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Jonathan BayfieldDirector, European Real Assets Research and Strategy @JonathanBayfield
The rise of the knowledge economy has energised cities which have reinvented themselves as global knowledge capitals, of which London is a prime example.
The knowledge economy has brought a revival in the fortunes of many cities in the developed world. In this new era, highly-skilled people are the key economic resource and business success requires access to networks of expertise. London is a prime example of success. Recent decades have seen it develop as an international knowledge capital, consistently vying with New York for top spot in rankings of global prominence.1
The city is a global leader in the factors that drive success in the knowledge economy – factors which are resilient: deep pools of talent; well-established clusters of knowledge-intensive activity; and the scale that facilitates the development of more extensive knowledge networks.2
Figure 1: Global cities human capital ranking
Source: Aviva Investors, Eurostat, OECD, QS September 2019
Part of London’s attraction is that its workforce is relatively young, international and highly educated. And it is also home to world-class educational and research institutions. In fact, almost 40 per cent were born outside the UK and approximately 60 per cent has tertiary education qualifications.
Part of London’s attraction is that its workforce is relatively young, international and highly educated
Clusters of knowledge-intensive activity help businesses exchange ideas, innovate, attract talent and develop new products. They contribute disproportionately to economic growth and to better-paying jobs, creating a virtuous cycle that cannot be easily replicated or designed.3 London’s world leading clusters include business services, creative industries, digital technologies, and the more mature clusters of insurance and financial services.
London is the world’s fourth largest city economy with a working-age population of over 6.1 million people, second in Europe only to Paris’s 6.5 million.4 Deep knowledge and expertise continue to be most easily shared face-to-face, giving the largest cities an advantage.
Robust demand expected to continue
Reinforcing these benefits are a host of regulatory and cultural strengths that underpin economic activity, from London’s favourable time-zone, through English being the most common second language, English Common Law being the most widespread legal system in the world , to extensive physical connectivity (London boasts the world’s busiest airport network) and high-quality digital access.
London is one of the world’s largest and most sophisticated office markets
Its credentials have helped London develop as one of the world’s largest and most sophisticated office markets. Another key advantage is its high level of liquidity and transparency; in fact, it is the world’s most liquid and transparent market, according to JLL.5
Central London boasts a diverse and dynamic office-occupier base driven largely by banking and finance, professional services, technology and media. Brexit, of course, poses a threat, but London’s knowledge-economy strengths will remain overwhelmingly in place, continuing to support demand for the city’s office space.
Of equal importance is the extent of restrictions on new supply because they can impact rental growth. In the UK, regulatory restrictions are particularly onerous, making central London one of the most difficult markets in Europe in which to develop new office space.6 Indeed, over the past 10 years, net new additions to office space in central London have been minimal, despite sustained growth in office employment levels.
An array of sub-markets
Given its scale and diversity, central London is comprised of over 30 sub-markets which vary significantly in terms of demand drivers, supply conditions and rental levels. Understanding the relative strengths and weaknesses of different sub-markets is essential if optimal investment strategies are to be deployed in London.
At the sub-market level, demand drivers are defined by the need for human capital. To draw and retain talent, markets must be well-connected places with good travel links, offering attractive amenities. By boosting local firms’ productivity, clusters also add to the value of a location.
To draw and retain talent, markets must be well-connected places with good travel links, offering attractive amenities
Local supply conditions vary between London’s eight local authorities, with planning regimes influencing geographic restrictions, conservation areas and listed buildings. Yet plans also target certain locations for development of different kinds, including brownfield sites such as Euston and Waterloo, and opportunities for redevelopment at higher densities like Farringdon and Clerkenwell.
While all sub-markets benefit from the city’s global stature, we believe the most resilient sub-markets include places like Soho, East Mayfair and Liverpool Street. These markets have strong transport links that allow connectivity to a deep pool of talent. The working environments are also boosted by rich local amenity, well-established industry clusters with a healthy outlook and supply conditions are supportive.
London’s deep pools of talent and the ability to retain them, its multiple, globally-significant clusters of knowledge-intensive activity, and its scale and international connectedness make it the ultimate 'city of the future’.
Figure 2: Map of central London office sub-markets by category
