Opinion

A Tale of Two Types of Cities – Part I

Most of you have most likely noticed the emerging gap between the world's top cities (the London's and New Yorks) and the rest of the regions in each respective country. At the start of the crash, prices in primary cities did not decline as much and have recovered much quicker than its counterparts. In my opinion, this appears to be a trend borne out of globalisation and one that we all should get used to, because it does not appear to be diminishing any time soon.  To the contrary, most industry experts are claiming that it is more likely to intensify.

London is a good example. Prime property in London experienced significant price growth during the boom and, while hit by the crash, suffered a brief downturn between early 2008 and May 2010. It is at this point in time that London home prices began their rebound and have not stopped since.

As a whole, UK home prices broke from free-fall in early 2010 as the market appeared to be boosted by government stimulus but the term "rebound" is questionable. Much of the discussion has been on how London is the only city within the UK not experiencing continued stagnation and/or price decline. Many experts argue that the rest of the UK has only recently experienced an end to falling prices, while the rise in the overall index has solely been the result of continued growth in London.

According to the UK Land Registry (see Exhibit A), London suffered a similar crash to Birmingham and bottomed out at the same point in time. London however has experienced a much steeper incline since and more importantly no double dip - Birmingham.

Likewise Exhibit B demonstrates the same comparison for the North West, which shows prices bobbling and stagnating since the decline, compared to the steep incline in the former.

A similar story can be told across almost all sectors, particularly the hotel sector. In 2011, according to hotel advisory firm HVS, the UK witnessed the most single-asset hotel transactions, with 32 hotels (more than 5,200 rooms) sold across the UK totaling in excess of one billion pounds.  However, according to HVS, London was the main driver, with over 62% of the sales. Hotel investments are performing better in London; according to PriceWaterHouseCoopers: occupancy in London hotels is at 83% this year and RevPAR (Revenue Per Available Room) is at £113.81, compared to a £41.05 RevPAR and 71.8% occupancy in the provincial hotel market.

London is not on it's own, in this regard. Globally, primary cities are outperforming secondary and tertiary cities across the board.  Like London, primary cities such as New York, Paris, Beijing, Singapore and Hong Kong appear to be outperforming non-primary regions in respect to property appreciation, rents, per capita income, employment levels, etc.  Wealth appears to be concentrating within these cities.

The real question is why?  Is this a short-term phenomenon or is this an irreversible trend?

Migration of Wealth

The reason for the migration of wealth from the provinces to primary markets appears to be two-fold. The first reason is safe-havenism. The affluent are purchasing prime property in places where property holds its value and these cities have become known for doing just that.

The second reason, as mentioned above, is globalization. Prior to the advent of air-travel, budget-flights and the internet, people would migrate to the wealthiest cities within their respective region.  The reason for this is because they wanted to find better job opportunities in order to improve their quality of life.

The British can easily empathise with this phenomenon. During the industrial revolution, the UK experienced an exodus from rural regions as the emergence of machinery reduced the required staffing levels on farms. This was a movement of necessity, because farm jobs traditionally entailed the inclusion of accommodation. Thus, the loss of farm jobs resulted in a loss of housing. Thankfully the same new technologies behind the machinery replacing the farm laborers also caused exponential growth in employment in the industrial cities, with water and steam powering large textile mills and plants. Consequently, UK farmlands experienced an exodus of ex-farmers in hopes of partaking in the industrial revolution in cities such as Birmingham, London and Glasgow.

People have always migrated, subject to transport available at the time, to cities and regions that offered the highest paying occupations and a perceived superior quality of life. As travel has become more cost efficient and available, people have been able to cast a wider net in search for a better life. A combination of the emergence of budget airlines, low cost communications and data, people are able to travel a lot further in their pursuit of a better life.

This is most likely one of the reasons for why the aforementioned primary cities are continuing to outpace their regional counterparts while the gap between them continues to widen. With the highest rents and property prices in-country, these cities are attracting the largest international companies and subsequently the brightest minds, who in turn are commanding the highest salaries.

Thus, it is evident that the combination of globalization and safe havenism is causing a self-perpetuating cycle.  As larger companies continue to enter these cities, the larger the requirement for qualified employees will become.  This in turn increases both the local population and per capita income, which leads to rising rents, increasing hotel occupancy, retail consumption and eventually property values. As this cycle continues, the primary city will continue to become more and more insulated from its domestic economy, making them more attractive to the safe-havenists. As prices and rents continue to grow and the less affluent are continually priced out of the market, one fails to see what could break the cycle, failing some serious government intervention, a surge in the construction of affordable housing and/or a combination of both.

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