Building momentum for a UK Northern Powerhouse

A global stronghold in the North of England would create multiple benefits, writes Royal Bank of Scotland’s Tom Sharman.

Tom Sharman
Tom Sharman

The concept of the Northern Powerhouse had its first airing in June 2014, and the UK chancellor, George Osborne, has revisited the theme many times since, most recently in his 2016 Budget on 16 March.

The premise behind the strategy is that the North of England, with its major cities of Manchester, Leeds, Liverpool, Newcastle, Sheffield and Hull, and a population of 15 million, is not fulfilling its potential. The region produces gross value added (GVA) of £287 billion, compared with £338 billion produced in London, from a population of 8.5 million. GVA per capita in the north ranges from £17,400 to £19,900, while in the capital it is £40,200. While the comparison with a global financial centre may be unfair, the gap in productivity between London and the UK’s second-largest city economy, Manchester, is wider than the equivalent in any other G7 country.

With the aim of creating more balanced growth across the UK, the government is already devolving certain powers to local authorities. Progress in this area has seen the establishment of the Greater Manchester Land Commission, which co-ordinates how the region’s publicly owned land can be used to support its wider ambitions – including the need for 10,000 new homes a year. In his budget speech the chancellor announced that next year Greater Manchester will be the first city region to hold elections for a “metro-mayor” who will have a range of newly devolved powers including control of a £300 million Housing Investment Fund.

Northern Powerhouse v London GVA

Infrastructure and connectivity

Significant infrastructure improvements, chiefly to rail and road networks, have also been set in motion, with the aim of reducing journey times between the north’s cities. This is expected to give businesses access to a larger pool of potential employees, encourage residents to look further afield for work, and foster increased interaction between businesses in different cities.

Improving roads would also boost private sector investment. Developer Scarborough Group estimates that the construction of the East Leeds Orbital Road will allow a potential 7,000 new homes to be built on their Thorpe Park site.

Some have voiced concerns that improved rail links across the largest northern cities will only serve to benefit these cities at the expense of smaller towns and rural areas. Indeed, there is an unashamed belief among some proponents of the plan that the vast majority of economic growth comes from urban concentrations, and that improving access to them is the fastest route to increasing productivity.

What then for smaller locations? Specialisation could offer the best route to success, as exemplified by the nuclear research and technology cluster in Warrington employing 4,000 people, and the media cluster in Salford centred on the BBC. Business parks would be particularly exposed to this trend, and those with no specific draw beyond access to a motorway would be forced to compete purely on price.

Analysis by property research consultancy PMA shows that, since 2008, rail connectivity has steadily become a key driver of office rental growth, along with airport accessibility. This suggests that office rents in central Manchester, Leeds, Liverpool and Sheffield could be significantly boosted by better rail links and access to Manchester Airport. The airport is already at the centre of a huge development project: the Chinese-funded Airport City Manchester, a 5 million square foot site encompassing offices and advanced manufacturing and logistics facilities.

More office jobs

Given an increased concentration of office-based employment in northern cities, it is possible that some smaller conurbations surrounding these cities will take on the characteristics of dormitory towns.

In the South East, there are a number of sizeable and affluent towns where a large proportion of the working population travel to London for work every day, thanks to quick and direct rail links. These would not be considered front-line office locations, as most white-collar workers who live locally would perceive considerably greater opportunities in London. They do, however, have very strong residential markets, and appealing retail, leisure and cultural offerings. Some towns and outer suburbs surrounding the key northern cities could benefit from a dramatic improvement in amenities where the increased affluence of the local population attracts new retailers and restaurants.

For the distribution sector, investment in port facilities in Liverpool, Hull and Newcastle could redraw the map of the country for logistics firms. The so-called ‘Golden Triangle’ in the East Midlands is currently the UK’s dominant logistics hub, thanks in part to its proximity to the major container ports of the South East. Over the last decade the Midlands have accounted for almost half of all logistics take-up in the UK. An increase in freight arriving directly in the North would reduce the need for so much of it to be transported across the country.

The real estate sector as a whole should benefit from a step change in economic growth and productivity in the North. The creation of a genuine northern powerhouse would reduce the North-South divide, with its legacy of the dramatically lower cost of living in the North, where the cost of a house relative to salary is barely half of what it is in London. This would be a huge draw to migrants if the perceived opportunity gap were closed.Focused action on infrastructure and innovation by empowered local government would attract more private sector investment, in turn creating more aspirational jobs across a range of industries, thereby helping to retain more of the thousands of graduates produced in the region each year. The greater affluence brought to the region by these jobs would, as a by-product, attract more retailers, restaurants and leisure operators to the region, further enhancing quality of life and creating additional jobs.

Focused action on infrastructure and innovation by empowered local government would attract more private sector investment, in turn creating more aspirational jobs across a range of industries, thereby helping to retain more of the thousands of graduates produced in the region each year. The greater affluence brought to the region by these jobs would, as a by-product, attract more retailers, restaurants and leisure operators to the region, further enhancing quality of life and creating additional jobs.

A new era

Over the 19th century, the population of the North increased rapidly, from 27 percent of England’s population in 1801 to 37 percent at the start of the last century, as the region became the dominant global centre of the industrial revolution. However, by 2013, it had fallen back to 28 percent as the industrial era gave way to the dominance of professional and financial services centred in London.

If the North of England were able to fully harness its potential, it could re-emerge as a centre of the new technological era, creating better opportunities, more robust economic growth and a higher standard of living. And these gains to the North would not come at a cost to the South. On the contrary, the virtuous circle would benefit the country as a whole, by rebalancing the economy, attracting inward investment, developing skills and alleviating the pressure on housing supply in the South East.


German Ruhr region shows what’s possible

A useful international comparison is the Rhine-Ruhr metropolitan region in Germany. It is home to 11 million people from five large and 10 smaller cities, compared with the North’s 15 million people from six major and 11 smaller cities. But Germany’s region is host to 12 Fortune 500 companies, and average GDP per capita is 30 percent higher than the gross value added (GVA) in the North of England.

The Rhine-Ruhr has an integrated rail network carrying 1.2 billion customers a year, with 39 transport companies operating under one ticketing and operating system.

Tom Sharman is the head of strategy & insight – real estate finance at Royal Bank of Scotland.

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