Levelling up and why the U.K. real estate industry should pay attention

At the beginning of February 2022, the U.K. government announced its long awaited ‘levelling up’ plan to address and close the gap between the rich and poorest parts of the country. An ambitious target of 2030 is set and much needed as, according to the Institute for Fiscal Studies¹, the U.K. is one of the most geographically uneven countries, with income inequality ranked as one of the highest in Europe.

Addressing the unequal level of productivity and economic success (which has historically been focused on select parts of the country, namely the South East) is high on the agenda. The government’s strategy also encompasses a broader range of social inequalities to include education, health and connectivity. To achieve this, the plan highlights detailed initiatives guided by 12 mission statements:

The 12 missions to level up the U.K.²

1. By 2030, pay, employment and productivity will have risen in every area of the U.K., with each containing a globally competitive city, with the gap between the top performing and other areas closing.
2. By 2030, domestic public investment in research and development outside the Greater South East will increase by at least 40% and at least one third over the spending review period, with that additional government funding seeking to leverage at least twice as much private sector investment over the long term to stimulate innovation and productivity growth.
3. By 2030, local public transport connectivity across the country will be significantly closer to the standards of London, with improved services, simpler fares and integrated ticketing.
4. By 2030, the U.K. will have nationwide gigabit-capable broadband and 4G coverage, with 5G coverage for the majority of the population.
5. By 2030, the number of primary school children achieving the expected standard in reading, writing and maths will have significantly increased. In England, this will mean 90% of children will achieve the expected standard, and the percentage of children meeting the expected standard in the worst performing areas will have increased by over a third.
6. By 2030, the number of people successfully completing high-quality skills training will have significantly increased in every area of the U.K. In England, this will lead to 200,000 more people successfully completing high-quality skills training annually, driven by 80,000 more people completing courses in the lowest skilled areas.
7. By 2030, the gap in healthy life expectancy (HLE) between local areas where it is highest and lowest will have narrowed, and by 2035 HLE will rise by 5 years.
8. By 2030, well-being will have improved in every area of the U.K., with the gap between top performing and other areas closing.
9. By 2030, pride in place, such as people's satisfaction with their town centre and engagement in local culture and community, will have risen in every area of the U.K., with the gap between the top performing and other areas closing.
10. By 2030, renters will have a secure path to ownership with the number of first-time buyers increasing in all areas; and the government’s ambition is for the number of non-decent rented homes to have fallen by 50%, with the biggest improvements in the lowest performing areas.
11. By 2030, homicide, serious violence and neighbourhood crime will have fallen, focused on the worst-affected areas.
12. By 2030, every part of England that wants one will have a devolution deal with powers at or approaching the highest level of devolution and a simplified, long-term funding settlement.

These statements help frame the national agenda. But the plan is not about making places identical. In fact, it highlights the importance and difference of place. Inequalities vary not just across our towns and cities but within them. Understanding the local make-up and associated needs and deprivation within towns is key to success.

Real estate investment is by its nature an investment in places and has the potential to shape those places through the active control and management of assets. Investors and asset managers therefore have to understand places in which their buildings exist and the communities that use them.

Importance of place

In our view, investment in underserved regions is crucial to stimulate growth across the country, and this will be supported by the shift of enhanced funding to these areas (as highlighted in mission statement 2).

However, real estate investment also has a role to play to ensure that capital reaches where it is needed. Strong foundations are already in place for this. MSCI data indicated about 38% of U.K. real estate assets (by capital value) were located within the most and more deprived regions of the country at the end of 2020. However, these investments have not always been made with place-based needs in minds and are therefore not actively contributing to resolving the underlying problems and inequalities in that region.

The levelling up paper identifies pilot regions such as Greater Manchester, West Midlands and Glasgow for £100 million of investment to create ‘Innovation Accelerators’. Modelling the likes of U.S. Silicon Valley, new investment will be used to drive centres of research excellence within these geographies which will impact business adoption and real estate requirements.

Understanding what a place needs is important for real estate investors because levelling up puts greater emphasis on community-led regeneration which will change the fortune of our towns and cities much faster than ever before.

Devolution and collaboration

Another key feature of the levelling up plan is the devolution of power to local districts which was identified as a failure of old policies trying to tackle geographical disparities from central government.

Devolution and collaboration are needed to drive the success of levelling up to ensure positive change is deeply embedded in place and will have a long-lasting impact. Real estate investing usually requires a long-term investment horizon and therefore ongoing collaboration with local stakeholders is vital to ensure investments are responding to increasingly empowered local leaders and local voices, as well as providing relevant and resilient real estate. This, in turn, should produce strong risk-adjusted returns. Passive landlords are a thing of the past. Sitting on long leases taking quarterly rents is no longer an option. Playing a much more active role in the operations of assets and connectivity with surrounding area is necessary.

Mission 3 of the plan identifies the need for public transport investment, which if successful will change and enhance the movement of people around towns which in turn can impact the demand for real estate. Collaboration with stakeholders involved in infrastructure and transport is important. Successful real estate is attributed to the communities that use it so identifying changes in footfall or how enhanced connectivity may lead communities to live further away from places of work, will all impact the performance of real estate.

Unleashing the power of the private sector

In November 2021, Glasgow held the COP26 global conference which actively sought more private sector capital to tackle our global climate crisis. The Glasgow Financial Alliance for Net Zero (GFANZ) was created and announced a commitment up to US$130 trillion in private financing to hit net-zero emissions targets by 2050.

While the values are different, the same principals apply to the levelling up agenda. Private sector capital is required to tackle social crises and help the U.K. government meet its ambitious targets, proactively boosting productivity and reducing inequality across the U.K.

The S in ESG is becoming increasingly important and gaining greater recognition across investment houses. Now is the time for investors including the real estate industry to understand fully the issues of social inequality and drive better solutions. Real Estate has an important role to enhance social infrastructure - a broad term that includes assets such as modern healthcare facilities, care homes, senior living, affordable housing for key workers and specialist housing for vulnerable groups.

The U.K. government’s levelling up paper also addresses the need for greater transparency, measurable data and accountability in terms of the plan’s adoption. These principals also apply to the private sector. Aided by the thorough analysis and clear aims of the levelling up agenda (and like established real estate environmental benchmarks), enhanced transparency among social impact solutions will garner favour among the private market. This will lead to increased demand for positive social impact products, consumers, occupier and investors.

While it feels we are at the beginning of a long journey, we hope the U.K.’s levelling up proposals are the first steps towards providing solutions to the U.K.’s geographical inequalities and driving new opportunities for real estate markets in towns which to date have been underserved. The paper puts increasing importance on driving positive social impact and something the real estate industry cannot and should not ignore.