20 July 2020
A personal view of the evolving role of real estate in a world of technological, social and business change, by Richard Pickering, Chief Strategy Officer, UK.
Turning off the commute and redistributing value
Over the past two centuries, public transport, and in particular the train, has had a huge influence on how our cities have been shaped. Major infrastructure projects such as the Liverpool and Manchester Railway (1830) and the Metropolitan Railway (1863), joined cities together and facilitated the explosion of the suburbs. In the space of just 50 years, starting in the 1840s, the population of the UK’s major industrial cities typically tripled, as more and more people were sucked into the gravity of the city centre. It appears that we may now be looking over the precipice of another major shift, driven this time by the internet and accelerated by the recent period of home working. In the short term we need to add another nuance. For most, the biggest disincentive to travelling to the office is the safety concern over the use of public transport. Only 20% of people state a willingness to use public transport now that lockdown has ended. In the longer term potentially radical social shifts could once again reshape our cities; and there are value opportunities for those capable of identifying the right markers.
A short history of city transport
The UK has long been at the centre of innovation in transport. As a mature, cramped nation at the forefront of industrialisation, we needed solutions to the challenges posed by rapid economic growth. In the early 1800s the principal mode of getting to work was walking. However, with most people unwilling to walk for more than 30 minutes, and with limited ability at that time to build at greater densities, new solutions were required. First came omnibuses and trams. And later came the railways; a huge step forward in the mass movement of people and freight. When cities ran out of space for rail tracks, new ones were found underground. In 1863 the London Underground became the world’s first subterranean railway.
In the 20th century there was a new show in town. Private automobiles, made more affordable due to production line techniques, had started to become the principal mode for many households. By the 1960s, faced with a corresponding decline in rail use, the Beeching report recommended the closure of many low usage public railways in the UK. This sets the present scene for many of our UK cities and less dense cities across the globe. However, for the dense global megacities such as London, use of private transport as a means of getting to work is just not practical. It is slower, and in total cost terms often more expensive than the public equivalent. If everyone suddenly decided to drive to work, there would be nowhere near enough parking spaces in central London, and people would likely spend more time commuting than actually working. A recent explosion in cycling, including the use of bike hire schemes, has added to the commuting options; however, for most, more traditional forms of public transport remains the only real viable option working in central London.
The time and inconvenience penalties associated with commuting are sufficiently significant that most people are willing to pay a fortune to avoid them. For this reason, the length of commute (measured using public transport timing) is the #1 factor affecting the price of ones’ home in the capital. Our statistical models at Cushman & Wakefield suggest a ~60% inverse correlation between commute time and unit house pricing.
Location vs value
It’s perhaps not surprising that the further out you live, the less valuable per unit area your home will be. This is a modern extrapolation of the theory of agricultural land use proposed by Johann van Thünen in his 1826 treatise ‘The Isolated State’. However, the position becomes more nuanced once you dig into the data. The unit value of flatted accommodation is significantly more correlated with commute time than detached accommodation (-32% correlated). There are a number of potential explanations for this. Flatted stock skews towards being more recently constructed and targeted at the young professional market, who are more sensitive to commute time.
The shift in recent years has been towards a greater correlation between commute time and value; with data from 2019 increasing against the 10-year average across all housing types. The blended impact for all stock is also higher as flatted accommodation has accounted for an increased component of total stock transacted.
Further nuances come in compass direction. When we talk about commute time to central London, there is a variance between Bank and Oxford Circus; the latter being more correlated with value. This is interesting, as the greater percentage of professional workers are in the City. In part, this is explained by historic factors. At a time when London was an industrial centre, with chimneys billowing out smoke into the air, there was a distinct benefit to living to the West of the City. Westerly winds blew smoke East, meaning that the more polluted areas were in this direction. Add to this the presence of nefarious activities downstream at London’s docks, and the case was made for wealthy people to live in the West End, Kensington and Chelsea. These factors are no longer relevant; however, centuries of wealth, culture and status agglomeration in these areas are slow to unwind, and so there is an almost permanent skew of value to inner West London.
Looking further out, the impact of distance is amplified. Not only are the outer zones obviously further apart from the centre as the crow flies, they are also less well served by tube stations, which means that total journey time is even longer. In Zones 1-2 the average distance to a tube station is 0.6 miles, whereas in Zones 5-6 the equivalent distance is 1.7 miles. At this distance it would take you more than 30 minutes to walk to the station, before your commute starts in earnest. Some people have the option of driving or cycling to the station, but there is another factor at work for many – that is simply that they don’t need to be in central London.
Most Londoners reading this blog will come into the centre to go to work. However, for many in the outer zones, their life is much more locally oriented. Perhaps they work in local shops, for the local Council, in small businesses or in trades. Either way, coming into central London is a less frequent activity. For these people, the distance-value equation breaks. However, as higher salaries are earned in central London, the market in these locations starts from a very different economic base. That is why there can be such a step change when new infrastructure is provided. However, this might all be about to change. If, due to homeworking, those commanding a central London salary no longer need to come into the centre as often, other factors will rise in prominence and redistribute geographic value gradients. Our model tells us that this is principally concerned with amenity factors.
Stripping out distance, what else matters?
Amenity means different things to different people. Traditionally, it could be schools (a bigger driver of relocation), shops and natural amenities such as parks. There is a double hit to the model in this regard, as the density, quantum and quality of amenity is much greater in central areas. Survey data shows that people are only willing to walk 5 mins to reach a public amenity and so density is an important factor. Similarly, there aren’t many British Museums or Madame Tussauds in the outer zones.
However, in recent years amenity has become more subjectively defined. Those familiar with Richard Florida’s work might have heard of the ‘Boho Index’. His statistically proven proposition is that the presence and concentration of bohemians in an area creates a milieu that attracts high human capital individuals. These in turn create local wealth. It is a combination of these factors that will have a greater percentage bearing on house pricing, as the importance of public transport connectivity lessens.
What might this mean for the future?
We are about to see a shift in the value hierarchy of villages in our major cities. Some areas are more predisposed to capture this value shift positively than others. The data provides clues to which these will be using a mix of demographic and more subjective markers. In general terms, watch out for those areas which have a sustainably vibrant proposition already. We can look to existing failings to explain the future. The low value of inner-urban areas such as Bow, which in commuting terms should carry a much higher value than it does, are explained by a lack of amenity. Shifting a demographic like this is possible (and rich pickings for those who do it successfully), but without major intervention is likely to take a very long time. More interesting are areas like New Malden, Pinner, Southgate, and Enfield. Areas with strong locally orientated cultures that don’t benefit from strong public transport connections are in the sweet spot of this potentially rapid change.
Some people will be tempted out of London in search of these amenities. Rightmove recently reported a 9% increase in enquiries to move out of the capital versus this time last year. The same is true in Edinburgh, Birmingham, Liverpool, Sheffield, Glasgow and Bristol. Where will they go?
Vibrant commuter towns such as Hertford, Guildford, Farnham and St Albans all stand to gain from this trend. Particular those with a strong existing university presence with all of the social infrastructure (F&B, the arts, community activity) present to support that are well placed. Ultimately these are in my opinion likely to trump the outer suburbs as growth opportunities.
In a world where obvious value drivers like distance are less important, an increasingly analytical approach to understanding location can reveal unexpected value opportunities. If you’d like to understand more about how spatial analytics can help to underpin investment decisions, contact me or Chris Hancocks. For occupier location analytics contact Dimitris Vlachopoulos.
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