positional Product Proposition in education than Britain.

Let us repeat a point we have made throughout this research: commercial and quasi-commercial education sectors are providing ever more valuable capital streams into Britain’s external and internal accounts; external because of the foreign earnings brought in through direct student fees, and internal because of the consumption, notably on accommodation, performed by students from overseas during their period of study in Britain.

Students in full time HEI are proving one of the fastest growing markets for Britain’s Private Residential Sector (PRS) with companies such as the two London listed; Empiric and UNITE. Empiric comprises 29 properties with

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11 assets under development, an aggregate of 3,503 beds. UNITE has 45,000 beds and is studied in depth in section 1.4.5.

Liberty Living, with its 16,827 room student accommodation portfolio covering 42 residences, considered an IPO in 2014 and was later bought by the Canada Pension Plan Investment Board for £1.1bn. CPPIB Liberty Living acquired a further 2,153 beds for £330m in August 2015.

Developers of purpose built student accommodation (PBSA) have risen to the challenge. One such example is Watkin Jones Group who have developed more than 25,000 student units since 1999, with a third of those student units (7,800 student units) built in just the last three years.

In short, with fee-paying education one of Britain’s fasting growing sectors, it cannot fail to register as an ever-larger owner and occupier of full and quasi commercial real estate, coincident with its customers (students) representing an ever more sizeable share of Britain’s rental sector.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.4.4 Education, Education and Education Britain’s HEIs are expanding, and as they do, they are creating CRE. They are adding campus capacity for tuition, recreation and accommodation, forging something of a hybrid industry. For whilst in its core a university sits within the education sector, it is part purpose built student accommodation, part leisure and recreation and part broader CRE, where the campus extends to business and science parks.

After all, just as it could be argued that hotel rooms can be considered to fall within the private rental sector, so too student accommodation. As student numbers rise, so will the need to add to the PRS element of Britain’s CRE, the demands on which do not however end there.

As Britain’s education sector continues on its impressive expansion path, a commensurate rise in its staffing levels – academic and support – will be required.

1.4.5 Case Study: Students, UNITE-d Back in 1991, research carried out by Bristol’s University of the West of England suggested disused inner-city office blocks could be converted into low-cost student housing. Within a year, the first UNITE property had opened in Bristol. At a time when the choice was between the draughty, often drab, halls of residence offered by the universities, or to rent a spare room from an obliging but not always personable landlord, UNITE offered students comfort, convenience and affordability.

Chart 4. UK student numbers, million Chart 5. UNITE revenues, £ million

Source: HESA, UNITE Group (Bloomberg), Toscafund (forecasts)

Since listing on the London Stock Exchange in 2000, UNITE has expanded considerably, adding to its core Bristol and London portfolios and expanding into other regional cities, notably Leeds, Manchester, Liverpool and Sheffield. UNITE has grown in tandem with the rising number of international students seeking easy-to-arrange and reputable accommodation. The firm currently provides over 45,000 beds in 28 university towns and cities. It recently raised £115m to fund further expansion, with the aim of funding its development pipeline in key university towns and cities.

Whilst the UNITE model has gone through changes, the emphasis remains redevelopment and conversion of former commercial properties into student accommodation. UNITE’s story is not unique and highlights one of our core points in assessing the growth future of Britain’s regional cities and the importance of commercial property in its dormitory form. Britain’s undergraduate accommodation is not simply serving students from abroad but investors too.

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1.5 Great retail developments Britain’s evolving retail sector is two-fold, with both large city-centre transformations (Birmingham’s Bull ring centre for example) and much smaller retail pop-ups adapting to the modern day shopper.

1.5.1 The Amazon story: Reading between the real estate lines Whilst Amazon can boast a considerable ‘loyal’ clientele, it also has its detractors; the two groups rather curiously are not necessarily mutually exclusive.

There are those who see Amazon as an unrelenting force pushing Britain’s independent book shops into extinction. By changing our reading habits – both in its physical form and through virtual delivery, via the Kindle – Amazon has become, it seems, a killer in its particular category. As its presence has grown, so it has had a marked effect on Britain’s real estate.

Britain’s once ubiquitous private book shops long provided local employment, generated business rate revenues and established something of a cultural presence on high streets. As for its public libraries, they too have been loyal local employers. In addition, they offered a welcoming indoor space for some to pass theirs days in thoughtful comfort. The reality is that as Amazon has grown, so the number of book shops and libraries across Britain has shrunk. For their part, authors too have come to see Amazon’s competitive pricing model as favouring mass market writing. Criticism of Amazon has been fuelled further by the revelation that it uses tax inversion to minimise what it pays to HMRC.

In terms of Britain’s CRE, there can be no denying the rate at which its book shops have closed in the face of the onslaught of online buying. There will be those, however, pointing not to the internet as undermining the independent book shop model, but to the end of the ‘price management’ governed by Net Book Agreement, which had finally come under the scrutiny of the OFT from 1994 and was revoked in 1997 (when Amazon was still in its infancy, formed as it was in 1994). Amazon’s defenders will point to how many of those sipping cappuccinos in the swelling ranks of Britain’s coffee shops might on close inspection be seen to be reading material obtained via it. They will suggest that new coffee shops often occupy space where once a book shop operated, and employ staff which a book shop would have drawn upon. This will all come as little comfort to those who see Starbucks as using the same tax inversion technique as Amazon.

Chart 6: Landscape of UK’s book-selling revamping, publisher sales, £bn

Source: The Publishers Association

This said, Britain’s book shops have increasing broadened their offer to become hybrids, adding cafes and in some ways providing a welcome space for those deprived of a public library. It could be argued that just as Britain’s cinemas have enjoyed a renaissance by becoming protean in their offer, so too can its book shops. The reality is there is a symbiosis or co-dependency between how Britain’s CRE adapts and the changing needs of its occupiers.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.5.2 C-REacting commercial space in a flash When we once spoke of restaurants, bars and shops having just popped up, it was as an expression of surprise when we saw a new retail unit on a road along which we were walking or driving. Whilst these businesses might not have survived for long, often their proprietors ventured into them with the hope they would prove durable, and so signed long-term leases. Now, there is an entirely new concept of pop-up business.

The modern pop-up unit involves sales space which by its very nature is intended to be – in the first instance at least – short-term, possibly just a day, known widely as ‘guerrilla’ retailers. Whilst modern pop-ups might be located in ‘real’ real estate, they could equally well be mobile structures, from freight containers to buses. Britain has had a long tradition of these temporary sales pitches where, for example, fireworks and Christmas trees have been sold seasonally, or longer still with weekly markets. The modern form of pop-up retail – whose origins in California date back 15 years – is distinguishable from that of Britain’s past in the sheer range of what is being offered, with food and beverages as likely to be sold as clothing and accessories. Remarkably, the pop-up phenomenon has even involved cinemas. The nature of the venue is often quite different too, as it is as likely to be a temporary structure as one that is permanent. Whilst some pop-up units will stand alone, others will be part of transient communities, say farmers markets, and whilst certain pop-up units will sell goods provided in a cottage industry volume, others may be used to test products by large retailers with an established physical footprint.

Whilst mobile units do not face business rates, a pop-up retailer in ‘real’ estate does, something which those who see the potential for pop-ups to fill vacant space and generate economic good argue is an obstacle to the phenomenon’s growth. Indeed, the Centre for Economics and Business Research (CEBR) in a report commissioned by the telecoms giant EE estimates the pop-up sector to have produced £2.1bn of turnover, or 0.5% of all retail spending, in 2013, doing so across 94,000 units and employing 23,000 workers. Moreover, CEBR forecasts Britain’s consumers will spend over 8% more with pop-up retailers in 2014 compared to 2013.

Transport for London (TfL) has woken up to the potential of pop-up retailing, owning as it does over 1,000 retail properties and the same number again of arches under its railways. The economics are simple. Consider Old Street Underground located in London’s Shoreditch. Each year, 23 million pass through a station which is open 20 hours each day. It is no surprise then that Old Street has been in the vanguard of TfL’s launch into short-term or pop-up leasing, an area transformed by the arrival of technology companies into its once unloved CRE to have it become known as the ‘Magic’ and ‘Silicon Roundabout’. On the theme of regeneration and under-utilised transport real estate, it was recently revealed that TfL has started to sell ‘unused’ tunnels and ‘Ghost’ stations. TfL has awakened to the potential of its property assets as tourist attractions, hotels, bars, shops and museums. Tunnels below Clapham North are home to a herb farm, and a deal has been signed with Waitrose to run a service where customers pick up goods from lockers at Chalfont & Latimer, on the Metropolitan Line. Here again is an instance of economically-empowering property under our very feet.

The reality is that what might at first be planned to be a short-term venture could easily take root. Rather than considered a rival or threat to Britain’s long-lease CRE, pop-up commercial units should be viewed in most cases as a welcome complement. After all, customers who travel to pop-up units as a destination, provide foot-fall for neighbouring permanent retailers. Pop-up businesses are more than likely to occupy units which have suffered long spells of inactivity and have blighted the surroundings for neighbouring retailers. The pop-up phenomenon has also been one of the most positive developments for Britain’s high streets, helping in part to mitigate the challenges they have faced in other dimensions, and helping not simply to contain vacancy rates but also to soften the recent fall. In order to make leases more attractive, it is critical to ensure that a prospective pop-up can be connected with its essential utilities.

1.5.3 All change: The moving story of Aldwych Station The story of Aldwych Station straddles a number of the real estate themes that we have covered elsewhere; property in the public sector finding a new lease of commercial life, a property having earned listed status (Grade II) and a story of unfulfilled development plans and ambitions. It is also a story of a property whose name has changed, as has its role from transporting people across a relatively short distance back and forth from Holborn, to transporting cinema and TV audiences back and forth over fictional time.

Descending from where the Royal Strand Theatre had once stood, Strand underground station opened in 1907 and finally closed in 1994. Over that period, and in the years since its closure, plans have been presented to

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link Aldwych Station with Waterloo and so onwards to the City (as well as with the DLR), to connect the Strand with The Docklands. Aldwych Station was also part of the original plans for the Fleet Line proposed in 1965, the template for what would become the Jubilee Line, which has bypassed Aldwych (née The Strand station). During both world wars, the station was used as shelter for Londoners and treasures from the British Museum, including the Elgin or Parthenon Marbles, closing to trains in 1940 and reopening six years later.

Passing the building, it has the unmistakable red-glazed terracotta blocks of the Underground Electric Railway Company of London (UERL), with a two-storey steel framed building following the familiar design of architect Leslie Green. As already noted, the station has, since its closure, become a favoured location for film and TV shoots and as an event venue. As well as hosting regular tours of the station and its environs, the curious are able to see a platform not used since 1914 and architectural sites of a bygone age.

Aldwych Station is far from being alone as a ‘ghost station’ – there are 40 – neither too is it the only one to have taken on a new role as tourist destination. Indeed, plans are being presented to enliven these sites or to economically move on these pieces of transport related real estate. TfL is hoping to raise £3.4bn in non-fare revenue from its disused stations and tunnels. Whatever any realised value might be, there can be no doubt the assets have considerable intrinsic worth located as they are in key locations across the UK capital.

1.5.4 CREating new markets from old London’s Covent Garden market has come to epitomise commercial urban redevelopment and regeneration, utilising character-rich listed property in the heart of a metropolis for modern purposes.

From housing Britain’s largest dedicated wholesale fruit, vegetable and flower market, the Covent Garden area in central London has, since 1979, increasingly become home to a mixture of residential and commercial tenants. Now, it spans a range of retail, leisure, creative and business service sectors and is one of the most visited tourist areas, not only across London but Europe too. Covent Garden is home to one of the largest Apple stores in the world, whilst also being a favoured location for the growing breed of pop-up food and retail stalls in its modern market incarnation.

Over the years, Covent Garden’s success has encouraged the redevelopment of its environs, with commercial revival now clearly evident across Seven Dials and most recently the area around St Giles. The end of horse drawn delivery and rise of cold storage transit has allowed wholesale markets to move out of central urban areas and thus free them up for modern economic purpose.

As much as Covent Garden provides clear evidence of the protean nature of Britain’s CRE, it also illustrates the economic potential that exists widely elsewhere. From the neighbouring wholesale meat market at Smithfield across to Nine Elms, the metonym home since 1974 of New Covent Garden, the Covent Garden ‘model’ highlights the redevelopment capacity and regeneration potential for CRE within a London that has far from exhausted its development potential. Just as New Covent Garden Market came to life in Nine Elms, so the peripatetic onward journey of London’s main wholesale fruit, vegetable and flower market will create economic multipliers at its next stop, as indeed will the relocation, when it happens, of Smithfield Meat Market.

Further afield from London, many cities across Britain have their own proven redeveloped equivalent of Covent Garden. There can be little doubt that there are further British cities with central urban areas whose property was developed originally for wholesale activity but which has long offered the potential for redevelopment and economic regeneration. Whilst these will obviously not be of the size of Covent Garden, their revival could conceivably prove to be more important, in terms of economic benefit to the city or large town within which they nestle.

In short, it would be no exaggeration to claim that the cumulative economic multipliers from redevelopment compare extremely favourably with the financial concessions that local authorities may need to offer as an incentive to catalyse change. It could be argued that domestic and overseas investors are keen enough to commit capital and so are not in need of actual financial inducement, but rather only require more certainty around the planning process.

1.5.5 Gateshead’s MetroCentre: A Real development turning point In the next section we reflect on the transformation of Birmingham’s Bull Ring Centre from a 1960s white elephant into a successful and economically empowering city centre shopping and recreational complex. In

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS considering its regeneration, we reflect on the site having been a market of some sort since the 12th century and how an originally poor design had been followed by one which had unlocked the area’s potential in a way the original clearly had not.

In this section we focus on an out of town shopping and leisure complex which opened almost thirty years ago in England’s North East, one developed on land unaccustomed to the use it would be put to, but which has performed its new role with such success it can now boast being Europe’s largest covered shopping and leisure centre. Indeed, the opening in 1986 of the MetroCentre in Gateshead was a turning point in the fortunes of not only the immediate area, but a defining economic moment for neighbouring Newcastle and indeed Tyneside.

The opening and extension of Gateshead’s MetroCentre, with its 340 stores extending over two million square feet of retail space, has come to symbolise a turning point in what had been an extremely troubled economic time across the North East. The complex was developed on a brownfield former industrial site once alive with activity but which had fallen victim to Britain’s changing fortunes. The area’s revival was to crucially prove the economic merit of dynamic evolution in land use.

The creation of the MetroCentre also illustrated how collaboration by the most unlikely of groups could realise a major real estate transformation and economic revival. Those aware of the importance of Sir John Hall’s vision in delivering the MetroCentre, might not be so clear as to how crucial the funding from the most unlikely of sources, the Church Commissioners, happened to be. Indeed, rather unusually for a shopping centre, it has its own chapel and resident full-time chaplain. Funding was also made available at national (an urban development grant from the Department of the Environment) and local (the Metropolitan Borough of Gateshead) levels.

Since opening in 1986, the MetroCentre has been developed further with the addition of more malls (there are now five) and a new cinema complex boasting 12 screens, including 3D and IMAX. It boasts additionally an area dedicated to dining and entertainment venues. It can claim to have its own railway station and has car parks with close to 10,000 spaces.

From the two Westfield centres in east and west London, across to Essex’s Lakeside and Kent’s Bluewater and north to the redeveloped Bull ring in the heart of Birmingham, new or redeveloped shopping complexes have provided centres of mixed-use real estate which have generated economic multipliers and employ considerable numbers of people from local communities. And few have done more to define an area of Britain more greatly than the MetroCentre in Gateshead.

Many other instances along the same regeneration lines can be found in other parts of the UK, examples including Merry Hill in Dudley and Meadowhall in Sheffield. Both of these modern mixed-use commercial developments were built on sites formerly occupied by steelworks.

The Round Oak steelworks in Merry Hill closed in December 1982, by which time it employed 1,286 people. A shopping centre would open three years later close to the site, actual development of which commenced from 1989 in the form of an expansive business park.

As mentioned, Meadowhall too was built on a larger steelworks site, becoming the UK’s second largest shopping centre when it opened in 1990. With over 280 stores, it attracted 19.8 million visitors in its first 12 months and currently brings in 30 million visitors a year. In October 2012, Norges Bank Investment Management announced that the Norwegian Government Pension Fund Global had acquired a 50% stake at a cost of £348m, another illustration of Britain’s CRE attracting sovereign wealth investors

1.5.6 Ring in positive change: Birmingham’s Bull Ring Centre story London’s Brent Cross (1976) and Wood Green (1981) developments, then Lakeside (1990) in Essex and most recently Bluewater (1999) in Kent have, in their respective ages, come to characterise episodes of innovative shopping centre design, each situated where there was little in the way of dense CRE before. In a world where design seems to be becoming less about building durability as design anticipating obsolescence, each will no doubt adapt as shopping patterns change. It is not, however, the story of four shopping centres on which we wish focus here, but one in the heart of England’s second city.

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The redevelopment of Birmingham’s Bull Ring Centre has come to represent most aspects of sympathetic and inclusive CRE design, just as its initial post-war development came to symbolise the worst aspects of 1960s ‘brutalist’ architecture and failure to deliver a commercially successful property product.

In 1961, construction began on Britain’s first indoor city-centre shopping precinct, the Bull Ring Centre on a site which historians could date as a market place as far back as the 12th century. The Bull Ring covered 23 acres and boasted 350,000 square feet of retail space, large enough for 140 shop units. Complementing the all new shopping centre was a traditional open air market of approximately 150 stalls. Accessibility seemed assured by direct access to New Street and Moor Street Stations, along with a network of subways and a 500-space multi-storey car. The development even included a nine-floor office block attached to the car park. Close by was the site of the Old Market Hall, which was turned into Manzoni Gardens, an open space where it was intended shoppers would relax between forays into the Bull Ring.

The Bull Ring Centre seemed a perfect template for integrated urban mixed use CRE, yet before long it became clear it ‘wasn’t working’. Relatively high rates of vacant space, frequent failures in its escalators and lifts and its isolation, surrounded as it was by ring roads and its uninviting subways, contrived to make the Bull Ring Centre a symbol of indisputable failure in urban development as footfall failed to arrive. Whilst plans to redevelop the centre began to take serious form in 1987, it would not be until 2000 that demolition would begin.

In 2003, the newly branded ‘Bullring’ opened, and within a year became the most visited shopping centre, attracting 36.5 million visitors. Where concrete once darkened areas, glass was used to shed light, indeed, a 75,000 square foot glass roof, known as the Skyplane, covers the main mall. Once barren and uninviting underground passages are now lined with shops, and where the old Bull Ring struggled to attract marquee stores, the new Bullring can boast Selfridges. In place of a once dark and isolated car park, there is retail space on the ground floor and a suspended footbridge, the Parametric Bridge, connecting directly to the Selfridges store. In 2011 ongoing redevelopment saw the nearby Spiceal Street become a restaurant hub, to provide a more integrated consumer environment for the entire development.

The story of the Bull Ring Centre has come to represent the importance of design and configuration in capitalising on city centre CRE, much like the development of One New Change along London’s Cheapside tells its own story. This has also introduced an entirely new element of mixed-use to transform a city centre area, and has brought economic activity into what had otherwise been largely barren weekends.

1.5.7 High street real estate, the butcher, and baker and... We will reflect later on the changing fortunes and real estate needs of the ‘picture’ and public houses, betting and shoe shops once ubiquitous along the high streets of Britain’s towns and cities. There was a time when such high streets and most small towns and even large villages boasted butchers, bakers, greengrocers and even fishmongers.

Consider these statistics; as of 2011, across Britain there were fewer than 7,000 butchers, 4,000 greengrocers, 3,000 independent bakeries and 1,000 specialist fishmongers. In each of those food categories, the total of specialists has reduced to 10% of what it had been in the 1950s. As independent fresh food specialists have left high streets, retail floor-space take up by supermarkets has itself risen sharply, at one point mostly away from city centres and in large out-of-town ground-scrappers and more recently returning to urban hubs in smaller but generalised convenience stores.

There has admittedly been a renaissance in specialist bakers, albeit not independents, with for instance Greggs now boasting an estate of nearly 1,700 shops. This said, and albeit a relatively recent development, artisan food retailers have begun to grow in numbers.

Concerns about the impossible-to-measure social, economic and health costs of the decline in ‘wholesome’ and community-centred independent fresh food retailers, have led to calls for a negative externalities, or more commonly ‘supermarket’, tax (essentially a business rate surcharge we will discuss later) whose receipts would be used to help mitigate for the perceived costs of dominant food generalists.

There is of course the counter argument that supermarkets have broadened availability of fresh food, and have done so whilst making it cheaper to buy. The response to this has often been that it conceals both the supermarkets’ oligopoly powers over their customers and monopoly powers over their suppliers.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS Let us return to the real estate demands of Greggs. True, it has gained an ever-more noticeable presence on high streets through its expansion programme. True too this has been coincident with a very clear hub and spoke strategy, where large regional bakeries supply its high street stores, which are bakeries only in name.

In summary, the CRE needs of Britain’s food retailers have altered dramatically over time. At first supermarkets crowded out specialist high street food retailers by their close proximity. Supermarkets then focused their growth ambitions on large edge of town and out-of-town superstores through the 1990s. Increasingly over the past decade or so we have seen evidence of the main supermarket groups returning to smaller town centre convenience formats. Remarkably, expansion in store numbers has been evident at both the discount and premium ends of the price spectrum. Waitrose and M&S Simply Food are expanding and so too Lidl, Aldi, Morrison and Sainsbury’s, the latter doing so by returning the Netto brand to Britain (initially by converting 15 stores across its estate to the brand). And crucial to store expansion has been the development of large regional distribution centres essential for efficiency in logistics.

1.5.8 Betting on a continued real estate need Britain’s pubs have had to adapt to changing social-economic and demographic patterns, its high street shops and post offices to e-commerce, and all to a challenging tax regime. Betting shops have had to cope with all three potential problems.

Betting shops were legalised in 1961 and operated under strict controls. At their peak, numbers exceeded 15,000, and many were often family run. Since then, numbers have fallen, with estimates suggesting around 9,000 shops following a burst of consolidation across the market.

In April 2014, the UK’s largest bookmaker William Hill announced it would close 109 shops. It cited the increased duty on Fixed-Odds Betting Terminals (FOBTs). Soon after, Ladbrokes revealed it too would make significant closures; William Hill and Ladbrokes had previously operated over half of all UK betting shops. Coral followed suit by revealing its own closure plans.

The reality was that, whilst Ladbrokes had already been closing its shops, this was being accompanied by new openings. During the first quarter of 2014 Ladbrokes opened ten shops, and during the same period it closed eight. William Hill stated in its Annual Reports the aim of a net expansion in its estate of 1% each year, in 2013 alone opening 59 new shops equivalent to a 2% rise in its estate size. Although numbers have increased over a 10 year period – 800 net new shops have been opened – their combined employment levels have been moving lower, down by one tenth. A significant factor in these seemingly paradoxical movements has been the presence of labour un-intensive FOBT’s, first introduced to betting shops in 2001 with the 2005 Gambling Act limiting their numbers to four for each betting shop across England and Wales, a decision which simply tempted operators to open betting shops in close proximity.

In 2012, the Commons Cross Party Culture Committee claimed the gambling Acts had left casinos (covered in the 2005 and a 1968 Gaming Act which liberalised the sector) and betting shops “ill-equipped” and “outdated” to deal with social and technological changes.

To conclude, since the 1960s Britain’s high streets have been home to betting shops in rising numbers, even as online gaming has increased. This is a pattern not unlike the rise – or the renaissance – of fresh food retailers even as home internet driven food delivery has increased.

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1.6 Hospitality and leisure In this section, we consider two property-hungry elements of Britain’s expanding service economy, the hospitality and leisure industries.

1.6.1 Center Parcs building its fifth British resort, creating 2,700 jobs As much as its decline symbolised the country’s ills, the renaissance in Britain’s domestic holiday sector will come to reflect its resurgence. No business captures this turnaround more than Center Parcs.

Since arriving in 1987, Center Parcs has grown to five sites across Britain. Of course some will claim resurgence in holidaying in Britain is a reflection of austerity, and therefore a sign of Britain’s weakness not its strength. We disagree.

Even a casual glance at the pricing of a basic Center Parcs stay proves it is not a budget option. Center Parcs has succeeded because it delivers the product demanded by Britons. In short, both overseas and domestic travel will increase.

There are also a rising number of tourists coming to Britain. Like so much else of Britain’s future, London will feature strongly in the latter. As for the strength we envisage for sterling against the dollar and euro, we anticipate the currencies of emerging nations will also strengthen, providing their nationals with a positive wealth effect that is certain to translate into higher consumption, and increased foreign travel will feature on their shopping list, with Britain a trophy destination.

1.6.2 Licensed to change Having appeared to have passed the worst, the pace at which pubs closed accelerated to 18 closures per week during 2012. In the first six months of 2014, Campaign for Real Ale (CamRA) estimated the rate of pub closures had reached an average of 31 per week, 3% of all suburban pubs shutting over the period. It is also suggested by CamRA, and analysts at CGA, that across Britain fewer than 55,000 pubs remain, with 10% of these expected to close by 2018.

According to CamRA, pubs have been closing and will continue to close because of gaps in planning legislation that allow pubs to be demolished or converted to a range of alternative commercial uses – notably convenience stores, betting shops and pay-day loan stores – without the need for planning permission. CamRA also identified the conversion of pubs to solely residential use as both socially and economically unfavourable to local communities.

Whilst the conversion of pubs to homes provides another instance of a ‘tax bias’ favouring residential over commercial use, it also captures how some pub property simply isn’t fit for modern purpose, given social and regulatory changes. Some pubs without the capacity to accommodate kitchens and dining areas have fallen victim to the trends towards patrons who prefer food with their alcohol. Others without outside areas have suffered in the wake of the ban on smoking in enclosed premises and others, it is widely argued, suffer from being tied to a brewery. Moreover, many of the pubs that have closed never quite dealt competitively following the 2003 Licensing Act, or with the off-sale rivalry from supermarkets, with the end of the beer-duty escalator in 2013 seen as little real mitigation.

Changing demographics have meant that once-viable pubs no longer have ‘natural’ local markets, prompting a falling demand in customers and hence helping the demise of the pub.

1.6.3 Hotels: A home from home Britain’s hospitality industry is undergoing much needed and long-overdue improvement and expansion widely across the country. For its hotels, restaurants and related sectors to upgrade existing and add new capacity, the cornerstone quite literally is new commercial real estate.

In part 2, we will analytically consider Britain’s Private Rental Sector (PRS) and the specific and wider economic benefits of its expansion. Given we can consider hotel rooms as a form of ultra short tenancy – their shortest tenure an overnight stay – we can extend upon our earlier analysis. By drawing upon hotel occupancy rates and average room revenues, we can establish an estimate of capital value. This is of course a fraction of the total, since we need to add the direct employment and supply chain related multipliers deriving from each room.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS It is estimated that Britain’s hotel sector added 5,000 new rooms in 20142, investment motivated by increasing tourist arrivals. From visits driven purely by curiosity and keenness to see the sights, to visiting those studying in Britain’s education sector – private schools and HEIs – tourist numbers are on the rise. With large tracts of the emerging world seeing an impressive enlargement in its middle class, the ability to satisfy travel ambitions is growing and Britain can only benefit.

If Britain is to see the sharp rise in tourist numbers that that are predicted, there will be some changes required. Across Britain, hotel capacity is increasing. Just consider a few instances.

Travelodge last year announced a target of 1,100 hotels and 100,000 rooms by 2025, more than doubling capacity.

Premier Inn, currently Britain’s largest branded budget hotel chain, plans to increase its room capacity by 65,000 within five years. New locations will be added across the country, the largest of which will be a 130-bedroom Premier Inn in Leeds.

Marriott aimed to increase its hotel room availability to 80,000 by 2015, adding 17,000 towards that target in 2014, with its push within Britain including London’s newly reopened and iconic St. Pancras Renaissance Hotel.

InterContinental Hotels Group, which owns seven major brands including Holiday Inn and Crowne Plaza, is planning to add 37 British sites to its portfolio.

The limited service hotel chain ‘Tune Hotels’ has increased capacity in the last few years. Currently the chain has eight hotels in Britain of which five are in London. We could continue with a great many more instances where capacity is being added, with jobs alongside.

1.6.4 Who could have accurately pictured that? The internet is having a profound effect on how we consume; from doing the travelling and hauling, we now click and have our goods and groceries delivered. This change is having a profound and increasingly debated and documented effect on Britain’s CRE.

Many see the encroachment of the internet as unambiguously negative for city-centre retail CRE. As with any assessment of what awaits in an uncertain world, it is instructive to identify credibly close historical precedents, and examine how events unfolded relative to the expectations of ‘the day’.

There was a time when cinemas, or as they were affectionately known, ‘picture houses’ were a staple of any medium to large town high street, the Odeons, ABCs and Coronets plus a raft of independent brands competing for a customer base which had grown sharply through the war years. Indeed, in 1946, there were a staggering 1.6 billion cinema admissions, equivalent to 33 visits per person per year. This was however to prove a high water mark.

Through the late 1940s, cinema attendances began to fall. Their decline was made worse with the arrival of ever more affordable televisions and rising living standards. The process was accelerated still further by the increasing amount of TV content; the BBC began broadcasting in 1936, with Independent Television launched in 1955, and BBC Two in 1964. With the arrival of the VCR and a general decline in investment in the cinema industry, by 1984 only 54 million cinema tickets were sold, equivalent to less than one trip per Briton per year. It is no surprise that cinema after cinema closed in the wake of falling attendances. Some would convert to billiard or snooker halls to cater for a craze whose popular interest had been galvanised by the very TV broadcasting which had darkened cinema screens. Many cinemas simply became derelict, blighting high streets and testament (it seemed) to an industry that would never again require CRE. Indeed, few in 1984 could have imagined otherwise.

From 1984, matters began to change for the better for Britain’s cinema industry. The introduction and expansion of multiplex cinema combined with improving economic fortunes and greater amounts of leisure time saw attendances revive, such that by 2011 total admissions had risen to 172 million. Whilst this hardly equalled the 1.6 billion ticket sales recorded in 1946, the nature of visits had altered. Multiplex cinema,

2 Colliers Hotel Snapshot, 2014

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straddling towns and out of town sites, had become a destination event; the film was part of a wider dining and recreational experience. Whilst the arrival of multiplex saw the revival of old cinema sites, it also saw the development of entirely new premises, often out of town within retail parks, which offered plentiful parking and relative ease of access.

As for legacy cinema sites that could not transition to multiplex, today many have been converted to other uses, often exploiting the grand architecture legacy which once characterised ‘cinema theatres’ and ‘electric palaces’. Here again one comes up against the protean nature of Britain’s CRE. After all, as music halls began to give way to cinema, the process was most often not dereliction but conversion. Many cinema sites have in turn converted to other uses, bowling alleys, snooker halls and licensed premises.

The intention in examining the rise, fall and then rise again in Britain’s cinema industry, has been to sound a note of caution to those convinced the ‘evacuation’ of its high streets can only continue unabated. For just as those in 1984 who saw an Orwellian view of the future of cinema in the age of home entertainment proved wrong, so too might those who see much the same thing for traditional retail in the age of the internet.

1.6.5 Britain’s built reCREational space There was a time when Britain’s communal built space dedicated to ‘leisure’ time was largely limited to public baths. Communal pools and bath were provided not for recreational needs however but essentially to make-up for the lack of basic washing facilities in homes. A great deal has thankfully changed since then.

Today Britain’s purpose-built leisure centres provide subsidised facilities across a wide range of sporting disciplines. It is not these large purpose-built leisure centres that we want to reflect on here, but rather the multitude of gyms which are housed within a wide range of Britain’s CRE.

Many of Britain’s now considerable number of commercial gyms do not use of what might be considered conventional built space. They tend to take up areas that might otherwise remain economically inactive, notably lower ground floors and other space with restricted or indeed no natural light.

The growing presence of gyms within multi-use buildings provides landlords with greater tenant diversification, whilst offering other occupiers proximity to facilities that are used in ever greater numbers during their leisure time.

The proliferation of its commercial gyms provides yet another instance of how utilisation of Britain’s CRE has become as much about improvisation as it has innovation.

1.6.6 A real Olympian effort On July 6th 2005, it was revealed that London had beaten off four fierce challengers to win the bid for hosting the 2012 Summer Olympics. Remarkably, at the time of the announcement, 60% of the facilities and venues necessary were already in place, but not the Stratford City development. This included the Olympic Park, and was no more than a computer simulation requiring considerable demolition, excavation and construction work ahead, in certain cases involving fiercely-contested compulsory purchases.

With the euphoria of the success of the London 2012 bid still high, a shocking series of attacks across the Capital on 7/7 would force a reassessment of venue logistics in the light of entirely new security issues. This challenge would not greatly interrupt the ‘building’ momentum towards summer 2012.

Key to the IOC agreeing to give London the 2012 Olympiad was a commitment to match improved transport infrastructure with the delivery of developed and redeveloped fit for purpose sporting real estate. Indeed, the IOC’s preliminary assessment was that London’s public transport system was relatively poorly prepared for the demands it would face in 2012. In the years up to the event – London’s third hosting, although its 1908 and 1948 experiences were by default – improvements were made to the Docklands Light Railway (DLR), the North London Line and the East London Line of the Overground network. An entirely new cable car was created across the River Thames to link Olympic venues. In each instance, the legacy of this Olympian effort would show benefits well after the event.

Just as the transport initiatives introduced to meet the needs of the 2012 Olympics would have a valuable post event legacy, so to would the accommodation delivered to house participants. Indeed, in the wake of the event, much has entered the private rental sector, helping accommodate London’s growing population.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS What London’s 2012 Olympian effort proved was the ability within Britain to utilise its existing CRE and, where necessary, to redevelop extensively on brownfield sites long in need of regeneration. Since hosting the 2012 Summer Olympics, it is clear that a greater focus on sustainability has been beneficial, as real estate delivered for the event has been refocused towards more durable and often commercial ends.

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1.6.7 Giving CRE a sporting chance The stadiums in which senior professional football teams perform are fully occupied infrequently, but generate an increasingly valuable revenue stream during that time.

With broadcasting deals breaking records when they are renewed, it would not be unreasonable to claim that, on a per square foot basis and allowing for match day ticket, food, beverage, merchandising and broadcast revenues, Old Trafford, The Etihad and The Emirates stadiums are amongst the most yielding pieces of commercial real estate England can boast. True running costs include what has become the increasingly contested issue of player costs, but even here novel ways of creating a ‘fair’ playing field are seeing innovative ways of generating revenues from the campus real estate, which football stadiums are increasingly becoming.

Whilst the numbers swell markedly on match days and require considerable occasional staff, the new campus stadiums retain a growing number of full-time workers to man the retail, stadium tour, museum, visitor events and other corollary activities that modern football venues operate. These provide welcome local employment to the relatively young in what are invariably urban areas with above average youth unemployment rates.

Figure 6: Stadiums with capacity more than 20,000 and opened since the millennium

Source: Local authorities

Redevelopment plans are in place for Tottenham Hotspur in Haringey North London. Elsewhere, Brighton & Hove Albion can boast a new stadium and so too can many other towns and cities, with more to follow no doubt. West Ham United is due to move into the Olympic Stadium in Stratford. The 2012 London Olympics has transformed a large swathe of London’s CRE, just as hosting the 2014 Commonwealth Games has done for Glasgow.

Whilst most are built for a prime purpose, sporting venues are proving versatile, increasingly playing host to other disciplines as well as a growing number of concerts. This extension of use is improving the utilisation of the assets, and enhancing the wider wealth benefits to local economies.

Wembley StadiumOpened March 2007Capacity 90000

Emirates StadiumOpened July 2006

Capacity 60000

Etihad StadiumOpened August 2003Capacity 60000

London Olympic StadiumOpened March 2012

Capacity 80000

Cardiff City StadiumOpened July 2009Capacity 33000 St Mary’s Stadium

Opened August 2001Capacity 32000

Ricoh ArenaOpened August 2005Capacity 32000

Leicester City StadiumOpened July 2002

Capacity 32000

AMEX Community StadiumOpened July 2011Capacity 30000

Stadium MKOpened November 2007

Capacity 30000

KC StadiumOpened December 2002

Capacity 25000

Darlington ArenaOpened August 2003

Capacity 25000

Rose BowlOpened May 2001Capacity 20000

Liberty StadiumOpened July 2005Capacity 20000

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS Of course transforming sporting venues has not always been without event.

It would take Wembley Stadium 59 years to be transformed from its 1948 British Empire design to the current model. Over its reconstruction period (2002-07), its contractor suffered serious budgetary pain, not entirely uncommon given the tender price and penalty clauses Britain’s contractors tend to work within.

As ‘The National Stadium’ was being developed, the Millennium Stadium in Cardiff played host to League and FA Cup Finals, providing a welcome boost to the local economy. England’s home internationals were distributed across club stadiums across the midlands and north that had enjoyed a long tradition of hosting semi finals for club competitions.

In broad terms, Britain has always and continues to enjoy improvements to its sporting CRE often in urban areas where stadiums have become the most important and extremely welcome wealth generators.

1.6.8 Britain’s winning CREw Hosting a major international sporting event, commercial show or arts gathering has become both an ambition for Britain’s cities – often in fierce competition with other overseas and indeed British rival cities – as well as the potential to prove a poison chalice. In addition to requiring the use of existing real estate, sufficiently large events will invariably need to draw upon additional capacity. They may need new strategically positioned venues for activities or they may need accommodation for visitors and participants, and will often in fact require both. With the need for additional space comes the risk that these short-term requirements are underused once the sporting, commercial or artistic event has passed (the idiom “be careful what you wish for” is something of a caution to cities and towns desirous of hosting a major international event).

Britain can rightfully boast an established reputation in successfully hosting major international events, such as the Rugby World Cup this year, last held in Britain in 1999 when Wales were the hosts, and the 2012 Summer Olympics. Glasgow was the venue for the Commonwealth Games in 2014, the world’s third largest sporting gathering, and an event that Manchester had hosted in 2002. In all cases, as well as utilising existing capacity, entirely new real estate was developed, which in some cases did admittedly ‘force’ existing property to be redeveloped. In every instance there was and remains no sign of any meaningful real-estate ‘hangover’.

We have reflected elsewhere how Wembley Stadium – née the Empire Stadium – having been intended for a single event, the British Empire Exhibition of 1924/5, survived a further 75 years, during which time it was the venue for part of the 1948 Summer Olympiad. Having famously and successfully hosted the World Cup in 1966, when the final was played at Wembley, England has since unsuccessfully bid for the 2006 and 2018 FIFA events. It did, of course, host a number of notable European Cup finals (including in 1968, when Manchester United became the first English club team to win the trophy) and the European Championships in 1996, when England progressed to the semi-final.

As much as hosting international sporting events provides economic benefits, there are, as already noted, potential pitfalls, in essence the events generate both positive and negative externalities. Around the world, a number of cities have hosted international events, for which they invested in considerable new real estate, only to find it had little subsequent commercial purpose.

Some cities have tried to avoid the challenges of excess capacity by satisfying the short-term needs of burgeoned attendances through the duration of an event by some innovative idea. This has included mooring cruise ships to provide temporary accommodation, as Lisbon did for Expo 1998 at which 11 million visitors arrived over 132 days. The use of temporary real estate for Expo 1998 showed that, whilst any major international event may be welcome to a city or region, a measured approach is essential in delivering a sustainable real estate solution. The idea of mooring cruise ships was muted for London 2012, however, it was never adopted since it was assessed that adequate use of existing space plus the delivery of additional new capacity would be sufficient. Crucially, the new capacity would find economic purpose after the event.

Another potential pitfall of a city hosting a major international event is the risk ‘crowding-out’ other economic activity. This was a particular concern voiced by the London theatre industry, which foresaw a marked decline in audience numbers and the threat from Andrew Lloyd Webber that this would turn “theatres dark” with the arrival of the Olympics. This fear seemed to be supported by a significant rise in hotel room rates – tariffs in August 2012 increased by nearly 40% on average compared to the previous year. Concerns were heightened

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still further by an anticipation that London’s ‘normal’ summer tourist patterns might be disrupted if potential visitors perceived ‘Olympic distribution’ would interfere with their plans for their time in the UK’s capital.

In reality, room occupancy across London’s hotels was only slightly down on average through the duration of the Olympics. Moreover, far from theatre audience numbers falling, attendances increased – boosted by Britons themselves – forcing Lloyd Webber to subsequently apologise for predicting a “bloodbath”, going on to say “I have been proved wrong and I couldn’t be more delighted about that”.

Chart 7: London hotels: average daily rate Chart 8: London hotels: occupancy

Source: ONS, Toscafund –vertical lines denote beginning and end of the Olympic and Paralympic London events.

This is not to claim that parts of London’s CRE did not suffer during the Olympic and Paralympic period, nor indeed that it did not face disruption to business activity in preparation for the events as a result of the considerable development work involved. What London’s most recent Olympic experiences – 1948 and 2012 – clearly seem to have shown, is that the benefits well exceed the costs, providing economic multipliers and catalysing real estate development which might otherwise not have happened.

Britain’s cities do not only vie for quadrennial international events, but provide annual rivals to events that move within the course of a year around Europe and beyond. London hosts Fashion Week twice each year, the first such week back in 1984. Not only is existing space used to accommodate the events, but considerable pop-up structures are constructed in public places for the purpose. With London Fashion Week, we have seen these take shape in Berkeley Square, in the grounds of Somerset House and elsewhere across London.

The reality is that with its extensive property estate, ever improving transport network, convenient time-zone and widely spoken language, Britain has considerable potential to regularly attract international showpiece events, across a wide variety of sports and extending to entertainment shows, commercial conferences and trade exhibitions. It is worthy of note in closing, that Britain currently hosts NFL league international fixtures, each to a full New Wembley. The draw of Britain is moreover not confined to its capital city but widely, with Manchester, Birmingham, Glasgow, Edinburgh, Cardiff, Belfast and many other centres, not simply vying with one another to host artistic, sporting and commercial events, but each in their own way rivalling other cities in Europe and beyond. Crucial to the list of attractions of Britain’s cities is the existence across all of an established and varied base of property assets – from conference and exhibition centres to hotel accommodation – as well as the ability to deliver temporary or pop-up structures, if and when needed, some performing a useful economic role long after they were intended, as with the original Wembley Stadium. For when it comes to international sports, Britain can boast a winning CREw.

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1.7 Private rental sector One aspect of Britain’s modern CRE base which warrants particular interest is its rapidly expanding private rental sector (PRS), an often overlooked but all the same increasingly important CRE market.

1.7.1 Britain’s modern work houses We have already given attention to what part of Britain’s residential property can be considered CRE, concluding that it qualifies if it is privately let and generates rental income. Including PRS, there is a second, admittedly smaller, segment of British property which can reasonably be considered to fulfil dual residential and commercial roles, namely where living space doubles as work space. Whilst home working is hardly new to Britain, its nature is very different today from its largely farming or ‘piece rate’ rag trade in the past. The ONS suggests that higher-paid occupations and managerial positions account for three quarters of those working from home. This is a significant change to the past, when home working was largely characterised by men undertaking manual agriculture or construction, or women performing low paid piece work.

There are, of course, the great many who are at home caring for their children or other dependants, all of whom perform a productive role even if not recognised fully or remunerated properly for their valuable attention. In addition to this group, there are those using their home as a regular workplace, affording them flexibility over hours and releasing them from commuting time and its attendant costs.

According to the ONS, there are now 1.5 million workers across Britain, or 5% of those in work, who ‘mainly’ operate from home compared to 678,000 in 2001. More broadly, 4.2 million people use their home as a base, a figure up 45% from the 2.9 million estimated in 1998. This is a leap in the last three years of more than 500,000, as the ‘home working rate’ is now 13.9% compared to 11.1% in 1998.

The majority (two-thirds) of Britain’s home workers are part of its growing self-employed class and are mostly found in rural areas. Previously, home working was concentrated in farming, construction and manual work, but it is now more common for highly skilled roles to be performed part-time from a home base by those commonly approaching or beyond retirement age. This helps to explain why median hourly earnings for home workers were recorded to be 30% higher than conventionally housed staff. Mixed residential/commercial real estate is the ‘home’ of part of the figurative grey economy, now recognised in the measurement of GDP.

Across the shires, growth in professionals working from home has been particularly noticeable, with almost one in five workers in the Derbyshire Dales performing their roles from home. The number across farming intensive West Somerset is over one in four, whereas it was one in twenty in Kingston upon Hull, and one in ten professionals working from home in Scotland.

Those now working from home range widely across the socio-economic spectrum and, in some cases, involve start up businesses for which the ambition is to move into commercial space at the earliest opportunity. For many, working from home is a lifestyle choice. In fact, it is estimated that 100,000 Britons are ‘home agents’ or provide contact centre call services from their own homes, capitalising on their remote access to data hubs, the internet and broadband.

Chart 9: Working from home Figure 7: % of home workers (January-March 2014)

% point increase since 2008

South West

1.5 South East 1.9 East of England 0.7 Wales 0.1 London 2.1 East Midlands 1.3 West Midlands 0.9 North West 1.8 Yorkshire and The Humber

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Source: ONS, Toscafund

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There is, of course, the issue of those working from home not being subject to business rates. They do nonetheless pay domestic rates, and will in addition be liable to income tax and national insurance. Many workers based at home will, of course, need to travel to customers and use traditional CRE, arranging meetings for instance in coffee shops.

A Government commissioned study from 2012 suggested that there would be a £15bn saving were more state workers to operate from home, £7bn in savings from office costs, and a £8bn gain in improved productivity. It also suggested that reduced commuting needs would help towards improved sustainability by reducing carbon emissions.

In short, whilst its farms continue to represent a cornerstone of Britain’s home working real estate, an expanding share of its residential sector is doubling as both living and working space, rising particularly quickly in professional services. As this trend develops, it is contributing to a wider change in the landscape of Britain’s commercial real estate map.

1.7.2 The welcome growth of commercial residential (née private rental) Britain’s residential market is changing fast, and importantly, it is changing for the better. The emphasis here is the encouragement we should be drawing from a growing private rental sector, or as we would call it an expanding commercial residential market. This provides a crucial ingredient for the movement of people around Britain, which is an instrumental element in narrowing regional economic divides. It is, of course, creating a nation of landlords and tenants. However, in a growing number of cases, individuals fulfil both roles. As tenants, Britons have flexibility to be peripatetic, and as landlords, they have housing equity and income.

As more Britons become ‘commercial’ landlords, so their spending and investment decisions will be influenced by Britain’s property market, providing revenues to the Exchequer and multipliers through a number of channels across the economy. It is no exaggeration to say that, as the nature of housing tenure changes over time, it is for the better. Better because it removes unwelcome barriers to the movement of households into and across Britain, and better because it creates another means by which property becomes commercial at the individual household level.

Chart 10: Number of mortgages Chart 11: Share of mortgages by type

Source: Council of Mortgage Lenders, Toscafund (forecasts)

It is important to emphasise there is a historic precedent for the current trajectory of Britain’s tenure mix, certainly in terms of crude statistics, although this unprecedented when one looks at the detail. Where once the large private rental market was characterised by slums and unregulated landlords, in its modern future Britain will have a commercial residential market which is fit for such an advanced developed economy. Where once landlords were ‘barons’ (often titled literally), now they are drawn across the socio-economic spectrum, often with properties in their portfolios which were once their own homes earlier in their move up the housing ladder. Where its renters were often unskilled manual labourers, Britain’s private commercial property market is increasingly occupied by skilled and professional classes, often property owners in their own right, using the rental market because it allows their affordable movement around the country to exploit work opportunities.

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1.8 Manufacturing CREativity In this short section we reflect on how CRE has taken Britain from its pastoral roots to an industrial powerhouse and is again manufacturing a whole new British economy.

1.8.1 Real estate’s food for thought A modern economy is not so much based in real estate, as would not exist without it. In fact, without real estate an economy will remain pastoral.

Real estate is essential in rural communities, as it is in urban areas. For without real estate, a nation’s agricultural sector cannot support the needs of its urban economy. From barns equipped with industrial milking equipment to silos storing cereals and greenhouses to protect crops from the elements, real estate allows food production to increase with ever less arable land and farm labour, whilst also reducing its exposure to the vicissitudes of an unpredictable climate. The factories in which food is processed provide another crucial element in the creation of an industrial food-supply-chain, literally feeding urbanisation by delivering affordable foods in ever greater volumes from, as already noted, lessening needs for farmland and farm labour. In addition, there is the real estate formed of large out of town supermarkets and high street volume grocery stores, both providing convenience to the urban population.

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1.9 Flexibility

1.9.1 Property arriving from above In this section, we reflect on how buildings that were once consecrated have been transformed into commercial real estate. Of course, as some declining ministries have resorted to disposing of their houses of worship, there have been those expanding theirs, acquiring existing property or building new. There is a continuous evolution in and out of CRE.

Chart 12: Churches opened and closed

Source: Whychurch.

Across Britain, it is estimated that 2,244 churches and chapels have ceased to be houses of worship since 2003, with many closing earlier. Some have become commercial or residential, in some cases, part of the expanding private rental sector. Houses of worship are generally located within the centre of parochial communities and so their transformation into commercial use can prove only positive for local economies.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.9.2 Protean property We would argue Britain’s stock of commercial property has never been more flexible, taking on a Protean or changeable form.

A great deal of British real estate is capable of relatively swift and affordable realignment, adapting for occupiers in quite different business sectors. From steel or textile mills to shipyards and coal mines, commercial property became practically useless on the demise of the industry it had been built for. As a consequence, the calculation of a present discounted value (PDV) for such single-use real estate demanded the inclusion of risk factors. These raised discount rates, which by their inflated nature lowered the intrinsic long-term value of each building.

Now, real estate often involves multiple occupiers across varied sectors with space able to be realigned relatively easily and not overly expensively. The result has been, if not to entirely remove the risk factors used in PDV calculations, to capture the possibility of a ‘permanent void’, as to bring the probability down sharply. This has provided property owners with enhanced asset values and allowed them to capitalise on this for the benefit of the wider British economy.

1.9.3 Our future is in the clouds but still very real As Britain progresses on its technological growth path, concerns will no doubt be expressed that its current commercial real estate will not be fit for future purpose. Whilst it is easy to understand why such concerns may exist, it is important to make clear why they must not be exaggerated.

The reality is that Britain’s real estate has been challenged by change on many previous occasions over time, and in the case of some notable ‘shocks’ it has failed to adjust, leading to obsolescence and considerable cost. We have considered elsewhere how in its past, Britain’s industrial real estate was shocked and exposed as being fit for only one purpose. To allay these fears, one needs to contrast the old mercantilist Britain with the new. Where once Britain traded in steel, coal and ships, it now does so in insurance, education and software. The real estate of these traditional industries were location and purpose specific and linked in size to manpower, the new generation are less.

Consider Google and its new one million square feet in King’s Cross, whose output is far larger than one would see from a traditional firm in a space of this size. Consider too how the new occupiers across London’s financial districts will platform their middle- and back-offices some distances from their front. Not overseas, we will stress, but in Manchester, Birmingham and Leeds. Online retailers also require premises, and as small inventory-intensive shops on the high street close, huge central distribution depots open. Whilst initially this seems to signal the demise of the British high street, they will, in fact, shrink and become more focused, with some conversions to residential.

As for cloud technology, it must be emphasised that this demands a physical presence on terra firma. Rather than imagining our physical data needs will lessen, we must be prepared to see them grow with our own population; Britain is set to become Europe’s largest economy by 2100, more populous not only than Germany, but also Turkey.

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1.9.4 The regeneration of Nine Elms and Battersea: a case study in regeneration and relocation The US Embassy in London will eventually relocate to Nine Elms from Grosvenor Square, and so too the Embassy of the Netherlands, moving from Hyde Park Gate. These moves will be to an area of London along the Thames with an industrial heritage, but not much pedigree beyond it. Indeed, one of its most recent inward relocations was the arrival in 1974 of New Covent Garden Market. By 2020, Nine Elms in Wandsworth is likely to be amongst London’s most celebrated extensive mixed-use real estate regeneration and relocation success stories, set to boast hotels, offices, retail, art, leisure and recreational real estate as well as residential, and even, it has been suggested, a university campus and related student accommodation. Once completed, Nine Elms will boast a skyline which will stand in the same way as The City and Docklands at present.

Amongst its many other claims, a reinvigorated Nine Elms will be testament to transport investment as the Northern Line is extended. The area’s revival will also highlight the potency of overseas capital, with funding for the redevelopment originating from Malaysia’s state-backed investment fund.

The regeneration of Nine Elms, and more widely the Vauxhall and Battersea area, will extend to the eponymous landmark power station. Comprising two coal fired power stations opened in the mid 1930s and mid 1950s, Battersea was decommissioned in 1983. Since then it has loomed large but economically useless along the Thames. Following the plant’s closure, schemes ranging from a theme park and site of a new stadium for Chelsea FC to a return to power production using bio fuels have all been muted. Each of these has floundered, not least because of the cost considerations in dealing with a Grade II listed structure. In September 2012, the site was sold to a Malaysian consortium who have committed to the redevelopment, involving the power station as the central focus of a regenerated 40-acre site, housing a blend of shops, cafes, restaurants, art and leisure facilities, office space and residential accommodation.

In addition to the restoration of the historic power station itself, the plan for the area includes the creation of a new riverside park to its north and the creation of a new High Street designed to link the future entrance to Battersea Power Station tube station with the power station structure. It is hoped that the redevelopment will bring about the extension of the existing riverside walk and facilitate access directly from the power station to Battersea Park and Chelsea Bridge. Work commenced last year and plans include the restoration of the art deco structure internally and externally, reconstruction of the chimneys, and refurbishment of the historic cranes and jetty as a new river taxi stop. The plan includes over 800 homes of varying sizes, of which around three-quarters of the off-plan townhouses and apartments in Phase 1 of the redevelopment were sold within four days.

The full redevelopment consists of seven main phases, some of which are planned to run concurrently. Phase 1, named Circus West involving work on the new residential property and the power station, began last year and is due to be complete in 2016/17. The Northern Line extension and new Battersea Power Station terminal is anticipated to complete in 2020. Liew Kee Sin, chairman of the Battersea Project Holding Company, has said that Phase 1 and Phase 2 investment combined has a 50-50% split between UK and foreign-based investment.

Returning to Nine Elms and its own regeneration, this will involve the need for New Covent Garden Market to relocate again, albeit across the road (temporarily whilst the new site is redeveloped), proving when it does the peripatetic qualities of Britain’s modern economy. For as the Covent Garden metonym is moved once more, it will illustrate the importance of space over place, and how Britain’s CRE requirements have altered. The occupational needs of its old industrial base were often dictated by place, with property so specific it offered little if any potential to be realigned for alternative use.

Like so many other case studies we have considered, Nine Elms and Battersea reflect how economically-dormant real estate across London, and more widely across Britain, is being brought back to commercial life, relocation coinciding with entirely new activity and all made possible by capital and occupiers from overseas.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.9.5 Time to open up Britain’s CRE We are familiar with many across the industrial sector using shift working around the clock to increase the productivity of all related real estate, and how this operational gearing improves its economic value. We would like to reflect on the operational leverage of non-industrial property in the areas of retail, leisure and even business services.

Some readers will remember when high street banks closed at 3.30pm, when many shops were shuttered early on Thursdays and when little commercial activity occurred on a Sunday. Whilst this was relatively recent, it now seems virtually impossible.

There will of course be those who remember the days before the introduction of Bank Holidays, when a need arose to improve working conditions and govern working hours. Across a large part of Britain’s CRE, in the past, its economic value was restricted because of relatively limited hours of operation, creating opportunity costs. As business hours have increased, so greater productivity has meant increased economic value.

Of course, some may claim longer business hours do not increase activity, but rather spread it, lowering hourly productivity and actually increasing business costs. They may go on to argue that, even were there to be economic gains from extended opening hours, these would need to be considered against the personal costs faced by those working them.

There is, however, the counter argument that longer business hours have delivered greater flexibility in how we use our precious leisure hours, releasing us to spend more not less time with one another. There is also the evidence that average hours worked have simply exhibited a cyclical pattern. One might also make the case that extended business hours have encouraged greater labour activity, as those unable or unwilling to take up full-time employment with ‘conventional’ business hours have been allowed into the labour market and into the world of work.

In section 1.3.6, we argued Britain’s economy would benefit as it provides a complementary time-zone home to those businesses with operations in emerging economies or resource rich nations looking to operate around the clock. Just as in making that case we argued certain business sectors do not lend their property or staff to shift-work, so we will make the case again here. Businesses are perfectly conscious of how best to optimise their property and professionals through the day, not to need the imposition of somewhat arbitrary restrictions.

In short, whilst working real estate involves depreciation and maintenance cost, these also apply to some degree when property stands idle. And for this reason, restrictions on business hours need to be considered in the context of the opportunity cost of inactivity.

1.9.6 Mixed and change of use property: all for the better There have been loudly-voiced concerns that abandoned shops could increasingly blight Britain’s high streets and create urban economic vacuums. Not only should any such alarm not be exaggerated, but the positive change for the good must not be ignored.

Many stock intensive retailers have abandoned Britain’s high streets, forced to close or relocate as ‘their offer’ is overtaken by the convenience of, and competition from, the internet and large capacity retail parks. Rather than their departure leading to long-term vacant possession, voids or the need to resort to ‘charity shops’, the relocation of low stock-turn and inventory intensive retailers is opening up the chance for premises to realign; ‘downstairs’ to consumer services and ‘upstairs’ to residential. Just consider a retailer of shoes or household textiles. In each case, the requirement to have stock to hand involves taking up an entire building, upper floors and back rooms filled with inventory. The departure of durable retail and consequent replacement with consumer services opens up the greater opportunity for combined business and residential use.

Far from high streets being abandoned, we have the real possibility that urban centres will enjoy population growth and renewal. Rather than centres emptying from 5.00pm and filling once more at 9.00am, urban centres will be enlivened by not only change of use but greater mixed use.

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1.9.7 Productive property The productivity of Britain’s labour force and the real estate they occupy has been dramatically transformed over the decades. Transformed because many of us can be productive in a host of real estate settings. And underlying this transformation has been Britain’s labour force becoming what we would argue is the prototype service economy. In its most reduced form, the productivity of property can be measured by the cumulative output of those ‘working’ in it. Once this would be confined to the single shift, or what one could call the ‘nine-to-five’ rule. Until relatively recently, many Britons were essentially only productive in their work situ. For those employed across ‘hard’ industrial sectors, their productive day could not begin until they had arrived at the real estate dedicated to their occupation. Similarly, for those across service sectors, albeit here one could arguably identify additional productivity as it were in the form of ‘home work’. Even this however was restricted by relatively limited remote office access. Matters are very different now, because more Britons than ever before are involved in ‘soft’ service sectors. And very different because of how technology has allowed so many of us to be productive even when remote from our designated place of work. The result has been to empower or make productive whichever property we occupy, whilst working off-site, but on-line. We are productive in transit and we are productive even in recreation. And what this has done is transform how we measure the productivity of Britain’s real estate. Transport real estate such as airports and train stations has been empowered. Consider too other real estate housing restaurants and retail. It is not only the cooking and waiting staff who can be said to be productive, but those diners enjoying a working meal. It is not only shop assistants who are being productive, but their customers using remote tools such as iPhones and androids, iPads and laptops between spending forays. The result of this technology transformation should have included a transformation in how we measure the productivity of real estate. And yet it hasn’t, or certainly hasn’t to the meaningful extent it should have.

1.9.8 Self-contained property According to the Self Storage Association, Britain had barely 5 million square feet of capacity in 2002, and by 2013, capacity had increased six fold, showing significant growth throughout the downturn, with over 1,000 facilities offering self storage space. The forces underlying this expansion reflected many changing social-economic and demographic patterns, as well as changing business habits. In both cases, self-storage provides greater flexibility than leasing warehouse space and improved security over traditional lock-ups.

Amongst Britain’s growing number of ‘Ebayers’, ‘Gumtree-ers’ and others, the flexibility, short-notice, low overheads and cost of self-storage is often a preferred option to holding inventory. Particularly attractive is the absence of a business rate. Whilst VAT was introduced to storage space in 2012, this can be reclaimed by business users. According to the Valuation Office Agency (VOA), “we normally assess self-storage facilities as a warehouse and the operator will generally be liable for the payment of rates” which of course is then included within the rent. As of 2014, 42% of self-storage use was commercial, an increase of 39% over the previous two years. For operators such as Safestore and Big Yellow, Britain’s two largest operators, self-storage breaks into profitability above an occupancy rate of 40% as there are relatively low overheads. For non-commercial users, self-storage provides an important option during home moves, with the rise in private rental and migration certain to trigger growing usage of temporary and even longer term storage.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 1.9.9 Moving buildings: It’s elementary Scotland Yard has become synonymous with London’s policing. The name has in fact gone beyond being a mere figurative metonym, attached officially to wherever the Metropolitan Police Service finds itself headquartered, the name literally moves building to building. Whilst the various ‘Scotland Yards’ of their time have not been part of London’s CRE, their ‘moving story’ has been inextricably linked with it, involving issues such as shifts from and to commercial use, land reclamation, new build and redevelopment, and more recently foreign ownership.

In 2016, the headquarters of London’s Metropolitan police force will move again, to what will become the fourth in the line of ‘Scotland Yards’. In its next incarnation, Scotland Yard will return for a second time to the Victoria Embankment, on this occasion taking up residence in the neo-classical ‘Extension’ Building, more commonly known as ‘The Curtis Green Building’ after its architect (one of whose designs is the Dorchester Hotel on London’s Park Lane and another the Wolseley Building on Piccadilly).

Ahead of relocating in 2016, the Met’s home remains where it has been since 1967, at 10 Broadway, by St James’s Park Station. The current Scotland Yard building was sold to the Abu Dhabi Financial Group at the end of 2014, its new owner intending to undertake a comprehensive redevelopment to mixed residential and commercial use.

This relocation highlights how space can be reclaimed and renewed from public to commercial use, done so in reverse, and where new space is built purposefully or existing property redeveloped. It might be instructive to briefly plot how, over time, Scotland Yard has moved around London.

The Metropolitan Police story begins in 1829 in a private house on 4 Whitehall Place backing onto a street named Great Scotland Yard. By 1887, the Met headquarters had expanded from 4 Whitehall Place into several neighbouring addresses, including 3, 5, 21 and 22 Whitehall Place; 8 and 9 Great Scotland Yard, and several stables. Indeed, some of the mounted branch to this day use stables located at 7 Great Scotland Yard just across the street from the first headquarters.

Eventually, the needs of the Metropolitan Police had outgrown its original site, requiring new headquarters, and these were to be built overlooking the River Thames.

The force moved into New Scotland Yard in 1890 to buildings sitting on land reclaimed from the Thames thanks to the construction of the Victoria Embankment. By this time, the Met had grown from its initial 1,000 officers to about 13,000 and needed more administrative staff and a bigger headquarters. Further increases in the size and responsibilities of the force required even more administrators, and in 1907 and 1940, New Scotland Yard was extended further. This complex is now a Grade I listed structure known as the North Norman Shaw Buildings, mostly Government offices, but still partly used as the base for the Metropolitan Police’s Territorial Support Group. The South Building, now Grade II listed, built during 1902-1906, was originally called Scotland House, and was linked to the original north building by a bridge over what was then a public road.

By the 1960s, the requirements of modern technology and further increases in the size of the force meant that it had outgrown its Victoria Embankment site. In 1967 New Scotland Yard moved to 10 Broadway, close to St James’s Park. The building, which was an existing office block was acquired under a long-term lease, and now houses 2,000 staff. It is also home to a national computer system developed for major crime enquiries by all British forces, called the Home Office Large Major Enquiry System, more commonly referred to by its acronym HOLMES, which recognises the great fictional detective Sherlock Holmes.

In addition to Scotland Yard and London’s many police stations, the Met occupies a number of large buildings across the capital. Certain administrative functions are based at the Empress State Building, whilst communications are handled at the three Metcall complexes, rather than at Scotland Yard.

The Empress State Building is a skyscraper, originally designed as a hotel located, on the border of West Brompton and Earls Court, in the London Borough of Hammersmith and Fulham. It was built in 1961 extending to 28 floors and was renovated in 2003.

Having been tenants since 1967, in 2008, at a time of considerable market unease amongst property owners, the Metropolitan Police Authority bought the freehold to New Scotland Yard for around £120m. As already mentioned, the freehold was sold in December 2014 for £370m, and the Met confirmed in May 2013 that it

48


would dispose of its Broadway site and the force’s headquarters would move to The Curtis Green Building located along the Victoria Embankment, which incidentally had formerly been home to Whitehall Police Station.

The Curtis Green Building will be renamed Scotland Yard. This will be all the more appropriate, albeit confusing to some, since its new site sits adjacent to the second “Scotland Yard”, now the Norman Shaw North Building.

As for the often gruesome private invitation-only Crime or ‘Black’ Museum housed in room 101 of the present Scotland Yard, this will be moved to a new site and opened to the public, with revenues contributing to the Met’s budget. The iconic rotating three-sided sign identifying Scotland Yard will adorn its new ‘home’.

It is likely that the Met’s HQ will move again at some point in the future, at which point the Scotland Yard name and its famous three-sided rotating sign will find themselves on the move again. As for the vacated Curtis Green Building, it too will turn itself to another useful occupation.

1.9.10 Britain’s sustainably eco-friendly built-scape From the use of solar, wind and other renewable forms of power and renewed materials, to more efficient use of heat and light, Britain’s CRE is arguably at the forefront in achieving ambitious targets on climate protection. Indeed it is crucial in fulfilling not one but two eco-friendly roles, one protecting our ‘eco-logy’ the other promoting our ‘eco-nomy’. And in its economic role, CRE provides a favourable feedback in its ecological role. For much of the reduction in the carbon footprint, made by us all whilst at work and in our leisure, has only been realised because of the eco-improvements made to the real estate we occupy in these pursuits. This is not to claim more cannot be done, because the process is not only ongoing but accelerating. Rather it is to make clear, that as a factor input to Britain’s economy, CRE is not only making its own contribution to reducing our impact on the environment but facilitating the improvement made by another factor input; us. Indeed, as important as has been the increase in the number of electric motor vehicles across Britain, we should remember these are being assembled in increasingly eco-friendly industrial real estate within Britain, driven in increasing numbers across Britain whilst also being exported in growing numbers too, friendly then on two eco-fronts.

In the pursuit of reducing our greenhouse gas emissions, we should remember that the glass or greenhouse is an early form of CRE which enhanced food production, embracing the environment rather than harming it. These structures, tracing themselves back to the Roman Emperor Tiberius to grow his favoured cucumber-like vegetable, began to appear in numbers across Britain from the 17th century. They arguably found their defining form in Kew Gardens, which formally started in 1759 and which consists of 300 acres of gardens, botanical greenhouses and conservatories. These include the Nash and Prince of Wales Conservatories, Palm, Temperate and Waterlily Houses, the Orangery and most recently the Alpine House, which opened in 2006, the third version taking that name. Just as Kew Gardens is flourishing as a non-departmental public body, so too are botanical and horticultural buildings run commercially across Britain’s real estate world.

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Part 2. Analytics of Britain’s CRE sector: concepts and numbers 2.1 Definition and value 2.1.1 Definition We must first define what we mean by CRE. While an everyday definition is fairly straightforward, in terms of examples like offices, factories and shops, a precise definition is more complex.

In economic terms CRE is capital, and constitutes a large part of the economy’s capital stock. Capital is a produced factor of production and as such it contributes to the economy in three distinct ways: first, as a factor of production it contributes directly to the output of goods and services (GDP), second, as an asset it is part, and we will argue a large part, of the economy’s stock of wealth, and third the production of CRE, that is construction, is in economic terms investment and thus a significant determinant of employment and economic growth. Thus, in the next two chapters (2.2 and 2.3) we endeavour to estimate the value of CRE, first in terms of its contribution to GDP, then as a component of wealth and thirdly as part of current economic activity.

‘Real Estate’ is ‘immoveable property’, that is buildings and other structures which are fixed at a particular location. We exclude land because it is not produced, but include location which is a component of the value of buildings. We will take the value of real estate to mean the full value of a commercial building, and not attempt to separate out an element of site value.

Originally the word ‘commercial’ referred to ‘trade’ as against ‘manufacturing’, so one might see reference to ‘industrial and commercial property’. More recently the word commercial has been used more inclusively, to cover any activities which produce marketable goods and services with the objective of generating a profit from so doing. It thus includes manufacturing (factories and the like) but also both business services (such as offices) and services provided direct to the consumer (such as shops, cinemas and hotels).

While these examples are not contentious there are many activities which are ‘commercial’ in the sense of having to cover their costs through the sale of goods or services, but which are owned or managed by public authorities, charities or other not-for-profit organisations, and which do not seek to make a profit. The reality is that there can be no definitive CRE universe because there are segments of the economy which do not categorise exactly. For example universities are not run primarily for pecuniary gain yet are moving increasingly into ventures with a commercial angle. Think also of the employer-owned retailer John Lewis Partnership – whose eponymous stores and Waitrose all operate within a trust. Or an independent school that needs to raise sufficient money through fees (or gifts) to cover its costs, but may typically be set up as a charity with trustees rather than shareholders, and any surplus is reinvested rather than distributed. We will refer to these activities, and the real estate they occupy, as ‘quasi-commercial’ because in many respects the owners of quasi-commercial real estate face very similar economic pressures to those of the commercial sector. Even where such activities are run on a commercial basis, it is contrary to normal usage to describe them as commercial, and we will not do so.

Of course much real estate is not commercial or even quasi-commercial. Most public buildings and most of the nation’s infrastructure of roads, tunnels, bridges and the like generate no pecuniary income or only from marginal activities, such as hiring out the town hall for a wedding reception. But even here the position is not always clear, for example airports were mostly public but now, at least in the UK, are mostly privately owned and run on commercial lines. Railways are more problematic having been privatised but now in part re-nationalised.

None the less, our ‘economic’ definition of CRE is somewhat wider than that often employed, which appears sometimes based more on property characteristics than economic function. For example, a property company renting out flats is in economic terms providing much the same service as a hotel, and similarly private individuals letting out property to generate income in the ‘buy-to-let’ sector are engaging in business activity

Box 1. The VOA The Valuation Office Agency is a Government body whose function is to value properties for the purpose of Council Tax and for non-domestic rates in England and Wales.

The Inland Revenue set up the VO after the introduction of a new land value tax in Finance Act of 1910.

The VOA employs almost 4,000 people and is the largest single employer of chartered surveyors in the UK.

Scottish Assessors perform the same work for Scotland and Land & Property Services operate on behalf of the Department of Finance & Personnel in Northern Ireland.

50


so that such housing is part of CRE. In the business sector, infrastructure installations like oil refineries or (privately owned) airports are as commercial as other manufacturing or retail operations. In what follows, we will make use of this definition to determine which structures count as CRE.

So how much of Britain’s real estate is ‘commercial’? We have, of course, not attempted to create a new register of all the property in the UK, but base our measures on the closest we have to a modern day Domesday Book; the register created by the Valuation Office Agency. The VOA was set up in 1910 for the purpose of listing and valuing all property in England and Wales thereby providing measures of the tax base for local authority property taxes (see Box 1 above).

However for various reasons, including taxation, it has been convenient to separate the valuation of dwellings (‘domestic’) from other (‘non-domestic’) properties. With regard to non-domestic properties the VOA lists properties in four main groups (offices, industrial, shops and hotels and others) which are sub-divided into no less than 369 categories. We have reviewed this list, carefully in the case of the larger categories, more impressionistically in the case of the smaller ones to determine which can properly be described as commercial and which better fit our ‘quasi-commercial’ or non-commercial categories.

In Table 2 below we indicate some examples of the types of property in each category while a full list is given in Appendix 1 (which also gives the aggregate value assigned to each category).

Table 2. How ‘commercial’ is Commercial Real Estate

Commercial Real Estate Quasi-Commercial Non-Commercial

Dwellings Private rental Property companies Buy-to-let

Owner occupied Social rented

Non-residential building Offices Factories and warehouses Shops

Universities Museums and art galleries

Local authority schools Hospitals and clinics NHS Police stations

Other structures Airports Oil installations

Sports grounds Roads

Source: Valuation Office Agency, Toscafund

2.1.2 Some taxing concerns over CRE taxonomy In our analysis, we have endeavoured to challenge the conventional taxonomy of Britain’s CRE market. We have argued that elements hitherto excluded from the orthodox categorisation be fully included, or that at the very least these be considered as quasi-CRE, in proportion to their respective contributions to Britain’s ‘commercial’ economy.

In theory, we have a clear-cut and seemingly mutually exclusive and exhaustive breakdown between offices, industrial and retail space, but there are two criticisms of this methodology. First, there is little or no room for a rapidly expanding PRS component, and second, there is the failure to allow for the increase in British commercial property essential for the (literal) delivery of goods serving the demands of a growing technology based economy.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS Chart 13: IPD performance measures Chart 14: Capital values of CRE and PRS

Source: IPD, Toscafund

We question the accuracy of the measurement of development, overall take-up and rental and capital growth of Britain’s CRE on the grounds that these exclude the property classes that we would choose to include as providing essential commercial benefits to Britain, not least private rental .Our argument, in essence, is that the existing taxonomy has yet to fully adjust to the evolution in Britain’s economy, and is therefore both under- and over-stating segmented performance.

We believe that PRS should be integrated into Britain’s modern CRE. Indeed, in many cases, property now involved in the PRS was formally in the retail, industrial and office segments. In its delivery of fiscal and broader wealth multipliers, PRS has all the hallmarks of the three ‘classical’ CRE markets.

-30

-20

-10

0

10

20

30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Retail Office Industrial

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2005 2009 2010 2011 2012 2013 2014

Trill

ions

Commercial real estate Private Rented Sector

52


2.1.3 Valuation The problem with valuing the contribution of property to economic activity is that it is essentially sedentary, whereas economic activity generally entails movement, flows of goods and services, production, consumption, exports and imports. Of course, property is needed to enable these activities to take place, but this does not help to quantify that contribution. The challenge is to measure what the UK’s property assets are worth to the economy, or their contribution to Gross Domestic Product (GDP).

GDP is the total value of all marketed goods and services produced within an economy over some period of time, usually a year. It is the value of final output, that is goods and services entering into consumption and investment (including government consumption or investment) or exports, but not including intermediate goods. Within any organisation, it corresponds to the value of sales less the cost of materials etc., also known as ‘value added’. The surplus of sales revenue over material costs constitutes income of a factor of production (labour or capital) or as profit. It therefore follows that GDP can also be measured as the total of payments to factors of production in the economy, which is also the sum of total household income and retained (undistributed) profits.

We have made clear in Part 1 of this report that the contribution of commercial real estate goes far beyond the generation of cash income for its owners. There are many benefits that are not included in GDP, from the environment to aesthetics and from security to sustainability. To focus solely on GDP would be grossly inadequate. However, the production of marketable goods and services is the immediate purpose of CRE (its day job, as it were), and we need therefore to measure this, and this also measures the contribution CRE makes to GDP.

It is a standard proposition in economics that, in competitive markets, the contribution of a factor to GDP can be measured by how much it gets paid. This example is illustrated in Box 2.

So, if a firm was to rent its office buildings from a property company, the rent it pays for the use of the buildings measures their value to the firm and hence their ‘contribution’ to the firm (the increase in the net profit the firm can make as against a situation in which it did not have the use of those buildings).

Valuing the contribution of property by its market rent, though beset with practical complexities, has the major advantage that it corresponds to the obligation on the VOA to provide ‘open market’ rental valuations of properties. The VOA therefore provides us not only with a register of all properties, but also its best estimate of their market rents. They are, of course, estimates only as we do not have direct open market rental evidence for many properties.

There are obvious complexities such as rent reviews, where rents are adjusted periodically rather than adjusting continuously to reflect changes in market conditions, but, more importantly for many types of property, there is no ‘open market’. For example, there is no market in oil refineries, or at least no evidence of market transactions. In fact, for many types of commercial property there is not much market evidence, but valuers have devised techniques for addressing these problems. Most rateable values are determined on the basis of accepted criteria with regard to factors such as comparability rather than exclusively on the basis of direct observation of open market rents. The absence of observed market rents has been a particular problem in relation to housing and we return to this below.

An immediate consequence of the paucity of open market rental evidence is that VOA valuations are conducted periodically, in principle once every five years. For non-domestic properties the principle of five-yearly valuations has been maintained until very recently, the most recent being in 2003 and 2008 (though for domestic properties the principle was abandoned in the 1970s, see below). For non-domestic properties new valuation lists were issued in 2005 and 2010, based on 2003 and 2008 (‘antecedent date’) valuations respectively. Chart 15 shows the evolution of non-domestic rateable value in England and Wales since 2000.

Box 2. Clearly firms employ both labour and capital: both are essential. So why does labour get paid 70% and capital 30%? Consider say Starbucks. Obviously it needs its CRE, its coffee shops, but it also needs its raw materials and its labour (baristas). What determines how much each of these gets paid? As far as Starbucks is concerned there is a market and it pays the market price. But the payoff to Starbucks from opening up another coffee shop is the additional profit it can make from doing so. And it will open up another coffee shop as long as the additional profit at least covers the cost. The additional profit is the addition to sales revenue less operating costs, so it measures the contribution of the CRE to GDP. So the contribution to GDP is measured by how much each factor contributes at the margin – one more coffee shop, one more barista, and measured in this way such contributions add up to the total GDP.

53

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS The graph has big jumps in value following the revaluations, with minimal changes in between (due to new buildings, renovations etc.) but, as the blue line shows overall floor space (‘footprint’) has been static during those jumps, and the growth in non-domestic rateable value reflects increasing rentals per square foot rather than an increase in the number of square feet.

Finally we consider housing. During much of the post-war period there was extensive rent control and in particular the last attempted revaluation of dwellings (in 1973) was carried out at a time, following the Rent Act of 1968, when an open market in rental housing was essentially non-existent. Clearly, in the absence of any evidence, basing taxation on hypothetical open market rents could not be sustained. This led to the abolition of domestic rates and their replacement initially by the community charge (poll tax) and then by council tax which is based on capital values. The VOA therefore made a comprehensive valuation of all dwellings for council tax, based on evidence of market transactions adjusted to the valuation date, April 1991. There has been no revaluation since then, so all dwellings built since 1991 are valued at what they would have been worth in 1991. Fortunately there are other sources of information on housing rents and prices.

In valuing CRE in the chapters that follow, we will therefore use VOA data for property other than housing (‘non-domestic’ property), but use independent data for the private rental sector.

Chart 15: VOA rateable value (England and Wales)

Source: Valuation Office Agency.(experimental statistics, release date May 2012 – data is Local Rating List sectors only)

Note: Figures include retail, offices and industrial business floor space – Other is excluded. The incremental increase in rateable value reflects the infrequent nature of valuation.

540

545

550

555

560

565

570

575

580

585

0

10

20

30

40

50

60

70

2000 2002 2004 2006 2008 2010 2012 2014

mill

ion

m2

£bn

Rateable value Footprint (rhs)

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2.2 Rental value (contribution to GDP) We estimate the total rental value of CRE in the UK in 2014 to be £94bn.

2.2.1 The value of ‘non-domestic’ CRE As already noted the prime source of data on non-domestic CRE is the VOA register of non-domestic rateable value. This, in principle, lists all immoveable property in Britain together with an estimate of its market rental value, which constitutes the tax base of local authority non-domestic (‘business’) rates.

The valuation list for 2014 consists, therefore, of all property which existed in 2008, valued in accordance with its observed or estimated market rent in that year, revised to include new developments and renovations between 2008 and 2013 (and to exclude any demolitions and changes in use to residential etc) again valued on the basis of their estimated 2008 (antecedent date) rents.

Before arriving at the final figures, there are several adjustment we need to make. First, as already noted, not all non-domestic property is commercial. In Table 3, we indicate how various categories have been classified as ‘commercial’, ‘quasi-commercial’ and ‘non-commercial’, together with their total rateable values in 2010. Clearly most non-domestic property is commercial, the three largest categories (offices, factories and shops) alone account for over £29bn of rateable value, close on half the total. Other properties should also be considered, for example, schools and universities account for as much as £2.5bn of rateable value.

Table 3: Rateable value (£m) of several sectors in England and Wales (full table in Appendix 1)

CRE type Examples 2005 2003 prices

2010 2008 prices

2014 2008 prices

Commercial Real Estate

Offices (inc. computer centres) 10,445 13,548 13,443 Factories workshops and warehouses (inc. bakeries and dairies)

7,702 8,504 8,344

Shops 6,588 7,883 7,855 Public houses / Pub restaurants (National scheme) 1,210 1,492 1,389 Large distribution warehouses 1,107 1,160 1,283 Hotels (4 star and above) and Chain operating 3 star (National scheme)

775 1,090 1,156

Quasi-Commercial

Universities (excl. Oxbridge) (National scheme) 333 413 448 Public and independent schools (National scheme) 266 336 391 Sports centres (Local Authority – wet and dry) (National scheme)

135 168 193

Non-Commercial

Local authority schools (National scheme) 1,129 1,446 1,582 Hospitals and clinics NHS (National scheme) 489 618 642 Police stations 130 165 167

Source: Valuation Office Agency, ONS, Toscafund

The full list of the 369 categories, their total rateable values in 2005 and 2010 and our classification in terms of their ‘commerciality’ is given in Appendix 1, and summarised in Table 4. In both 2005 and 2010 about 85-90% of non-domestic property is ‘commercial’ based on our criteria.

The VOA separates the data into two lists; local and central rating lists. The central rating list covers infrastructure that is widespread (with about 12 sectors such as railways, electricity distribution and gas transportation) and comes to about 5% of the total. The VOA covers only England and Wales, however, we are concerned with the UK as a whole. Unlike the VOA, the Scottish Assessors do not give a comprehensive breakdown and have 20 categories. Although easier to classify them in terms of their ‘commerciality’, we accept that it is not as robust as our efforts on the English and Welsh categories. Lastly, the Land & Property Services who operate on behalf of the Department of Finance and Personnel in Northern Ireland do not provide any category data on the rateable values of property in Northern Ireland. We have used the Northern Ireland ratio of GVA compared to the England, Wales and Scotland to give an approximate value for the commercial real estate and the total. We have also used the Scottish ratio of commercial real estate by type to the total real estate to estimate the rateable value for the different types of commercial real estate.

Once the data is aggregated, the prices were made current by using the relative IPD rental value growth index (by the various types). Finally, these rental values are adjusted to exclude vacant properties (which are not making any contemporaneous economic contribution).

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Table 4: Rateable values of CRE in UK

Region List Year of data 2005 2009 2010 2011 2012 2013 2014 En

glan

d an

d W

ales

Antecedent date (priced at) 2003 2008 2008 2008 2008 2008 2008 Lo

cal

Ratin

g Commercial Real Estate (£bn) 42.0 51.1 51.5 51.7 51.6 51.4 51.5

Quasi-CRE (£bn) 2.3 2.9 2.9 3.0 3.1 3.1 3.2

Non-remunerative (£bn) 3.8 4.8 4.8 4.9 5.0 5.0 5.0

Cent

ral

Ratin

g

Commercial Real Estate (£bn) 2.7 2.6 2.6 2.6 2.6 2.5 2.5

Quasi-CRE (£bn) 0.08 0.07 0.07 0.07 0.07 0.07 0.06


Tota l


All Non-Domestic Real Estate (£bn) 51.3 61.8 62.3 62.7 62.6 62.5 62.6

Curr

ent

Pric

es Commercial Real Estate (£bn) 47.2 49.3 49.5 49.8 49.6 49.6 51.0


Scot

land

Antecedent date (priced at) 2003 2003 2008 2008 2008 2008 2008

Tota

ls

(Cur

rent


Quasi-CRE (£bn) 0.9 1.0 1.5 1.5 1.5 1.5 1.5



Nor

ther

n Ire

land

Curr

ent

Pric

es

Commercial Real Estate (£bn) (calculated using GVA ratio))

1.22 1.27 1.26 1.25 1.23 1.21 1.30


UK

at C

urre

nt

pric

es To

tal Commercial Real Estate (£bn) 52.4 54.6 54.9 55.3 55.1 55.1 56.8


Tota

l (V

oids

) Commercial Real Estate (£bn) 48.6 49.4 50.2 50.5 50.0 50.4 52.3


Source: Valuation Office Agency, Scottish Assessors, ONS, Toscafund. Note: Data shaded grey is estimated

Chart 16: UK rateable values by type, at current prices and accounting for voids

Source: Valuation Office Agency. Scottish Assessors, ONS, Toscafund

0

10

20

30

40

50

2005 2009 2010 2011 2012 2013 2014

£ bi

llion

s

Retail Office Industrial Infrastructure Other

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2.2.2 The Value of private rental housing The bulk of UK housing stock is owner-occupied and, for better or worse, this does not count as commercial. Similarly, local authorities and housing associations provide much of the rented housing and this is also not commercial. Table 5 and chart 17 show the growth of the various sectors since 1981, during which time the number of owner-occupied properties has more than doubled while the private rental sector fell sharply up until 1991, but has experienced rapid growth more recently, particularly since 2001. The table and chart also show forecasts of the increase in the housing stock by sector up until 2014, which project a rapid further growth in private renting.

Table 5: Trends in tenure in the UK (million dwellings) Chart 17: UK tenure trend, dwellings

Year Owner occupied

Private renters

Social renters

1961 7.15 5.65 3.82 1971 9.63 3.75 5.89 1981 12.21 2.32 7.05 1991 15.53 2.01 5.84 2001 17.60 2.44 5.32 2011 17.90 4.73 4.92 2012 17.79 4.96 4.94 2013 17.71 5.17 4.96 2014* 17.65 5.47 4.90

Source: Department for Communities and Local Government, ONS (Census), Toscafund (*forecast)

Chart 18: Tenure by region, 2013

Source: DCLG, Welsh Assembly Government, Scottish Government, ONS, Toscafund

Around 18.6% of the UK housing stock is in the private rented sector. It includes both major residential developments such as blocks of flats, but also a substantial small scale activity where individual landlords ‘buy-to-let’ one or a small number of properties. Data on housing is collected separately for England, Wales, Scotland and Northern Ireland. The distribution of the housing stock by tenure is shown by country in chart 18.

We also have data on average rents paid in the private sector, so this data taken with the number of properties in the sector allows us to obtain estimates of the total income received by private sector landlords.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS Table 6: UK private rental sector income

Region Year 2005 2008 2009 2010 2011 2012 2013 2014 Source

England and

Wales

Number of dwellings (£m) 2.83 3.58 3.86 4.08 4.29 4.48 4.66 4.80 DCLG

Average monthly rent 599 666 656 674 702 723 742 754 LSL

Monthly rental income (£bn) 1.69 2.38 2.53 2.75 3.01 3.24 3.45 3.62

England

Number of dwellings (m) 2.72 3.44 3.71 3.91 4.11 4.29 4.47 4.59 DCLG

Average monthly rent 592 659 648 667 696 705 742 745 VOA


Wales


Average monthly rent) 412 459 451 472 489 498 498 519 StatsWales


Scotland


Average monthly rent 424 472 464 478 508 509 519 534 LSL


Northern Ireland


Average monthly Rent 435 484 476 490 510 526 539 548 NI Housing Executive


UK Annual rental income (£bn) 21.37 29.90 31.81 34.64 38.04 40.40 44.15 45.73

UK Annual rental income (£bn) Accounting for voids

19.6 27.4 29.2 31.7 34.9 37.0 40.5 41.9

Notes: Dwelling stock forecasted for Wales and Scotland, 2014, using a linear regression analysis. Data shaded grey is estimated using the complete England and Wales LSL Property Services rental dataset.

The Department for Communities and Local Government’s (DCLG) latest number of dwellings figures have been updated to 2014 except for Wales and Scotland, where we used a linear regression analysis to forecast the 2014 value. We had a complete list of data for England and Wales rents from LSL Property Services, but wanted to use the larger rental datasets from the VOA, Statistics Wales and NI Housing Executive. So we took the LSL rental dynamics and applied them to the larger datasets.

Adding the estimates for each country gives a UK value of total rental income from private sector dwellings of £45.7bn (2014). Lastly, this estimate has to be reduced to reflect voids – property left empty and providing no service. It is customary to assume properties are on average empty for one month a year, so the actual rents generated fall short of the full occupancy potential by around 8%. Reducing £45.7bn by 8.3% gives a figure of £41.9bn. This measures the contribution of private rented housing to GDP.

Adding the total rental income from PRS (£41.9bn) to the rental value of non-domestic CRE (£52.3bn) gives a final figure of £94.2bn for the contribution of CRE to GDP in 2014. This is 5.4% of GDP.

2.2.3 CRE and the generation of household income The income attributable to commercial property accrues in the first instance to its owners. It may be thought that as most people do not own commercial property, this is of no great interest to them, but such a conclusion would be wrong.

We need to distinguish legal from ‘beneficial’ ownership. The latter is the entity who ultimately receives the income which is, often, far from obvious. For example, if a company issues equity shares to finance a new CRE investment, many of those shares will be acquired by financial intermediaries such as pension or insurance companies. The pension fund will use the dividends on these equities to fund its obligations to its contributors, so that ultimately a pensioner is receiving income generated by the CRE.

Office buildings are often owned by property companies, but these too need finance, again sometimes through the issue of equity capital, but often through debt (corporate debentures or loans). Such debt may be put up directly by households or provided by other financial institutions such as banks, which in turn raise funds from households. Likewise in the housing sector, much ‘buy-to-let’ housing is financed through

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mortgages from banks or building societies. The rental income generated thus pays the interest households receive on their bank or building society deposits.

We look in more detail at the linkages between financial intermediaries in section 2.3.4 – Who owns Britain’s CRE?, as the data on this relates more directly to asset values than to income flows. Some insight on income receipts can be gleaned from tax returns and we look at this next.

In Table 7, we set out aggregate HMRC tax data for 2012/13, broken down into four main categories, employment, self-employment, pensions and a final category ‘property, interest, dividend and other income’. The first three of these categories were until recently termed ‘earned income’ (income from labour), and the final category ‘unearned or investment income’ (income from capital). The total income known to the tax authorities amounted to £904bn of which only £70.3bn (7.4%) was derived from property, interest and dividends.

Even so, remarkably no less than 26.6 million taxpayers (80%) derived some income from this source. However, the actual amount households receive is very unequally distributed. The average income from this source is £2,650, but the median is only £22, meaning that half of all recipient households benefit by less than £22 a year from these income sources.

The tax authorities split up the income received between the several sub-categories. This is shown in Table 7, which shows that most households receive income from interest on bank deposits (though the average is relatively low) with only a few households (1.63 million, or about 5% of taxpayers) receiving money directly from property.

Finally, we have HMRC data also on the split between state (unfunded) and private (funded) pensions. Private pensions amount in aggregate to £80bn, about double the payments of state pensions. We will argue in Section 2.3.4 that private pensions are to a significant extent funded from the income generated by CRE. There are over 7 million UK citizens with private pensions whose retirement income is thus directly linked to the fortunes of the CRE sector.

Table 7: UK income and tax, 2012-13

Category No. of individuals (‘000) Mean (£) Median* (£) Amount (£ million)

Self employment income 3,490 21,000 10,600 73,400

Employment income 23,400 27,200 26,600 638,000

Pensions 14,400

National Insurance 5,950 7,210 42,900

All other pensions 7,390 10,800 80,000

Property, interest, dividend and other income

26,600 2,650 22 70,300

Property 1,630 8,030 13,100

Interest 24,800 317 7,870

Dividends 4,560 9,940 45,300

Other 1,110 3,780 4,190

Total income 30,600 29,600 28,800 904,000

Total tax 30,600 5,140 5,060 157,000

Source: HMRC – Median values from 2011-2012 tax year

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2.3 The asset value of CRE (CRE as an investment class) We estimate that the value of CRE in modern Britain is just over £1,662bn, which amounts to just under 20% of national wealth. In chart 20, and for comparative purposes, we have included the yield for 10 year Gilts, the most conventionally used risk-free or swap rate for CRE.

Chart 19: Capital values of CRE and PRS Chart 20: Yield comparison between CRE and 10 year Gilt

Source: VOA, Scottish Assessors (Scottish Government statistics), IPD (MSCI), DCLG (ONS), Stats Wales, NI Housing Executive, Wriglesworth Consultancy (part of Instinctif Partners), LSL Property Services, Bloomberg, Toscafund

2.3.1 The value of Britain’s CRE: AcCREdited and AcCREtive As an investment, Britain’s CRE is by its very nature asset backed, and so provides a welcome degree of security. Capital values have on occasion fallen broadly, most notably in 2008/9, however over time capital growth has been the norm and impressive advances in total return all the more so. CRE is also income generating. Whilst its income varies with its rate of occupancy, it also moves in line with the level of rent, whose flexibility is in stark contrast to the intractability of the coupon paid on fixed income ‘paper’.

Whilst CRE is often viewed in the collective, we must stress that as an asset class it covers an assortment of business models and occupier types, from retail and leisure across to industrial and business and financial services. Each of these sectors’ assets can be reduced still further and so too the real estate which is an essential element of their activity.

Some CRE is entirely reliant on economic events unfolding within the UK, whilst other real estate faces entirely outwards, involved in making goods for export or selling services overseas, and whereas certain real estate assets may cater for traditional needs, say food processing and other food services, other elements may serve entirely new markets, for instance renewable energy. Tenancy agreements for their part provide as much for security of tenure for the occupier as security of income for the landlord. Elements of Britain’s CRE can also boast the added security of the public sector as a cornerstone tenant.

There can be said to be an essential symbiosis between Britain’s CRE and the economy. As one demands a particular form of property, the other provides it, and as innovative real estate is delivered, so Britain’s economic base broadens, a diversification which can only be for the good.

To conclude, Britain’s CRE can boast an asset quality and provenance, and security of ownership and in turn tenancy contracts as best in class. Its CRE is in addition valued in the world’s third most saved currency. It is, in short, a sterling asset class.

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2.3.2 The asset value of CRE The value of CRE is largely determined by the income it can generate. The person buying an asset acquires the right to the income stream (in terms of financial revenue or direct services) it produces. In the case of real estate, this income stream can be expected to continue for many years into the future and so the asset value can be expected to be a substantial multiple of the current rent.

But how big is this multiple? In financial theory, the value of an asset is the discounted present value of the net income stream that the asset generates, and hence depends on the current and future income stream, the life of the asset, and the risk adjusted interest rate. Since different classes of property differ in terms of their useful life and their riskiness, the relationship between asset value and current rental income – the rental yield – will not be the same for all properties but vary between them. Similarly the rental yield will not be the same as for example, the interest on deposits (which have less risk but have static rather than growing income potential).

We have looked at the data on rental yields for the various types of property that we have classified as CRE. With regard to non-domestic properties, the most extensive data has been collected by the IPD. It may be noted that the rental yield on offices is lower than on industrial assets, reflecting both the greater potential for growth in values for offices etc due to their being in prime sites, and the lower the risks of obsolescence due to their greater flexibility. On the basis of the data in Table 8, we estimate the asset value of non-domestic CRE in the UK in 2014 to be £824bn.

Table 8: UK capital value of ‘non-domestic’ Commercial Real Estate, by type (and accounting for voids)

(£bn) 2005 2009 2010 2011 2012 2013 2014

Retail 320 241 274 280 271 281 311

Office 163 132 152 158 153 166 202

Industrial 158 108 112 113 109 116 140

Infrastructure 105 83 88 89 87 88 97

Other 58 58 62 64 65 66 74

Capital value of UK Commercial Real Estate (£bn)

805 623 687 705 685 717 824

Source: VOA, Scottish Assessors, IPD, IPF (Yield data kindly provided by IPF Research Programme in their latest Size and Structure of the UK Property Market, End-2014), Toscafund

Chart 21: Implied UK capital value of CRE, by type

Source: Valuation Office Agency, Scottish Assessors, IPD, Toscafund

With regard to the private rental sector data on rental yields was drawn from LSL property yields and is given in Table 9.

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS Table 9: Imputed capital value of UK private rented sector

2005 2008 2009 2010 2011 2012 2013 2014

England and Wales Annual rental income (£bn)

18.2 25.6 27.2 29.6 32.4 34.3 37.5 38.8

England and Wales (yields %) 4.4 4.61 5.01 4.87 5.18 5.31 5.36 5.10

Capital value of English and Welsh private rented sector (£bn)

413.9 556.1 543.0 608.0 626.1 645.8 699.5 761.0

Scotland Annual rental income (£bn)

1.05 1.34 1.46 1.59 1.79 2.05 2.22 2.32

Scotland (yields %) 3.41 3.57 3.88 3.77 4.01 4.03 4.13 4.06

Capital value of Scottish private rented sector (£bn)

30.8 37.7 37.5 42.2 44.6 50.8 53.8 57.1

Northern Irish capital value based on GVA 10.6 14.2 13.8 15.2 15.5 15.9 16.9 19.1

Imputed capital value of UK PRS (£bn) 455 608 594 665 686 712 770 837

Source: LSL Property Services, Toscafund

On the basis of this data, we estimate the asset value of domestic CRE in the UK in 2014 to be £837bn. Adding to the above figure for business CRE yields an estimated total of £1,662bn in 2014.

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2.3.3 CRE as a proportion of national wealth The Office of National Statistics (ONS) publishes a measure of national wealth (or now ‘worth’) which is the value of all assets at current market prices. This measure is published annually in the Blue Book. At the end of 2014, according to the Blue Book, national wealth consisted of £8.52tn non-financial assets together with £29.54tn of financial assets. However, with every financial asset comes a financial liability, so that net national wealth comprises only non-financial assets and is £8.06tn.

Table 10: UK national balance sheet Total value at end-2014 (£bn)

Non-financial assets Produced assets Fixed assets 8231.4 Tangible fixed assets 8034.8 Dwellings 5061.8 Other buildings and structures 1897.4 Non-residential buildings 950.2 Other structures 947.2 Machinery and equipment 849.6 Transport equipment 186.8 ICT equipment 36.2 Other machinery, equip. and systems 626.6 Cultivated biological resources 226.0 Intellectual property products 196.6 Inventories 283.7 Total produced assets 8515.1 Total non-produced assets 2.5 Total financial assets/liabilities -454.1

Total net worth 8063.5

Source: ONS (Blue book), Toscafund

The Blue Book table (above) shows the breakdown of different types of non-financial assets. The largest single category is dwellings valued at £5.06tn, or 62.8% of the total. Non-residential buildings, which might be thought to correspond fairly closely to commercial real estate, are valued at £0.95tn or 11.8% of the total. The ONS classifications do not correspond at all closely with our definition of CRE, in that ‘commercial buildings’ include some dwellings and other structures while non-residential buildings include those in the public sector or in other non-commercial uses.

In section 2.3.2, we estimated the value of Britain’s CRE at £1.66tn. This constitutes 20% of net national wealth. The main reason why our estimate of CRE is higher than some others is that it includes private rented housing. The significance of this is illustrated in Figure 8, which is a Venn diagram showing the growth and overlap in current asset value between commercial real estate and dwellings.

If we leave aside dwellings, we can derive a figure for the proportion of non-housing wealth accounted for by non-domestic CRE. We have estimated non-domestic CRE at around £0.82tn, as against £2.97tn of total national wealth other than housing. So, leaving aside housing, CRE constitutes 28% of national wealth.

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Figure 8: Britain’s real estate universe (£ billions)

Source: Blue Book, Toscafund

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2.3.4 Who owns Britain’s CRE? Let us start with ‘business’ CRE, excluding the domestic private rental sector. We have seen that’s nearly 45% of Britain’s non-housing wealth is represented by CRE. But who benefits from the income it generates? In Section 2.2.3, we noted that around 1.6 million people owned property directly, however this is mostly residential. Another 7.3 million people draw private pensions from funds, which in turn derive their income from the assets they own. Ultimately that income comes from ‘real’, non-financial assets, 45% of these in the business sector are real estate. Is it possible to state that 45% of private pension income (that is 45% of £80bn or £36bn) derives from CRE? Or, in other words, that more than half the income generated by CRE ultimately accrues to pensioners?

There are two immediate complications. Pension funds hold a considerable amount of Government debt, and while this is as such not wealth, it is to a very large extent, balanced by public investment (in everything from road and schools to Olympic parks and defence equipment). These public sector investments are not CRE, but they do appear on the VOA valuation lists and on the ONS measure (as part of ‘other structures’). We should, therefore, remove pension fund holdings of Government debt from our calculations.

A second complication is the overseas sector. Pension funds may hold overseas assets of various forms, and some UK CRE may be owned by foreign nationals. This creates two sources of leakage: the pension fund holds less CRE because it is invested in overseas securities, and a smaller proportion of UK CRE income goes to UK households because some is being paid abroad.

If we look in more detail at pension fund holdings, the most comprehensive data is available from the ONS known as MQ5. According to this data, of their overall assets of £1,431bn, £403bn is held in UK Government securities and £407bn in overseas assets. Of the remainder, £476bn (33.3%) is held in UK corporate securities, mostly mutual funds and equities, £111bn (7.8%) in insurance funds and £33bn (2.3%) in fixed property.

Of course, insurance funds also hold property (according to the MQ5 figures about £42bn) and they hold corporate securities (again mostly mutual funds which hold equities including shares in property companies). All in all, it seems reasonable to assume that around 40% of pension fund assets are held in UK businesses.

With regard to overseas holdings of UK CRE, the IPF report suggests that this has now risen to around 25%, implying that 75% of the income generated by UK CRE accrues to UK nationals. It then would follow that domestically owned CRE constitutes not 45% but more like 35% of national wealth.

So, very approximately, we have 40% of pension fund income derived from UK businesses (that is 40%of £80bn which is £32bn), and 34% of that, which is around £10bn, is income generated by domestically owned CRE.

The ownership of ‘business’ (i.e. excluding private rented housing) CRE can be split into that which is owned directly by commercial firms or households, and that which is owned by financial institutions. Starting with financial institutions, which account for about half the total, the types of institutions involved, together with the investment of each, are given in Table 11.

Table 11: Ownership of CRE investment by sectors

£ billions as at 2014 % change since 2013

Financial institutions UK insurance company funds 48 14 UK segregated pension funds 37 12 UK and Channel Island domiciled collective investment schemes 77

22

UK REITs and listed property companies 65 19 227 UK private property companies 59 11 UK traditional estates and charities 20 17 UK private investors 11 15 UK other 19 4 Overseas (excludes foreign-owned fund managers, insurance companies and pension funds investing UK sourced capital) 113

20

Total 449 17 Source: IPF’s The Size and Structure of the UK Property Market End–2014 Report (table 4.1, Source PMRECON estimates using data from company accounts, IPD, ONS, PFR and RCA/PD)

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TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 2.3.5 Ownership – the significance of foreign capital Many high profile developments in recent years have been financed by foreign capital. The most notable developments include The Shard by Qatar or the London Gateway by the UAE. We give many more examples in Part 1. Such foreign investment could be viewed negatively by a community in which the properties have central importance, as they may believe that they should belong to the community or at least to its fellow citizens.

What are the facts? As noted in the table above, 25% of institutionally owned CRE was owned by foreign institutions in 2014, and more significantly this share has doubled in the last 10 years. Despite the number of foreign-owned, high-profile developments, we should stress that overall British CRE remains predominantly owned from within.

There is little or nothing inherently unwelcome in Britain’s CRE being owned by those overseas. Capital is mobile across frontiers and it seeks the best return in terms of its owners’ objectives, their time horizon and attitudes to risk. Moreover, for its part, British capital has made its way extensively into foreign assets. The fact that our property attracts interest can be considered something of an international endorsement of Britain’s economic present and future. However, while we would not for one moment wish to argue for barriers to capital mobility, the phenomenon of foreign ownership does raise concerns in some quarters, and we may first ask why it is growing.

Typically, capital is invested locally: the ‘home country bias’ has puzzled finance theorists who point to the benefits of diversification, but it is generally explained in terms of local knowledge, both of production possibilities and of the market. These factors might seem particularly important in relation to property, which is by its nature ‘local’. So why have so many major CRE investments been financed externally?

One possible explanation, the availability of external funds, has increased enormously over the past ten years, initially under the influence of rapid economic growth led by China and an associated boom in raw material and most importantly oil prices, leading in particular to the emergence of sovereign wealth funds, often with different investment objectives from more traditional financial institutions. So part of the answer is that foreign investors have ‘crowded out’ domestic investors, by bidding more for available sites and investment opportunities, or providing more extensive amenities. Major foreign investors often have two key characteristics; they can bring a lot of money to support a project and they have long-term investment horizons. Both of these are very important in relation to property development; one way of accommodating the agglomeration and co-ordination externalities associated with property development is through their internalisation in large-scale developments. In many cases, property assets are designed and built to stand the test of time, so investors must be prepared to have their money tied up over a long period of time. Clearly, sovereign wealth funds are ideally placed to make such investments and are one major source of such funds.

It is only natural that the allocations or weightings across asset classes will vary over time, reflecting cyclical factors. The question is whether the amount of domestic capital flowing into developing British CRE assets is below the rate needed to meet Britain’s growth ambitions. Should we be content that foreign capital is crowding in, and less worried that it might be crowding out domestic funds? This said, recent signs have been promising, with evidence showing that British investors are rotating capital back into its CRE assets. There is every chance that, in absolute terms, domestic and international ownership of Britain’s expanding CRE base will increase in tandem, and will increase via joint ventures in developing commercial and indeed residential real estate.

Another possible (and related) explanation is that the elevation of short term ‘shareholder value’ as the guiding principle of commercial governance in the UK (taking its lead from the US), has encouraged firms to stabilise their share price rather than to take risks and to devote resources to financial engineering rather than to real investment. This may have created barriers to raising domestic finance for major property developments, and hence the availability of external funds has allowed good investments to go ahead often linked to domestic investments. Thus there may have been crowding in rather than crowding out as domestic investors feel less able to take long-term risks than their overseas peers.

Whilst UK residents enjoy the use of these investments, working in them or living nearby, often they will not enjoy the income they generate. Those who provide external finance will obviously expect a return on their investment, which may take the form of rents on properties and any residual surplus. However well managed,

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these foreign owned developments will need to make a return for their owners, and cannot contribute to local incomes to the same extent as those indigenously owned.

A further concern arises if foreign ownership is accompanied by foreign debt. Not only does this introduces a currency mismatch between property assets across Britain and the liabilities secured against them, but cheap debt may be ‘carried into’ Britain to fund asset purchases. Even in our inter-connected global economy, this debt transfer is something that must be viewed with a little concern. In fact, the experiences post 2008 suggest how destabilising to Britain’s economy this kind of funding mismatch could prove as exchange rates moved sharply ‘the wrong way’, such that sterling denominated assets like UK CRE lost value from an overseas perspective. The result was that otherwise perfectly well-functioning property assets, such as prime London hotels, found themselves characterised as distressed. Whilst the pound’s move downwards in 2008 may have been welcomed by exporters and others for whom it provided a competitive boost, it was hardly viewed favourably so by those whose funding of British property asset purchases were in currencies against which sterling had tumbled. Funding mismatches can also occur when domestic investors finance purchases of British assets with foreign debt or when short-term debt funding is used to support long-term investments.

Where overseas investors acquire UK CRE, their acquisition creates a capital inflow while their subsequent ownership creates current account outflows, as rental income is distributed to investors or used to repay overseas debt funding. Some may argue that these outflows are not a good thing as they represent UK income leaving the country, but we must remember that some foreign financed CRE projects will contribute to future export earnings, mitigating CRE-related outflows. For example, a foreign-owned hotel may well attract sufficient customers from abroad that its foreign exchange income more than covers its foreign exchange repayments. It is possible that some externally financed CRE projects may strengthen both the current and the capital accounts, and one may wish to ask whether particular externally financed projects will generate the foreign exchange income to cover their (foreign exchange) servicing costs.

In summary, we have noted the arrival into Britain’s CRE market of investors from overseas and argued that their interest should be welcomed. Following the wave of Japanese investment and occupancy in the 1980s, and subsequently from Germany, more recently capital arriving into Britain’s commercial real estate market has spread widely from the Gulf across to Asia, taking in China, Singapore, Malaysia and Indonesia. There has also been investment from Norway and Canada. With time, more names are certain to be added and these will not be absent or negligent landlords. They will be buying for the long term, with the intention to hold rather than ‘to flip’, and will often buy without taking on debt. Some might view these points as contradictory; rental wealth remitted from Britain and so denying it the growth multipliers that we suggested it would generate and acting against its balance of payments, but though there may be some concerns with foreign ownership of CRE, we believe on balance it has been, and will continue to be, much to the benefit of the British economy.

2.3.6 Understanding the reason for foreign capital Whilst foreign ownership of Britain’s CRE is hardly new, the buying of British assets has recently been little short of extraordinary, the value more than doubling in the ten years to 2013. Very often real estate ownership is an essential by-product of an overseas acquisition to Britain, for instance, General Motors absorbing the production assets of Vauxhall Motors in 1957. Significantly, there is no sign of any lessening in the appetite for British real estate from overseas buyers. Before reflecting on some of the consequences of this markedly higher foreign ownership, it is instructive to consider why we have seen events unfold as they have. Much of the explanation can be found in the rapid growth recorded by ‘emergent’ nations, notably China, whose appetite for natural resources has in turn powered expansion across large tracts of the world with a resulting boost in sovereign, corporate and indeed personal wealth. It can be argued that it is in the process of this wealth being diversified that Britain’s CRE and residential property markets have been targeted. The UK after all offers a long-established and recognised currency, in fact it has long been one of the top four most widely held in foreign reserves (see chart 22). With the increase in global wealth we should not then be surprised that something so asset-backed as UK property should find itself so sought after, and why indeed it will continue to be.

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Chart 22: Composition of foreign exchange reserves

Source: IMF, Toscafund

To repeat, the recent surge in foreign buying of British real estate has, it could be argued, been far less about acquiring the corporate entities occupying the premises, as simply the premises themselves. The same applies to development activity funded from overseas, as for instance when Ford invested in the development of its sizeable plant in Dagenham, which opened in 1931 covering 475 acres. This is not to claim that buying as an owner and occupier is not occurring, just that these instances are becoming rarer. Nor too is it to claim that overseas owners will not someday become owner-occupiers; just that they have not taken up both roles in the first instance.

Aside from the obvious competition to existing – and indeed prospective – UK landlords, the arrival of overseas landlords across Britain’s CRE market has had an unquestionable impact. As already noted, a great deal of overseas ownership can be explained by a desire to diversify wealth. The result is that income generation is often relegated to a secondary desire. The growing overseas ownership of British CRE can lead to situations where an asset is valued in one currency but the debt secured against the asset is valued in a different currency. There are a number of consequences of such ‘currency mismatch’ situations. Most notably, a sharp unanticipated movement in exchange rates could quite easily trigger covenant breaches and the forced selling of property in no way distressed in the conventional sense. However, it is quite typical for investors to engage in foreign exchange hedging strategies in order to mitigate these risks.

The reality is that the sharp increase in the overseas ownership of Britain’s CRE has not only internationalised ownership, but opened entirely new, and widened existing, transmission channels. We have to accept that monetary shocks elsewhere will increasingly have a very direct bearing within Britain, even on real estate occupied by business sectors insulated from macro-economic events overseas. Statutory restriction on foreign ownership is not required, but instead a greater understanding of monetary mismatches – in relation to funding and accounting currencies – is needed, and an insistence that these are hedged or mitigated against as much as possible.

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2.4 Employment 2.4.1 A CREator of jobs We have emphasised how CRE is a crucial production factor within the British economy, providing an irreplaceable input across almost every business sector. However, the process of creating CRE is an industry in itself, as is its operation, management and maintenance. Let us first focus on construction.

Over the course of the last decade, construction has on average directly employed 2.1m workers across Britain – currently just over 2m (of whom 1.1m are private contractors), some are active beyond CRE in building infrastructure. In addition, there are a number of workers involved along mutually dependent supply chains, in secondary and tertiary sectors; notably the extraction, production and distribution of materials and in plant hire. There will also be some who benefit from being in proximity to the activity generated by a ‘building site’ and all other positive economic multiplier effects (although there will no doubt be adverse aspects from the unavoidable disruption).

Whilst construction draws upon a range of non-manual professions – developers, architects, surveyors, etc – and a multitude of highly skilled manual crafts, it also provides large scale employment for young people whose skills are limited, and whose employment opportunities are as a consequence restricted; this is evidenced by the stubbornly above average unemployment rate. Whilst labouring may be physically strenuous, average earnings are known to be above manual work performed in the hotel and catering sectors.

Chart 23: Average weekly earnings (construction vs retail wholesale, hotels and catering)

Chart 24: Average weekly earnings for industries compared

Source: ONS.

Much like construction, property provides work extensively across professional non-manual and skilled manual activities in its operation, maintenance and management. We would wish to continue to focus here on the largely unskilled areas. Properties need to be secure, clean, well-maintained and a range of employees are needed to achieve these ends.

Chart 25: Jobs (construction vs real estate activities) Chart 26: Vacancies (construction vs real estate activities)

Source: ON

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69

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS While some of the traditional labour needs in the construction and maintenance of property have been overtaken by technology, from the introduction of security gates to automated window cleaning, CRE assets still require full and part-time labour to facilitate their operation. Not only is CRE a consumer of technology, but it has, on occasion, been the trigger for innovation, indirectly driving a range of sectors seemingly unrelated to it. The growth in cloud technology for instance was motivated in no small way by a commercial desire to ‘free-up’ valuable office space.

The reality is that the construction, operation and maintenance of Britain’s property assets opens a range of employment opportunities across a breadth of skill-sets, a number of supply-chains, a spectrum of business sizes and across the entire country.

Chart 27: Unemployment rates

Source: ONS

2.4.2 ‘Multiplier’ externalities It is often claimed that buildings are needed for employment, but there are two sides to this. First, the construction and maintenance of buildings creates jobs, but labour is a resource and there is a need to deploy it in its most productive use. As the dismal experience of the centrally planned economies has shown, it is easy enough to create jobs if the pay is sufficiently low and no one cares about what is produced. Not only the labour, but also the capital equipment used in construction have value and could contribute to economic output in other ways if they were not employed in construction. Employing people in construction makes sense only if the value of what they produce is greater than the cost of employing them.

But how well does this argument hold up if the economy is in recession? Then there is an overall deficiency in the demand for labour, and the economy is not creating enough jobs for its labour force. In such circumstances, with widespread unemployment, any form of spending is good as it provides work for the unemployed, whose higher incomes are spent creating more employment, and there are usually substantial fiscal paybacks from higher tax receipts and reduced welfare payments. One concern with such ‘counter-cyclical’ policies is that jobs are created and money is spent on employing more people rather than on consultants’ fees or imported materials. There is also the issue of speed; recessions are sometimes fairly short-lived, so any intervention must be quick acting if it is to be effective.

During the post-war period, the UK has not used construction as a tool of counter-cyclical policy, not least because, until the current recession, all downturns in the post-war period had been deliberately created by Government to hold down inflation. The recession following the financial crash of 2008 was different; it was not created by deflationary Government policies induced by rising inflation, and more spending of a traditional Keynesian type might well have alleviated its consequences (it could be argued that the United States emerged more quickly from recession than European countries because it avoided fiscal cutbacks despite its enormous budget deficit). However, this recession has now drawn to a close, in the UK as well as in the US, and should not be assumed to provide the backdrop to economic policy for the foreseeable future.

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As technology advances, more people are working in professional, managerial, administrative and other skilled positions while fewer are engaged in unskilled manual jobs. As the labour market increasingly rewards skills, prospects for the unskilled can deteriorate. The construction sector – fuelled by demand for CRE – can provide jobs for less qualified people.

Chart 28: Sectoral employment in the UK since 1982

Source: ONS

Buildings contribute to employment not only when they are being built, but also in use. Workers need somewhere to work, and not much can be done without buildings to work in. Capital equipment, roads and vehicles, water and electricity are all necessary for commercial enterprises to be viable. Without any of these, production would collapse, but they cannot all claim credit for all that is produced as it is the marginal, rather than the total product, that measures a factor’s contribution.

Nonetheless, better premises enhance worker productivity and this constitutes a ‘pecuniary’ externality. Workers benefit from better capital because they get paid more.

Finally, CRE contributes to the rest of the economy through taxation. Of course, (nearly) everyone and (nearly) every business pays taxes, the question is whether CRE is more heavily burdened than other sectors. If the answer to that is yes, then investment in CRE is liable to more taxation than equivalent investment in other forms of capital, and that excess represents a unique contribution to the rest of the economy.

Though business rates are a tax deductible expense in determining corporation tax (or income tax for unincorporated enterprises), the overall tax burden on CRE none-the-less remains higher. For example, in 2009/10, receipts from business rates amounted to £22.9bn as against corporation tax receipts of £35.8bn (there are more up-to-date figures available). It may be noted that businesses can reduce their corporation tax payments by various mechanisms, such as locating their head offices in low tax jurisdictions. For the service sector, business must be located near the customers, so whilst Starbucks may not be paying much in corporation tax, it cannot avoid payments of business rates. Likewise foreign owned companies operating in the UK are liable for business rates.

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71

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS 2.4.3 The employment value Britain’s CRE construction Were we to consider the numbers employed across Britain’s construction markets (new build, maintenance and improvement across residential and the various non-residential sectors) we would record that, on average, between 2002 and 2014 this amounted to 2.1 million, or 6.8% of the labour force.

Chart 29: Number of people employed in construction, quarterly

Source: ONS

There is marked oscillation, reflecting Britain’s unwelcome violent construction cycle. The reality is that such metrics belie the value in providing work for a particular cohort of the labour force, specifically largely unskilled people. From land clearance, excavation and construction, there is a need for general labourers across to security staff for whom building sites offer valuable, albeit sometimes casual and itinerant, work. Then there is the skilled manual and non-manual labour needed, from plasterers, crane operators and site managers, to surveyors and architects.

If one clear macro policy objective emerges, it is to make every effort to create a backdrop for sustained activity, one where monetary policy combines effectively with fiscal policy to shave the edges off of Britain’s construction cycle. A more accommodating approach to planning would help with this by allowing the supply-side to deliver.

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72


2.5 CRE and taxation 2.5.1 The burden of taxation on CRE relative to other factors of production Taxation represents a shift in the claim on output away from those producing it to the government (or taxation authority). The total output of the economy is measured by its GDP, which is also the total value added by firms and the total of factor incomes received, ultimately, by households. A fundamental principle of taxation is that it should be ‘neutral’, that the burden on different factors or sectors should be the same, as this avoids inefficient arrangements whose purpose is more to minimise tax than to make the most efficient use of resources.

CRE is an important factor of production. Within the business sector, it is the major component of the capital employed by firms. Differential rates of taxation on different factors can lead to inefficiencies both in the choice of techniques within firms and in the pattern of output as consumers switch from more heavily to less heavily taxed products.

Two of the largest taxes by yield in the economy, income tax and VAT, are quite neutral in their impact within the business sector. Income tax, which generates about 30% of all tax revenue, is levied on all forms of income, from interest and rents to wages and salaries. VAT raises about 15% of total revenue, but the tax base of VAT is the same as the payment of total factor incomes in firms. While these two taxes are neutral, the next big tax, namely national insurance which raises about 20% of total revenue, is a tax on employment. There are also a number of taxes on capital, such as corporation tax, stamp duties, business rates and council tax, which are all taxes on capital and together raise around 20% of total revenue.

In the business sector, firms pay corporation tax on the total return on their capital (less any financed by borrowing, interest payments being tax deductible), which amounts to around 8% of tax revenue. Additionally, they pay business rates on the property they occupy, with a much smaller amount of stamp duty on transactions of (non-residential) land and property (around 5% of the total). Overall, the tax paid on property is close on twice as high as the tax paid on other types of capital employed.

Outside the business sector, the imbalance is much greater. Households hold an enormous proportion of the capital stock in the form of dwellings, which are taxed through council tax and stamp duty. These add up to about 7% of total revenue, but there is no taxation on the implicit income produced by owner-occupied property, and owner-occupied primary residences are also exempt from capital gains tax. So perhaps not surprisingly around 60% of the capital stock consists of dwellings as against around 25% in the business sector (here excluding buy-to-let). The effective tax rate on capital held in the form of dwellings is around 0.8%, whereas that employed in business pays around 3.0% on top of the income and value-added taxes levied on business activity. This difference in effective tax rates is bound to affect investment decisions and may be resulting in a misallocation of resources across the economy. So gross disparity is bound to influence investment decisions; it is scarcely surprising that we see an apparently endless boom in housing while business struggles.

Academics, economists and politicians often discuss the taxation of housing, and whilst it is clear that there are some flaws in the current system, we are not going to solve those issues in this report. One obvious anomaly is council tax. When this was introduced in early 1993 to replace the ‘community charge’ (poll tax), the Government clearly wished to avoid the embarrassment of reintroducing domestic rates just a few years after having abolished them. Council tax is a tax on dwellings, banded in accordance with capital value, but the bands have been left unchanged since the early 1990s and there has not been a revaluation since that time (the capital value of a dwelling for council tax is still the assessed capital value of the house as of 1 April 1991, and new houses are thus valued according to the amount valuers think they would have been worth in April 1991). Clearly this tax is becoming as remote from market values as were domestic rates in the years before their abolition; the bands need to be revised and the properties revalued to bring them into line with market values. For as long as politicians remain averse to revaluations and housing remains tax privileged, it is likely that households will continue to invest the bulk of their wealth in this form. An unfortunate consequence is that they do not invest in other assets such as CRE, which in part may explain the lack of political support for the commercial property sector.

It might be thought that the efficiency loss caused by higher taxes on business property (as against other forms of business capital) may be relatively small because there is not that much scope for substitution. After all, in

73

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS business, CRE is an essential input; for example, a firm cannot substitute inventories for real estate. There are, nonetheless, ill effects of the heavy taxation of commercial property.

One serious problem is that taxes reduce the incentive to use CRE efficiently. Property may be left empty, or stagnate in some outdated use because using it more profitably will attract a larger tax bill. This is particularly the case as, in principle, CRE has become more flexible – a property built for one purpose can, as the economy develops, be adjusted to another.

In summary, we would argue that CRE is taxed more heavily than other forms of wealth or other factors of production. We suggest that this results in a gross misallocation of savings into residential property rather than productive capital, and often inefficiencies in the use of CRE. Lastly, there is perhaps some diminution in the representation of CRE in the political sphere as so few people have significant direct investments in it.

74


Appendix 1 – England and Wales rating list, VOA, as of Sept 2014 List Sector Real Estate type Sector type 2010 Rating List

2008 prices In thousands

CRL Water Supply Commercial real estate Infrastructure 781000

CRL National & Regional Gas Transportation Commercial real estate Infrastructure 616000

CRL Electricity Distribution Commercial real estate Infrastructure 567000

CRL Railways Non-commercial Infrastructure 351000

CRL Communications Commercial real estate Infrastructure 181000

CRL Electricity Transmission Commercial real estate Infrastructure 170000

CRL Gas Meters Commercial real estate Infrastructure 94000

CRL Pipelines Quasi-CRE Infrastructure 62000

CRL Electricity Meters Commercial real estate Infrastructure 39000

CRL Light Railways Commercial real estate Infrastructure 10000

CRL Local Gas Transportation Commercial real estate Infrastructure 8000

CRL Canals Non-commercial Infrastructure 0

LRL Offices (Inc Computer Centres) Commercial real estate Office 13443242

LRL Factories Workshops and Warehouses (Incl Bakeries & Dairies) Commercial real estate Industrial 8344843

LRL Shops Commercial real estate Retail 7855459

LRL Hypermarkets/Superstores (over 2500m2) Commercial real estate Retail 2983333

LRL Retail Warehouses and Foodstores Commercial real estate Retail 2106187

LRL Local Authority Schools (National Scheme) Non-commercial Other 1581617

LRL Public Houses/Pub Restaurants (National Scheme) Commercial real estate Retail 1389008

LRL Large Distribution Warehouses Commercial real estate Industrial 1283199

LRL Hotels (4 Star & Above) & Chain Op. 3 Star (National Scheme) Commercial real estate Other 1155723

LRL Large Shops (Over 1850m2) Commercial real estate Retail 1022017

LRL Restaurants Commercial real estate Retail 829632

LRL Large Industrials (Over 20 000m2) Commercial real estate Industrial 753473

LRL Power Generators Commercial real estate Infrastructure 646771

LRL Hospitals & Clinics NHS (National Scheme) Non-commercial Other 641757

LRL Surgeries Clinics Health Centres (Rental Valuation) Non-commercial Other 563291

LRL Car Showrooms Commercial real estate Retail 485503

LRL Banks/Insurance/Building Society Offices & Other A2 Uses Commercial real estate Office 448890

LRL Universities (Excluding Oxbridge) (National Scheme) Quasi-CRE Other 447883

LRL Civil Airports Commercial real estate Infrastructure 404375

LRL Large Food Stores (750 - 2500m2) Commercial real estate Retail 393213

LRL Public and Independent Schools (National Scheme) Quasi-CRE Other 391378

LRL Sewage Works (National Scheme) Non-commercial Infrastructure 383682

LRL Stores Commercial real estate Industrial 359699

75

TOSCAFUND BRITAIN’s PROPERTY CREDENTIALS List Sector Real Estate type Sector type 2010 Rating List


LRL Communication Stations (National Scheme) Commercial real estate Infrastructure 324194

LRL Colleges of Further Education (National Scheme) Quasi-CRE Other 322031

LRL Offices (Headquarters/Institutional) Commercial real estate Office 279204

LRL Land Used for Storage Commercial real estate Other 258150

LRL Petrol Filling Stations (National Scheme) Commercial real estate Other 257299

LRL Departmental and Walk Round Stores (Large) Commercial real estate Retail 241980

LRL Car Parks (NCP & Multi-Storey) Commercial real estate Other 219936

LRL Showrooms Commercial real estate Retail 217183

LRL Airport Let Outs Commercial real estate Retail 215419

LRL Car Parks (Surfaced Open) Quasi-CRE Other 206072

LRL Vehicle Repair Workshops & Garages Commercial real estate Retail 201757

LRL Sports & Leisure Centres (LA) (Wet & Dry) (National Scheme) Quasi-CRE Other 193446

LRL Sports & Leisure Centres (Private) (Wet & Dry) Commercial real estate Other 189703

LRL Cafes Commercial real estate Retail 178527

LRL Day Nurseries/Play Schools Quasi-CRE Other 178406

LRL Hotels (3 Star And Under) Commercial real estate Other 176877

LRL Police Stations Non-commercial Other 166764

LRL Telecommunications Cable Networks (National Scheme) Quasi-CRE Infrastructure 159371

LRL Holiday Homes (Self Catering) Commercial real estate Other 146856

LRL Civic and Public Buildings (Local Authority Occupations) Non-commercial Office 144838

LRL Liquid Bulk Storage (Incl Petrol & Oil) (National Scheme) Commercial real estate Industrial 139994

LRL Courts (Contractors Valuation) Non-commercial Other 135968

LRL Caravan Parks (Leisure) (National Scheme) Commercial real estate Other 135211

LRL Museums and Art Galleries (Contractors) Non-commercial Other 128742

LRL Hairdressing/Beauty Salons Commercial real estate Retail 124282

LRL Iron and/or Steel Works Commercial real estate Industrial 122414

LRL Army Hereditaments Non-commercial Excluded 116788

LRL Clubs & Institutions Non-commercial Other 116677

LRL Chemical Works Commercial real estate Industrial 113663

LRL Golf Courses Commercial real estate Other 110120

LRL Libraries Non-commercial Other 109395

LRL Community Day Centres Non-commercial Other 106573

LRL Car Spaces Quasi-CRE Other 106342

76


List Sector Real Estate type Sector type 2010 Rating List


LRL Garden Centres Commercial real estate Retail 101150

LRL Cinemas (National Scheme) Commercial real estate Other 100902

LRL MOD Hereditaments Non-commercial Excluded 100130

LRL Oil Refineries Commercial real estate Industrial 96450

LRL Drive-Thru Restaurants Commercial real estate Retail 91863

LRL Laboratories Non-commercial Other 91149

LRL Factory Shops Commercial real estate Retail 90467

LRL Storage Depots Commercial real estate Industrial 89379

LRL Motorway and Major Road Service Areas Commercial real estate Retail 85640

LRL Prison Service Hereditaments Non-commercial Excluded 85428

LRL Motor Vehicle Works Commercial real estate Industrial 84860

LRL Hospitals & Clinics (Private) (National Scheme) Commercial real estate Other 83986

LRL Wholesale Warehouses Commercial real estate Retail 81792

LRL Large Shops (750 - 1850m2) Commercial real estate Retail 80431

LRL Surgeries Clinics Health Centres (Contractors Valuation) Non-commercial Other 79264

LRL Fire Stations Non-commercial Excluded 79185

LRL Business Units Commercial real estate Office 77448

LRL Cold Stores (Rental Valuation) Commercial real estate Industrial 77282

LRL Night Clubs & Discotheques Commercial real estate Other 74843

LRL Football Stadia Commercial real estate Other 73959

LRL Nuclear Establishments Non-commercial Industrial 73080

LRL Betting Offices Commercial real estate Retail 72382

LRL ATMs Commercial real estate Retail 71444

LRL Advertising Right Commercial real estate Other 67056

LRL Garages (Transport and Commercial) Commercial real estate Other 65623

LRL Sports & Leisure Centres (LA) (Dry Only) (National Scheme) Quasi-CRE Other 64928

LRL Computer Centres (Purpose Built) Commercial real estate Office 64284

LRL Village Halls Scout Huts Cadet Huts Etc Non-commercial Other 64134

LRL Pipelines Quasi-CRE Infrastructure 62000

LRL Drive-In Restaurants Commercial real estate Retail 59924

LRL Exhaust and Tyre Centres Commercial real estate Retail 58203

LRL Statutory Docks and Harbours (Non-Formula Prescribed) Quasi-CRE Infrastructure 57805

LRL Sports & Leisure Centres (Private)(Dry Only) Commercial real estate Other 56037

LRL Waste Transfer Stations Quasi-CRE Industrial 55972

77



LRL RAF Hereditaments Non-commercial Excluded 55540

LRL Film and TV Studios Commercial real estate Other 55331

LRL Casinos and Gambling Clubs Commercial real estate Other 55285

LRL Holiday Centres Commercial real estate Other 53978

LRL Public Houses/Pub Restaurants (Inc. Lodge) (National Scheme) Commercial real estate Retail 53952

LRL Post Office Sorting Centres Commercial real estate Industrial 49906

LRL Guest & Boarding Houses Commercial real estate Other 47957

LRL Conference & Exhibition Centres Commercial real estate Other 45139

LRL Theatres (National Scheme) Commercial real estate Other 44269

LRL Training Centre (Residential) Quasi-CRE Other 43623

LRL Sales Kiosks Commercial real estate Retail 43619

LRL Showhouses (National Scheme) Commercial real estate Retail 43382

LRL Waste Incinerator Plants Quasi-CRE Industrial 42619

LRL Mineral Producing Hereditament - Putrescible Commercial real estate Industrial 42415

LRL Bingo Halls (National Scheme) Commercial real estate Other 42399

LRL Post Offices Commercial real estate Retail 42315

LRL Gymnasia/Fitness Suites Commercial real estate Other 41497

LRL Navy Hereditaments Non-commercial Excluded 41492

LRL Bowling Alleys Commercial real estate Other 41080

LRL Swimming Pools (Local Authority) Non-commercial Other 40848

LRL Sports Grounds Quasi-CRE Other 40442

LRL Mineral Producing Hereditament - Hardrock Commercial real estate Industrial 38965

LRL Car/Caravan Sales/Display/Hiring Sites Commercial real estate Retail 37313

LRL Crown Miscellaneous Quasi-CRE Other 37309

LRL Training Centre (Non Residential) Commercial real estate Other 35600

LRL Clubhouses Commercial real estate Other 33110

LRL Tourist Attractions Quasi-CRE Other 33109

LRL Docks and Harbours (Non-Statutory) Quasi-CRE Infrastructure 32876

LRL Industrial Miscellaneous Commercial real estate Industrial 32657

LRL Paper Mills Commercial real estate Industrial 32518

LRL Wine Bars Commercial real estate Retail 31837

LRL Sports Stadia Commercial real estate Other 31735

LRL Computer Centres (Non-Purpose Built) Commercial real estate Office 30361

78




LRL Markets (other than livestock) Commercial real estate Other 30150

LRL Archives Quasi-CRE Other 30044

LRL Mineral Producing Hereditament - Sand and Gravel Commercial real estate Industrial 29837

LRL Railways & Tramways (Non Leisure) Non-commercial Infrastructure 29300

LRL Amusement Arcades Commercial real estate Other 28815

LRL Commercial Miscellaneous Commercial real estate Other 28770

LRL Waste Recycling Plants Quasi-CRE Infrastructure 28712

LRL Breweries (National Scheme) Commercial real estate Industrial 27144

LRL Courts (Rental Valuation) Quasi-CRE Other 26979

LRL Takeaway Food Outlet (Predominantly Off Premises) Commercial real estate Retail 26666

LRL Aircraft Works With Airfields Commercial real estate Industrial 26027

LRL Pitches for Stalls Sales or Promotions Quasi-CRE Retail 25976

LRL Concrete Batching Plants Commercial real estate Industrial 25974

LRL Newspaper Printing Works (National Scheme) Commercial real estate Industrial 25398

LRL Ship Building Yards Quasi-CRE Industrial 25160

LRL Bus Garages (Contractors Valuation) Quasi-CRE Other 24789

LRL Crematoria (With & Without Cemeteries) (National Scheme) Quasi-CRE Other 24235

LRL Pharmacies Within/Adjacent to Surgery/Health Centre Quasi-CRE Retail 24015

LRL Concrete Product Works Commercial real estate Industrial 23951

LRL Bus Stations Commercial real estate Other 23898

LRL Lorry Parks Quasi-CRE Other 23717

LRL Riding Schools & Livery Stables (National Scheme) Quasi-CRE Other 23481

LRL Pharmacies Commercial real estate Retail 23357

LRL Veterinary Clinics / Animal Clinics Commercial real estate Other 22696

LRL Oxbridge Colleges Quasi-CRE Other 22203

LRL Leisure Miscellaneous Quasi-CRE Other 21324

LRL Cement Works Commercial real estate Industrial 21300

LRL Car Washes (Stand Alone) Commercial real estate Other 21109

LRL Hostels Commercial real estate Other 20985

LRL Bus Garages (Rental Valuation) Quasi-CRE Other 20656

LRL Theme Parks Commercial real estate Other 19741

LRL Country House Hotels Commercial real estate Other 19719

LRL Caravan Sites and Pitches (National Scheme) Commercial real estate Other 19694

LRL Brickworks (Traditional) Clay Tile/Pipe Works Commercial real estate Industrial 19610

79



LRL Marinas (National Scheme) Commercial real estate Other 19363

LRL Food Stores Commercial real estate Retail 18477

LRL Statutory Docks and Harbours (Formula) Quasi-CRE Infrastructure 17853

LRL Civic Amenity Sites Quasi-CRE Infrastructure 17768

LRL Funeral Parlours/Chapels Of Rest Commercial real estate Other 17588

LRL Landfill Gas Generator Sites Quasi-CRE Infrastructure 17529

LRL Gas Processing Plants Commercial real estate Industrial 17429

LRL Scrap Metal/Breakers Yard Non-commercial Industrial 17209

LRL Asphalt Plants Commercial real estate Industrial 17079

LRL Car Auction Buildings/Sites Commercial real estate Other 16873

LRL Food Processing Centres Commercial real estate Industrial 16699

LRL Tolls (Ferries Roads And Bridges) Quasi-CRE Infrastructure 16002

LRL Museums and Art Galleries (Non-Contractors) Quasi-CRE Other 15876

LRL Kennels and Catteries Quasi-CRE Other 15691

LRL Public Conveniences (National Scheme) Non-commercial Excluded 15619

LRL Abattoirs & Slaughter Houses (Rental Valuation) Commercial real estate Industrial 15454

LRL Ambulance Stations Quasi-CRE Other 15357

LRL Horse Racecourses Commercial real estate Other 15301

LRL Lodges (National Scheme) Quasi-CRE Other 14990

LRL Stables and Loose Boxes Quasi-CRE Other 14804

LRL Snooker Halls/Clubs Commercial real estate Other 14106

LRL Mineral Producing Hereditament - Oil Commercial real estate Industrial 14068

LRL Car Parks (Unsurfaced Open) Quasi-CRE Other 13511

LRL Arenas Commercial real estate Other 12706

LRL Educational Miscellaneous Quasi-CRE Other 12649

LRL Creameries Quasi-CRE Industrial 12429

LRL Electricity Undertakings (Non-Statutory) Quasi-CRE Infrastructure 12157

LRL Vehicle Testing Centres (with Test Tracks) Quasi-CRE Other 11908

LRL Zoos & Safari Parks Commercial real estate Other 11485

LRL Flour Mills (National Scheme) Commercial real estate Industrial 11347

LRL Bullion/Money Stores (National Scheme) Commercial real estate Retail 11071

LRL Concrete Block Works Commercial real estate Industrial 11040

LRL Sports & Leisure Centres within/part of Specialist Property Commercial real estate Other 11025

80




LRL Provender Mills (National Scheme) Commercial real estate Industrial 10784

LRL Beet Sugar Factories Commercial real estate Industrial 10180

LRL Landfill Sites Non-commercial Infrastructure 9907

LRL Car Supermarkets Commercial real estate Retail 9883

LRL Air Ports (Minor) (National Scheme) Commercial real estate Infrastructure 9835

LRL Roadside Restaurants (National Scheme) Commercial real estate Retail 9661

LRL Dance Schools & Centres Commercial real estate Other 9651

LRL Racing Stables (National Scheme) Commercial real estate Other 9579

LRL Field Study Activity and Adventure Centres Quasi-CRE Other 9410

LRL Cemeteries (National Scheme) Quasi-CRE Other 9229

LRL Public Halls Quasi-CRE Other 9170

LRL Auction Rooms Commercial real estate Retail 9151

LRL Police Training Colleges Non-commercial Other 9110

LRL Studios Commercial real estate Other 8952

LRL Cricket Grounds/Pitches (Non-County) Commercial real estate Other 8727

LRL Beach Huts Quasi-CRE Other 8520

LRL Mineral Producing Hereditament - Coal Commercial real estate Industrial 8507

LRL Concert Halls (National Scheme) Commercial real estate Other 8501

LRL Miscellaneous Non-commercial Other 8323

LRL Chalet Parks (National Scheme) Commercial real estate Other 8253

LRL Football Grounds Quasi-CRE Other 7980

LRL Recording Studios Commercial real estate Other 7977

LRL University Occupation within Hospitals Quasi-CRE Other 7924

LRL Timeshare Complexes (National Scheme) Commercial real estate Other 7883

LRL Motorway Service Area Let Outs Commercial real estate Retail 7881

LRL Air Strips (National Scheme) Commercial real estate Infrastructure 7830

LRL Properties Involving Extraction of Materials for Profit Commercial real estate Industrial 7730

LRL Minerals Miscellaneous Quasi-CRE Industrial 7647

LRL Motor Racetracks Commercial real estate Other 7562

LRL Farm Shops Commercial real estate Retail 7547

LRL Foundries Commercial real estate Industrial 7528

LRL Maltings - Non Trad Commercial real estate Industrial 7489

LRL Shops within/part of Specialist Property Commercial real estate Retail 7141

LRL Livestock Markets (National Scheme) Commercial real estate Other 7103

81



LRL Rugby Union Grounds Quasi-CRE Other 6911

LRL Conference Centres in Country Houses Commercial real estate Other 6888

LRL Potteries Commercial real estate Industrial 6880

LRL Bowling Centres (Indoor) Commercial real estate Other 6845

LRL Heredits used for Primary Treatment/Processing of Minerals Commercial real estate Industrial 6744

LRL Cafes/Restaurants within part of Specialist Property Commercial real estate Retail 6557

LRL Mineral Producing Hereditament - Shale Burnt Commercial real estate Industrial 6525

LRL Boat Yards Quasi-CRE Other 6504

LRL Sea Dredged Aggregate Processing Plants & Depots Non-commercial Industrial 6374

LRL Mechanised Handling Depots Commercial real estate Industrial 6292

LRL Warehouses within/part of Specialist Property Commercial real estate Industrial 6265

LRL Coaching Inns Commercial real estate Other 6265

LRL Bowling Greens (Outdoor) Commercial real estate Other 6261

LRL Tennis Courts/Clubs Quasi-CRE Other 6031

LRL Tennis Centres Quasi-CRE Other 5949

LRL Moorings (Floating Hereditaments) Quasi-CRE Infrastructure 5935

LRL Amusement Parks Commercial real estate Other 5920

LRL Golf Driving Ranges Commercial real estate Other 5889

LRL Contractors Huts & Compounds Commercial real estate Industrial 5721

LRL Food Courts Commercial real estate Other 5657

LRL Royal Palaces Non-commercial Excluded 5654

LRL Health Farms Commercial real estate Other 5529

LRL Stately Homes & Historic Houses (National Scheme) Quasi-CRE Other 5131

LRL Cricket Grounds (County) Commercial real estate Other 5089

LRL Mineral Producing Hereditament - China Clay Commercial real estate Industrial 5071

LRL Statutory Docks and Harbours (Other) Quasi-CRE Infrastructure 4564

LRL Agricultural Showgrounds (National Scheme) Quasi-CRE Other 4445

LRL Lifeboat Stations Non-commercial Other 4388

LRL Wafer Fabrications (National Scheme) Commercial real estate Industrial 4299

LRL Go Kart Rinks Commercial real estate Other 4132

LRL Artificial Fibre Works Commercial real estate Industrial 4090

LRL Stud Farms Quasi-CRE Other 4052

LRL District Heating Undertakings & Networks Quasi-CRE Infrastructure 3943

82




LRL Religious Retreats/Study Centres (Residential) Quasi-CRE Other 3864

LRL Greyhound Racetracks Commercial real estate Other 3829

LRL Aquaria Commercial real estate Other 3758

LRL Nursing Homes (Inc. Old Peoples Homes) Quasi-CRE Other 3732

LRL Mineral Producing Hereditament - Chalk Commercial real estate Industrial 3721

LRL Station Let Outs Commercial real estate Retail 3541

LRL Vehicle Testing Centres (Without Test Tracks) Quasi-CRE Retail 3479

LRL Grain Silos Commercial real estate Industrial 3442

LRL Pleasure Piers Commercial real estate Other 3404

LRL Bulk Cement Storage Depots Commercial real estate Industrial 3246

LRL University - Ancillary Land or Buildings Quasi-CRE Other 3201

LRL Ski Centres Commercial real estate Other 3197

LRL Pack Houses Quasi-CRE Industrial 3145

LRL Cement Tile Works Commercial real estate Industrial 3116

LRL Mineral Producing Hereditament - Blockstone Commercial real estate Industrial 3021

LRL Information/Visitor Centres Quasi-CRE Other 2942

LRL Mineral Producing Hereditament - Inert Commercial real estate Industrial 2890

LRL Pavilions Non-commercial Other 2837

LRL Sales Offices Commercial real estate Retail 2796

LRL Ship Repair Yards Quasi-CRE Industrial 2796

LRL Aluminium Smelting Works Commercial real estate Industrial 2698

LRL Lakes with Water Sport Facilities Quasi-CRE Other 2689

LRL Heritage Railways Quasi-CRE Infrastructure 2658

LRL Mineral Producing Hereditament - Other Mineral Category Commercial real estate Industrial 2509

LRL Hospital Let Outs Commercial real estate Other 2380

LRL Squash Courts Commercial real estate Other 2204

LRL Granaries and Intervention Stores Commercial real estate Industrial 2194

LRL Workshops within/part of Specialist Property Commercial real estate Industrial 2095

LRL Rifle and Weapons Ranges Quasi-CRE Other 2093

LRL Mineral Producing Hereditament - Clay Commercial real estate Industrial 2025

LRL Kiosks within/part of Specialist Property Commercial real estate Retail 1984

LRL Land used for Display Quasi-CRE Other 1971

LRL Football Pitches Quasi-CRE Other 1876

LRL Boathouses Quasi-CRE Other 1822

83



LRL Ice Rinks Commercial real estate Other 1792

LRL Miscellaneous within/part of Specialist Property Quasi-CRE Other 1740

LRL Land used for Car Boot Sales Quasi-CRE Other 1691

LRL Truck Stops Quasi-CRE Other 1662

LRL War Games Courses/Misc Ag. Use Commercial real estate Other 1496

LRL Animal Boarding Commercial real estate Other 1440

LRL Totalisators on Horse Racecourses Commercial real estate Other 1427

LRL Coking and Carbonising Plants Commercial real estate Industrial 1321

LRL Mineral Producing Hereditament - Brine Commercial real estate Industrial 1279

LRL Land used for Advertising Quasi-CRE Other 1244

LRL High Tech Warehouses Commercial real estate Industrial 1238

LRL Offices within/part of Specialist Property Commercial real estate Office 1237

LRL Telecommunications Switching Centres Commercial real estate Infrastructure 1235

LRL Swimming Pools (Private) Commercial real estate Other 1226

LRL Peat Fields Non-commercial Other 1185

LRL Nurseries/Creches within/part of Specialist Property Quasi-CRE Other 1140

LRL Rugby League Grounds Commercial real estate Other 1111

LRL Mineral Producing Hereditament - Slate Commercial real estate Industrial 1084

LRL Photographic Booths Commercial real estate Retail 1014

LRL Car Parking within/part of Specialist Property Commercial real estate Other 916

LRL Roller Skating Rings Commercial real estate Other 857

LRL Mortuaries Non-commercial Other 838

LRL Bird Sanctuaries Non-commercial Other 836

LRL Agricultural Research Centres Quasi-CRE Other 797

LRL Heliports Commercial real estate Infrastructure 793

LRL Distilleries Commercial real estate Industrial 780

LRL Electric Generators at Landfill Sites with Connecting Pipelines Quasi-CRE Infrastructure 765

LRL Changing Rooms Commercial real estate Other 721

LRL Polo Grounds Quasi-CRE Other 662

LRL Game Farms Quasi-CRE Other 547

LRL Pitch and Putt/Putting Greens Quasi-CRE Other 538

LRL Mineral Producing Hereditament - Gas Commercial real estate Industrial 486

LRL Tanneries Quasi-CRE Industrial 458

84




LRL Spoil Heap Workings Non-commercial Industrial 452

LRL Vineyards/Wineries Quasi-CRE Other 447

LRL Pet Grooming Parlours Commercial real estate Retail 406

LRL Fish Farms Commercial real estate Industrial 354

LRL Stores within/part of Specialist Property Commercial real estate Retail 338

LRL Weighbridges Non-commercial Other 297

LRL Speedway Racetracks Commercial real estate Other 293

LRL Refuse Destructor Plants/Disposal Sites Non-commercial Infrastructure 269

LRL Maltings - Trad Commercial real estate Industrial 262

LRL Model Villages Quasi-CRE Retail 258

LRL Salons/Clinics within/part of Specialist Property Commercial real estate Retail 251

LRL Pumping Mines Quasi-CRE Industrial 250

LRL Coastgaurd Stations Quasi-CRE Other 244

LRL Water Undertakings (Non-Statutory) Commercial real estate Infrastructure 240

LRL Point to Point and Eventing Courses Quasi-CRE Other 224

LRL Observatories Non-commercial Other 189

LRL Cricket Centres Commercial real estate Other 181

LRL Garages within/part of Specialist Property Quasi-CRE Industrial 173

LRL Gymnasia/Fitness Suites within/part of Specialist Property Commercial real estate Other 139

LRL Miniature Railways Quasi-CRE Other 137

LRL Public Telephone Kiosks (National Scheme) Quasi-CRE Retail 122

LRL Hatcheries/Poultry Farms Quasi-CRE Industrial 120

LRL AA/RAC Service Centres and Boxes Quasi-CRE Retail 85

LRL Mineral Producing Hereditament - Fluorspar Commercial real estate Industrial 74

LRL Sporting Rights Quasi-CRE Other 46

LRL Gypsy Camp Sites (Short Stay) Non-commercial Other 45

LRL Windmills Commercial real estate Other 40

LRL Interactive Telephone Kiosks Commercial real estate Other 25

LRL Telescope Sites Non-commercial Infrastructure 14

LRL Cattle Breeding Centres Commercial real estate Industrial 6

LRL Cable Head End Buildings Quasi-CRE Infrastructure 3

LRL Domestic Fuel Installations Quasi-CRE Infrastructure 3

LRL Abattoirs & Slaughter Houses (Contractors Valuation) Commercial real estate Industrial ..

Source: Valuation Office Agency, ONS, Toscafund

85


Appendix 2 – England and Wales top 5 sectors by category, VOA

Unlike Appendix 1, the values below have been adjusted and are at current prices.

Chart 30: Retail - Total Chart 31: Retail -Shops

Source: VOA, IPD (MSCI), Toscafund

Chart 32: Retail - Hypermarkets/Superstores (over 2,500 m2)

Chart 33: Retail - Retail Warehouses and Food Stores


Chart 34: Retail - Public Houses/Pub Restaurants (National Scheme)

Chart 35: Retail - Large Shops (over 1,850 m2)


17.45

17.50

17.55

17.60

17.65

17.70

17.75

17.80

17.85

17.90

17.95

2009 2010 2011 2012 2013 2014

£ bi

llion

7.00

7.05

7.10

7.15

7.20

7.25

7.30

7.35

7.40

2009 2010 2011 2012 2013 2014£

billi

on

2.30

2.35

2.40

2.45

2.50

2.55

2.60

2.65

2.70

2.75

2009 2010 2011 2012 2013 2014

£ bi

llion

1.86

1.88

1.90

1.92

1.94

1.96

1.98

2.00

2.02

2.04

2009 2010 2011 2012 2013 2014

£ bi

llion

1.15

1.20

1.25

1.30

1.35

1.40

1.45

2009 2010 2011 2012 2013 2014

£ bi

llion

0.91

0.92

0.92

0.93

0.93

0.94

0.94

0.95

2009 2010 2011 2012 2013 2014

£ bi

llion

86


Chart 36: Office - Total Chart 37: Office - Offices (inc Computer Centres)


Chart 38: Office - Banks/Insurance/Building Society Offices and other A2 uses

Chart 39: Office - Offices (Headquarters/Institutional)


Chart 40: Office - Business Units Chart 41: Office - Computer Centres (Purpose Built)


10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

2009 2010 2011 2012 2013 2014

£ bi

llion

10.0

10.5

11.0

11.5

12.0

12.5

13.0

2009 2010 2011 2012 2013 2014

£ bi

llion

0.36

0.37

0.38

0.39

0.40

0.41

0.42

0.43

0.44

2009 2010 2011 2012 2013 2014

£ bi

llion

0.230

0.235

0.240

0.245

0.250

0.255

0.260

0.265

0.270

0.275

0.280

2009 2010 2011 2012 2013 2014

£ bi

llion

0.065

0.066

0.067

0.068

0.069

0.070

0.071

0.072

0.073

0.074

0.075

2009 2010 2011 2012 2013 2014

£ bi

llion

0.046

0.048

0.050

0.052

0.054

0.056

0.058

0.060

0.062

2009 2010 2011 2012 2013 2014

£ bi

llion

87


Chart 42: Industrials - Total Chart 43: Industrials - Factories Workshops and Warehouses (inc Bakeries and Dairies)


Chart 44: Industrials - Large Distribution Warehouses

Chart 45: Industrials - Large Industrials (over 20,000 m2)


Chart 46: Industrials - Stores Chart 47: Industrials - Liquid Bulk Storage (inc Petrol and Oil) (National Scheme)


10.8

11.0

11.2

11.4

11.6

11.8

12.0

2009 2010 2011 2012 2013 2014

£ bi

llion

7.5

7.6

7.7

7.8

7.9

8.0

8.1

8.2

8.3

2009 2010 2011 2012 2013 2014

£ bi

llion

1.00

1.05

1.10

1.15

1.20

1.25

2009 2010 2011 2012 2013 2014

£ bi

llion

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82

2009 2010 2011 2012 2013 2014

£ bi

llion

0.320

0.325

0.330

0.335

0.340

0.345

0.350

0.355

0.360

0.365

0.370

2009 2010 2011 2012 2013 2014

£ bi

llion

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2009 2010 2011 2012 2013 2014

£ bi

llion

88


Chart 48: ‘Other’ - Total Chart 49: ‘Other’ - Hotels (4 Star & Above) and Chain Op. 3 Star (National Scheme)


Chart 50: ‘Other’ - Land used for Storage Chart 51: ‘Other’ - Petrol Filling Stations (National Scheme)


Chart 52: ‘Other’ - Car Parks (NCP and Multi-Storey) Chart 53: ‘Other’ - Sports and Leisure Centres (Private)


4.00

4.05

4.10

4.15

4.20

4.25

4.30

4.35

4.40

2009 2010 2011 2012 2013 2014

£ bi

llion

0.95

1.00

1.05

1.10

1.15

1.20

1.25

2009 2010 2011 2012 2013 2014

£ bi

llion

0.225

0.230

0.235

0.240

0.245

0.250

0.255

0.260

0.265

0.270

2009 2010 2011 2012 2013 2014

£ bi

llion

0.23

0.24

0.25

0.26

0.27

0.28

0.29

0.30

2009 2010 2011 2012 2013 2014

£ bi

llion

0.215

0.220

0.225

0.230

0.235

0.240

0.245

0.250

2009 2010 2011 2012 2013 2014

£ bi

llion

0.190

0.192

0.194

0.196

0.198

0.200

0.202

0.204

2009 2010 2011 2012 2013 2014

£ bi

llion

89


Chart 54: Infrastructure - Total Chart 55: Infrastructure - Power Generators


Chart 56: Infrastructure - Civil Airports Chart 57: Infrastructure - Communication Stations (National Scheme)


Chart 58: Infrastructure - Air Ports (Minor) (National Scheme)

Chart 59: Infrastructure - Air Strips (National Scheme)


0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2009 2010 2011 2012 2013 2014

£ bi

llion

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2009 2010 2011 2012 2013 2014

£ bi

llion

0.390

0.395

0.400

0.405

0.410

0.415

0.420

2009 2010 2011 2012 2013 2014

£ bi

llion

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2009 2010 2011 2012 2013 2014

£ bi

llion

0.0088

0.0090

0.0092

0.0094

0.0096

0.0098

0.0100

0.0102

0.0104

2009 2010 2011 2012 2013 2014

£ bi

llion

0.0000

0.0010

0.0020

0.0030

0.0040

0.0050

0.0060

0.0070

0.0080

0.0090

2009 2010 2011 2012 2013 2014

£ bi

llion

90


Toscafund Asset Management LLP Important Notice This document is confidential. Accordingly, it should not be copied, distributed, published, referenced or reproduced, in whole or in part, or disclosed by any recipient to any other person. By accepting this document, the recipient agrees that neither it nor its employees or advisors shall use the information contained herein for any other purpose than evaluating the transaction. This document, and the information contained herein, is not for viewing, release, distribution or publication in any jurisdiction where applicable laws prohibit its release, distribution or publication.

This document is published by Toscafund Asset Management LLP (“Toscafund”), which is authorised and regulated by the Financial Conduct Authority (“FCA”) and registered with the U.S. Securities and Exchange Commission as an Investment Adviser. It is intended for Eligible Counterparties and Professional Clients only, it is not intended for Retail Clients.

The collective investment schemes managed by Toscafund (the “Funds”) are unregulated collective investment schemes, which pursuant to sections 238 and 240 of the Financial Services and Markets Act 2000 may only be promoted to persons who are sufficiently experienced and sophisticated to understand the risks involved and satisfy the criteria relating to investment professionals. Persons other than those who would be regarded as investment professionals must not act upon the information in this document or acquire units/shares in the schemes to which this document relates.

The information contained in this document is believed to be accurate at the time of publication but no warranty is given as to its accuracy and the information, opinions or estimates are subject to change without notice. Views expressed are those of Toscafund only. The information contained in this document was obtained from various sources, has not been independently verified by Toscafund or any other person and does not constitute a recommendation from Toscafund or any other person to the recipient. In furnishing this information Toscafund undertakes no obligation to provide the recipient with access to any additional information to update or correct the information.

The information contained in this document does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities or products in any jurisdiction in which such an offer or invitation is not authorised and/or would be contrary to local law or regulation. Specifically, this statement applies to the United States of America (“USA”) (whether residents of the USA or partnerships or corporations organised under the laws of the USA, state or territory), South Africa and France. Any offering is made only pursuant to the relevant offering document and the relevant subscription application, all of which must be read in their entirety. No offer to purchase securities will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments in the Funds. In certain jurisdictions the circulation and distribution of this document and the sale of interests in the Funds are restricted by law. The information provided herein is for general guidance only, and it is the responsibility of any person proposing to purchase interests in any of the Funds to inform himself, herself or itself of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective investors must determine that: (i) they have the authority to purchase interests; (ii) there are no legal restrictions on their purchase of interests; and (iii) the offer or sale of interests is lawful in the jurisdiction applicable to them.

Funds managed by Toscafund have agreed to modify investment terms for certain investors for bona fide commercial reasons, subject to applicable law and regulation. Lower performance and management fees were negotiated in the case of certain institutions and individuals who made seed investments, substantial investments or who agreed to specified lock-up periods. An investor was also provided with the right to the same preferential treatment agreed with (if so agreed) subsequent similar or smaller investors. None of the investors with whom modifications have been agreed have any legal or economic links (other than as investors) with the funds managed by Toscafund and/or with Toscafund. Notwithstanding the foregoing, reduced fees may be payable by Toscafund partners and employees. To the extent there have been any modifications, these have not resulted in an overall material disadvantage to other investors.

No liability is accepted by any person within Toscafund for any losses or damage arising from the use or reliance on the information contained in this document including, without limitation, any loss or profit, or any other damage; direct or consequential. No person has been authorised to give any information or to make any representation, warranty, statement or assurance not contained in the relevant offering document and, if given or made, such other information, representation, warranty, statement or assurance may not be relied upon. The content of this document may not be reproduced, redistributed, or copied in whole or in part for any purpose without Toscafund’s prior express consent. This document is not an advertisement and is not intended for public use or distribution. The source of all graphs and data is as stated, otherwise the source is Toscafund.

For Swiss prospective investors: The Fund has not been approved for distribution in or from Switzerland by the Swiss Financial Market Supervisory Authority. As a result, the Fund’s shares/units may only be offered or distributed to qualified investors within the meaning of Swiss law. The Representative of the Fund in Switzerland is Bastions Partners Office SA with registered office at Route de Chêne 61A, 1208 Geneva, Switzerland. The Paying Agent in Switzerland is Banque Heritage, with registered office at Route de Chêne 61, 1208 Geneva, Switzerland. The place of performance and jurisdiction for Shares/Units of the Fund distributed in or from Switzerland are at the registered office of the Representative.

Past performance is not an indicator of future performance and the value of investments and the income derived from those investments can go down as well as up. Future returns are not guaranteed and a total loss of principal may occur. Please note that performance information is not available for five years. © 2015, Toscafund, All rights reserved.

91

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