Levelling up the UK: will real estate investors look outside London?


In general, the northern half of the UK is less prosperous than the southern half.

While some parts of the north are very affluent, and some areas of the south are very deprived, the wealth disparity between the two halves of the country generally holds true.

The government’s “levelling up” agenda – which seeks to more fairly distribute employment opportunities and invest in deprived parts of the country - aims to reduce this wealth disparity.

However, without institutional investors investing alongside, it won’t succeed. At first glance, the prognosis is bleak. But numbers can be deceptive.

How government funding stacks up

The government has already unveiled a number of initiatives to tackle inequality in education, health, income across different parts of the UK.  A few are listed below:

  • The UK Infrastructure Bank is a government-owned bank based in Leeds that backs infrastructure projects seeking to tackle climate change and support regional and local economic growth.
  • The Levelling Up Fund will invest in schemes that improve everyday life across the UK, focussing on High Streets, local transport and culture.
  • The Towns Fund intends to help raise living standards and productivity across 101 towns in England.
  • The Future High Street Fund aims to help reshape and renew town centres by providing funds and expertise to adapt.
  • Next year will see the launch of the UK Shared Prosperity Fund to replace the EU’s structural and investment funds.
  • The government has established eight freeports, adjacent to ports and airports. Manufacturers in freeports can import and re-export goods without paying tariffs and are eligible for other tax breaks. Although freeports should attract new investment, there is a risk that they take it away from the surrounding areas.

In order to really succeed, these initiatives will also need to attract large amounts of private capital. Without this, the government will not be able to fund, among other things, new social housing, business space to promote employment and the regeneration of town centres.

Are UK institutions - largely based in London - willing to invest in real estate outside London and the South East?

Pies and prejudice

We looked at the current regional allocation of real estate portfolios and how their composition has changed over the last 10 years.

The analysis is based on the MSCI UK Annual Index, which covers most of the real estate owned by UK pension funds, insurance funds, landed estates and listed REITs and was valued at £200 billion at the end of 2020.

The MSCI index uses government office regions, but we have aggregated them into four groups for the purposes of this analysis.

  1. London
  2. South eastern (the South East and East of England)
  3. Rest of England (the East Midlands, North East, North West, West Midlands and Yorkshire and the Humber)
  4. Scotland, Northern Ireland and Wales are grouped together.

The outer ring of Figure 1 shows the regional composition of the MSCI UK Annual Index at the end of 2020.  London accounted for 42% of total capital value, followed by the rest of England (29%), South Eastern (23%) and Scotland, Wales and Northern Ireland combined at 6%.  The inner ring provides the corresponding breakdown for UK GDP in 2020.

Figure 1: UK Real Estate Portfolios and UK GDP in 2020

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The comparison suggests that UK institutional investors have a bias towards investing in London, take a neutral stance towards the South East and are less inclined to invest in the rest of England, Scotland, Wales and Northern Ireland.

A similar picture emerges at a sector level comparing, for example, retail capital value by region against retail sales, or office capital value by region against office employment. The apparent bias in favour of London and against the rest of England, Scotland, Wales and Northern Ireland is not simply the result of an extreme position in one sector.

Half a world away

Moreover, the MSCI data suggest that the apparent bias in favour of London has got more, not less pronounced over the last 10 years. Figure 2 shows that London’s share of total real estate capital value grew from 34% in 2010 to 42% in 2020, whereas both the Rest of England and Scotland, Wales and Northern Ireland saw their shares drop by 3-4%, to 29% and 6%, respectively. The share of South Eastern remained stable at 23-24%.

Figure 2: UK real estate portfolios by broad region 2010 -2020

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Superficially, the data suggest that UK institutional investors have a strong preference for investing in London and might be reluctant to invest alongside the government in the Rest of England, Scotland, Wales and Northern Ireland.

But Figure 2 does not tell the whole story.

The Full Monty

Figure 3 separates the changes in the share of each region between 2010-2020 into active and passive changes.

Active changes reflect deliberate decisions by investors to buy, sell, or invest capital through development or refurbishment. Passive changes are due to capital values rising or falling at different speeds in different regions due to market trends.

This more detailed analysis reveals that UK institutional investors have been significant net investors in the Rest of England, Scotland, Wales and Northern Ireland over the last decade, and net sellers of London assets.

They have invested heavily in hotels, offices, student accommodation and warehouses outside London and the South East and sold many London offices, primarily to overseas investors. However, at a regional level these allocations have been swamped by market movements in capital values.

The value of retail assets outside London has collapsed, while London offices, warehouses and residential assets1 saw a relatively big increase in capital values between 2010-2020.

Figure 3: Change in regional portfolio weightings 2010 -2020

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Similarly, the main reason why London accounts for a higher share of total capital value than GDP in Figure 1 is that real estate yields in London are significantly lower than in the rest of the country (Figure 4).  In part this is due to the greater liquidity of London’s investment markets with the city attracting a wide array of domestic and international investors.

Figure 4: Prime real estate net initial yields – 2021 Q3

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The lower yields in London also reflects the expectation that, over the long term, the city will see faster economic growth than the rest of the country and faster rental growth. That has been a reasonable assumption over the past decade, but it has not always been the case. London offices suffered a relatively big fall in rents between 1990-1995, following a building boom in the late 1980s.

Narrowing the north-south divide

Unfortunately, the north-south divide is not new. It first started to open after the First World War with the decline of the cotton industry in Lancashire. It then widened further through the 20th century with the closure of the coal mines and widespread loss of heavy industry in the north.

While the government’s levelling up agenda and devolution initiatives are unlikely to fully close the divide, they should help to narrow it by increasing the number of investment opportunities outside London and the South East. 

Contrary to popular belief, the evidence suggests that UK institutions are ready to play their part alongside the government and invest in real estate outside of London and the South East.