What are the new Investment Zones?
Whilst many of the tax announcements in the ‘Mini Budget’ on 23 September have been consigned to history, proposals for a series of new Investment Zones remain on the table.
The Government’s intention is that Investment Zones will help to drive economic growth, foster business agglomeration, and unlock development. It hopes to achieve this through a combination of time-limited tax incentives (potentially including 100% business rates relief on newly occupied premises and enhanced capital allowances), greater control over local growth funding, and a faster, more flexible planning framework to accelerate development.
The proposal includes the introduction of designated development sites, where the need for planning applications will be minimised and the planning process streamlined.
At the launch of the Mini Budget, discussions were already under way with 38 Upper Tier Local Authorities and Mayoral Combined Authorities in England (the process for other parts of the UK will be devolved). These areas accounted for nearly 70% England’s population. All Authorities have now been given the opportunity to become involved, making the initiative virtually a national one. The deadline for applications was Friday 14 October.
This initiative follows the eight Freeports created by Rishi Sunak in 2021 (which provide tax and customs incentives) and is in many ways similar in concept to the Urban Development Corporations introduced in the 1980s. It also follows a host of other recent policy initiatives, including Build Back Better, launched in March 2021; its predecessor, the Industrial Growth Strategy; and the Levelling Up White Paper, published in February this year.
What is the case for Investment Zones?
A common criticism of investment zones is that they simply transfer demand from one location to another across the UK (or within regions of the UK), and areas simply compete against each other for investment. However, redistribution from one part of the UK to another is beneficial if it helps to ‘level up’ by raising the productivity of under-performing areas towards that of higher performing ones. Indeed, this has been a central aim of recent Government policy, and is the background for the initiative to relocate 22,000 civil service roles out of London and the South East, and to sell Government-owned office space in London worth £1.5bn.
Investment zones can be immensely successful in enabling development. Although the Urban Development Corporations had variable success, many left a legacy of regeneration, employment, and new development, as a visit to Cardiff Bay or London’s Docklands will testify. The London Docklands Development Corporation (LDDC) is the largest-scale demonstration of what is possible, transforming swathes of former industrial land into a thriving financial and residential area that now includes Canary Wharf, the ExCeL Exhibition Centre and London City Airport.
The Government’s Mini Budget rightly highlighted supply side reform, which is critical for increasing the UK economy’s trend rate of growth. Where a local economy is already highly productive with a strong employment and skills base, the Government’s role must be to ensure that supply constraints do not hinder further growth – and ensure they are globally attractive and competitive. Increasing the level of supply has the potential not only to satisfy existing latent demand within a market, but also to help attract demand from elsewhere (either from within the UK or, critically, from competing global locations).
The cities of Oxford and Cambridge are cases in point. The now-defunct Oxford Cambridge Arc initiative could have helped accelerate development (both housing and commercial space) in these key commercial centres which have historic city cores (making development difficult), and are surrounded by significant areas of green belt. It could have facilitated development in surrounding areas, the necessary transport infrastructure, and the environment to attract national and international skills and capital. It is notable that only two Authorities (Bedford and Central Bedfordshire) that lie within the Oxford Cambridge Arc are identified amongst the initial list of 38 Authorities.
Is unlocking supply beneficial?
The UK’s housing backlog is well-documented and remains a major constraint to growth. A relaxed planning regime in the proposed Investment Zones may be modestly beneficial, but it will not necessarily mean a step-change in the development rate. Housebuilders will not want to flood the market with properties, especially against the current economic backdrop. Furthermore, some areas of England with significant pressures on housing supply are not included within the initial list of 38 Authorities (including much of the home counties, for example). However, the proposal should reduce development costs (through lower affordable housing requirements and lower planning costs, for example) and increase planning certainty.
In terms of commercial property, most locations have a significant amount of surplus space (with some exceptions such as the most desirable city centre submarkets and prime distribution hubs). To take one example from the Government’s list of 38 Authorities – Nottinghamshire - there is circa 850,000 sq ft of available office space outside of Nottingham city centre, and nearly half a million sq ft within the central area. Even assuming strong employment growth, this is considerably more than will be required.
A streamlined planning process within Investment Zones has the potential to help provide much-needed space in markets where there is under-supply of the right space. But in many under-performing locations, they will not make new commercial development viable, and new development sites within their boundaries could simply leave additional redundant space elsewhere. It will also depend upon the level to which planning decisions are genuinely independent of local authority control.
The Docklands development was successful because it provided supply for which there was sufficient demand. Although its timing was unfortunate (its launch coincided with the start of the early 1990s recession and resulting oversupply of office space in central London), it satisfied an underlying long-term need for modern central London office space with large floorplates, which could not be developed within the physical and planning constraints of central London.
Focusing on change of use for commercial spaces
Creating new supply is important but this will need to be partnered with the removal of obsolete stock for other uses. The main issue with commercial space is not a lack of it – overall, there is too much – but that so much is of the wrong type, specification or quality for its market. The ongoing structural shifts in demand means there is likely to be a large quantity of redundant commercial space.
Given the contrast with other uses such as residential, where there is a structural shortage, change of use will be key, especially considering its potential sustainability benefits over new build in terms of embodied carbon. Indeed, the reforms in 2020 to the Use Classes Order were aimed at facilitating this across broad variety of urban uses from retail, office and light industrial to health and recreation uses.
It will be important to review further details around the Governments proposals when they are released, and in particular, the approach to two typical obstacles.
Firstly, how will enabling infrastructure be funded? The cost may be significant, with a long payback time (requiring the Government to act as a central coordinating and funding body). Returning to the Docklands example, the scale of public funding for the Dockland Light Railway and Jubilee Line extension was significant in ensuring its success.
Secondly, who will be vested with the power to make a CPO if required? Many of the sites that Local Authorities put forward are likely to have complex land ownership structures.
It also remains to be seen how keen Local Authorities will be to give up their planning powers in these areas. They will benefit from growth, however, receiving 100% of the additional business rates in designated sites.
Increasing the supply of high quality commercial space in key markets is vital for growth, whether through conversion or new development. Investment Zones may help, but they are only a small piece of the puzzle.
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