For a major city to flourish, and to maintain its competitive edge, it needs to sustain diverse economic activity at all scales, from the multi-national corporation to the individual start-up. Whilst London is a powerhouse for business and finance, it is also a city that benefits from a flourishing creative sector with specialisms including, jewellery, fashion, furniture, publishing, digital media and cultural tourism.
However, this sector is increasingly under threat as start-ups and small-medium sized (SMEs) enterprisesare effectively being pushed out of Central London; victims of the city’s success which they have in part supported. There are a range of risks; from the increase in the number conversions of from workspace to residential development, the rise of commercial rents and the gentrification of areas driven by high-end residential development and demand from successful start-ups that can afford rising rents.
The value of London’s creative clusters
Creative industries within London have naturally clustered together overtime, as seen with the Hatton Garden Jewellery Quarter last century and Silicon Roundabout in ‘Tech City’ since the millennium. It’s not surprising as business clustering has a number of advantages: greater opportunities for sharing resources, knowledge and infrastructure (e.g. internet connectivity, flexible, hybrid workspace), attracting talented and highly skilled professionals and increasing innovation and competitiveness in the marketplace.
The UK Government has therefore been actively encouraging the growth of creative clusters in London and other major UK cities since 2010. It launched, for example, the "East London Tech City" initiative in November 2011 to support the emerging Silicon Roundabout digital cluster in East London. Here the critical mass of cultural, media, marketing and internet businesses has successfully branded the area as the "UK’s alternative to the USA’s Silicon Valley" and culminated in the creation of over 32,000 new businesses in the area between 2012 and 2014.
There are nonetheless a few key ingredients as small and medium-sized enterprises (SMEs) rely on access to good quality commercial workspace to operate and grow. These types of businesses benefit from having access to flexible workspace. This means space that can accommodate office/workshop activities, be made available as small units and floorspace, is affordably priced or can be rented by the hour. It also requires good public transport connectivity, such as the London Underground tube network, and access to reliable broadband internet for customer connectivity. Unsurprisingly, these are equally attractive to other occupiers and developers, albeit for different reasons.
Conversion of valuable workspace
One recent challenge is that commercial workspace in London is being converted into housing. These conversions are a result of an easement in planning requirements, known as Permitted Development Rights, which has made it easier for employment space to be converted into homes. Indeed, London boroughs received 2,005 such “Prior Approval” applications for conversion under these new Permitted Development Rights between May 2013 and July 2014 and the Government is looking at extending them yet further. Housing demand therefore places the need for new homes in direct competition with that for business space; the value difference means that the former is often far more appealing.
Whilst Central London’s “Central Activities Zone” is currently exempt from this relaxation, other parts of London and other major centres (e.g. Birmingham, Liverpool, Sheffield and Bristol)with similar economies of agglomeration are under threat from conversion. That said, the Government considers its PDR policy to be so successful that it is considering removing Central London’s protection altogether. Croydon is a place which exemplifies the current challenge. Here a ‘significant amount’ of the office space in line for conversion is occupied by businesses. Mike Kiely, Director of Planning at Croydon Council, stated "we’ve had some fairly major occupiers that have told us they are being forced out. These are blue chip companies. They don’t want to leave Croydon and we are having to work very hard to keep them in Croydon".
Rising Rents and Capital Values
In addition, the new swathes of high-rise luxury flats that are changing the skyline of London are leading to the gentrification of Inner London, as foreign investors snap up properties and the majority of local residents are forced further out. Furthermore, many successful start-ups, once more established, seek to remain in the same area but with better quality and more expensive accommodation that the market seeks to provide. Together, this is leading to a rise in commercial rents and residential values, which is forcing out local businesses (particularly small-medium enterprises (SMEs) and start-ups) that are often important to the local economy and character of an area.
In London’s Shoreditch many SMEs are already being either priced out or are not able to find available space; partly because of the demand from flourishing higher value industries for better office space, and partly because of the pressure created by Permitted Development Rights. The result could be considered to be a form of industrial gentrification, whereby smaller firms are pushed out by higher value firms who are able to afford the rising commercial rents.
This is leading to growing resistance. In early 2015, property developers Hammerson and Ballymore submitted plans for two high rise towers of up to 48 floors - the same height as a Canary Wharf high-rise - at the Bishopsgate Goodsyard site in Shoreditch. Whilst London Mayor Boris Johnson supports the scheme, Hackney Mayor Jules Piper launched a campaign to stop the developers. Mayor Piper, in raising his concerns, stated that the "these luxury flats, which are well beyond the reach of ordinary Londoners, will cast a shadow over the whole of Tech City, and threaten to damage the local, creative economy". Ironically, many of these luxury flats will be of undoubted interest to the entrepreneurs who once moved to the area for its affordable character. A sign of success, perhaps, but causing concern that such developments could ultimately lead to the dissipation of growing business clusters.
The two key pressures are therefore a reduction in available stock and rising values. The result is that businesses, including start-ups and SMEs are effectively either priced out of an area and/or are not able to find available space and forced to move elsewhere. Yet unlike many elements of a normal market economy, it is very difficult to reverse these changes. Modern floorplate office stock is rarely suited to affordable occupation, residential uses result in fragmented ownership and gentrification causes complaints from new residents as to the existing uses. Providing a space that facilitates regeneration but retains what makes a place special is therefore a huge challenge.
Businesses benefit from physical co-location in large groups e.g. Canary Wharf and East London’s Tech City. The dissipation of SMEs from business clusters in London, particularly in the creative sector, could therefore have devastating effects for London’s economy and competitive edge. The problem is that, whilst there is a need for a step-change in national policy that ensures greater protection for business cluster areas, this can’t come at the expense of positive change. Local Government has a fine balancing act to undertake but the UK Government’s current approach to Permitted Development Rights is undermining this at the same time that London’s success is driving demand. The likelihood is that this will result in the continued erosion of valuable workspace and the rapid rise of luxury flats in London, sowing the seeds of discontent. For now, however, this seems likely to continue and to the detriment of functioning local economies that ultimately ensure London’s continued success.