How does productivity fit into the property investment equation?

The Autumn Budget held some clues to where you should invest in property

In Philip Hammond’s Autumn Budget Statement, much was made of ‘productivity’. It has long been suggested that the zero productivity growth in the UK economy since 2008 will weigh on economic growth. It appears that this fear is coming to pass. But what does productivity mean? Why is it so important for the UK economy? And does it give any clues as to the best places to invest in property UK?

What is productivity?

Productivity is the term used to describe the relationship between work produced and time taken. The more work produced in a set amount of time (or by a worker), the higher the productivity. Take the example of a baker who makes 100 cupcakes an hour. Another baker joins the firm, and she makes 120 cupcakes every hour. The second baker is 20% more productive than the first.

Why does productivity matter?

I love cupcakes, and there is no doubt that I would rather employ the second baker. Especially if I was the bakery owner. Producing 20 more cupcakes an hour means my overall cost of production goes down, while I can sell more cupcakes to more customers. I make more money. And because I make more money, I can afford to pay the baker more.

In the context of the UK economy, we become better off by producing more goods and services. We can do this in two ways: work more hours (yuck! Who wants to do that?), or increase productivity. The best solution is to work smarter, not harder – become more productive.

It’s no fluke that the major periods when our individual and national wealth has boomed have coincided with the periods when productivity has increased. Think of the Industrial Revolution, automation, and computerisation.

So, what’s been happening with productivity lately?

After an extended period of productivity growth that extends back to the end of World War II, during which productivity grew at about 2% per year, the UK has stalled. Since the end of 2008, productivity has remained flat.

During this time, the number of people employed in the UK has increased from 29.5 million to 32.1 million. That’s an increase of 9% in the number of people employed.

In other words, as a nation, the UK is working way harder, but no smarter. The result is that, even though there are more people employed in the UK than ever before, people aren’t getting wealthier. Wages, in real terms after inflation, aren’t rising very much.

Why does economic productivity matter to property investors?

If it’s difficult to increase wages, people have less money to spend on essentials, like food, energy, and housing. It’s going to stifle growth (as we’re beginning to see). The slower growth that has been forecast by the OBR for the next five years isn’t a Brexit issue, but a productivity issue.

Slower economic growth is likely to dampen demand for housing, and squeeze the ability of tenants to pay higher rents and homeowners to pay higher mortgage interest payments. Bad news for property investment. But, where there’s a cloud, there is always a silver lining. The road to better productivity could be the road to property investment profits.

How can the UK increase its productivity and national wealth?

Economists believe that raising productivity requires specific investment. Earlier in this article, I noted that during periods of technological advance, productivity in the UK has increased, and wealth has followed. It happened because companies (and the government) invested in the new technologies. Since the Global Financial Crisis, UK companies have found it hard to access lending. Therefore, such investment has been muted at best.

Today, that specific investment that economists believe will spur productivity higher includes pumping money into technology, education and research, the digital economy, and infrastructure.

What did the Budget do for productivity?

Philip Hammond announced some ambitious spending and investment plans in the Budget, specifically with the aim of investing in the most productive areas of the new economy. He’s pouring billions into driving the tech economy forward, and faster. Among the measures he announced are:

• The government has earmarked money to invest in the digital economy, AI, driverless cars, and 5G.
• A promise to increase the emphasis on scientific and mathematical education in schools, colleges, and universities, with a pledge to triple the number of qualified teachers in relevant subjects.
• Investing a further £2.3 billion in research and development. A total of £12.5 billion a year will be spent on R&D by 2022.
• £500 million funding for AI, 5G, and full-fibre broadband
• An increase in the R&D tax credit from 11 % to 12%.
• A commitment to seeing fully self-driving cars on UK roads by 2021”.
• A £10 million Regulators’ Pioneer Fund will be launched to “help regulators to develop innovative approaches aimed at getting new products and services to market”.
• £30 million will be spent on trialling solutions to improve digital and mobile connectivity on trains on the Trans Pennine route.

In announcing these measures, Philip Hammond said:

“The world is on the brink of a technological revolution, one that will change the way we work and live and transform our living standards for generations to come. For the first time in decades, Britain is genuinely at the forefront of this technological revolution.”

Additionally, a £1.7 billion fund will be dedicated to developing transport systems for urban areas. The Chancellor said that the money “will target projects which drive productivity by improving connectivity, reducing congestion, and utilising new mobility services and technology”.

The UK is taking steps to increase productivity – great news for property investors

These steps (and others that we haven’t highlighted) are great news for property investment potential in the UK. But not all locations will have equal potential from this massive investment in high productivity sectors. Fortunately, Hammond also gave us a clue to where we might find the best property investments.

The government is expanding its Tech City development in East London into a nationwide project. It is creating sites in several cities across the UK, including in three cities that we’re already pumped up about. Watch this space to find out which cities we think could offer the biggest potential for property investors who want to benefit from the increasing focus on the new economy and productivity.

Can’t wait for our next three blogs?

Hey, if you’re as pumped up about finding out where you should be investing in UK property as we are about the opportunities in three major UK cities, you might want to contact one of the Gladfish team today on +44 207 923 6100. Getting in early could help you to push your investment returns even higher.

Live with passion,

Brett Alegre-Wood

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