Luke Johnson: Building commercial property in the regions is a sure way to lose money

Low commercial rent values outside London are a drag on the economy. What can be done?

by Luke Johnson
Last Updated: 17 Jun 2013

I recently bought a fairly modern office building on the south coast as an investment. The terms of the deal help explain why Britain's economic problems are so profound outside the M25.

The purchase price was £38 per square foot for the freehold - and it was an open-market transaction, suggesting that it wasn't a special bargain. The trouble is that the cost of building such premises would be at least £150 a square foot - excluding the price of the land.

This means that unless there is a massive recovery in tenant demand - and hence rents - it makes no business sense whatsoever to construct almost any commercial property except in London.

But without up-to-date industrial, retail and office facilities, how can regional companies prosper and provide new jobs?

Last year, for the first time on record, more money poured into commercial property in London than the rest of Britain - £16.1bn against £15.9bn.

This makes perfect sense when annual office rents in prime central London premises are more than twice the freehold purchase price of an office 200 miles away. Such rents have been rising rapidly in the past few years.

Meanwhile, rents in the sort of building I bought outside the capital are probably the same as they were 20 years ago.

Of course, the way we work and shop influences the premises we occupy. Home working and online shopping are now widespread, obviating the need for a certain proportion of total office and retail space that was once seen as necessary.

But for us to breed serious contenders in sectors such as manufacturing, we need state-of-the-art facilities. Commercial premises age much faster than residential, further undermining the economic arguments in favour of constructing them. It makes sense only for an owner-occupier to build such a plant.

The disconnect between London and provincial rents and tenant demand, construction costs and returns means there is unlikely to be much new building of commercial space outside the capital for the foreseeable future.

If this is the case, one hopes that some of that investment will find its way into the construction of more residential property, which overall appears to offer a much better bet - and might help to address the housing shortage in many areas of the country.

But that will not provide the long-term jobs and wealth creation Britain needs right across the land. Finding the solution to that is the greatest challenge we face.


The march of the digital monster, devouring all before it, continues relentlessly. It has been eating the media industry for some time, gobbling up advertising and eyeballs without respite.

Traditional retailing is also under severe pressure as shoppers move increasingly online, leaving bricks-and-mortar players stranded with huge portfolios of profitless stores.

The travel and financial services industries have also been transformed: old-fashioned agencies and brokers are being driven to the wall by internet specialists. Usually, the digital entrants come to an unspoken bargain with customers: they offer a streamlined service and split the profits enjoyed under the old economic model.

They operate at huge scale with low overheads and, thanks to automation, can often enjoy minimal incremental costs with extra business. Everyone seems to win except the incumbent operators.

And now I detect that the impact is being felt in the recruitment industry. Staffing firms argued that their franchises would be protected because employers want curated help in hiring people.

But they too are being disintermediated. Firms like LinkedIn are replacing the old-school employment agencies. Margins are being squeezed in almost every segment of the recruitment market - blue or white collar, private or public sector. Growth, profits and valuations of the established operators will inevitably suffer.

I have been involved in a series of investments in the employment agency field for over 20 years and, with one or two exceptions, backing well-run firms has paid off handsomely.

There has been enormous consolidation, with giants such as Adecco, Randstad and Manpower absorbing many smaller competitors so as to command ever greater market shares.

A majority of personnel companies still mostly use conventional suppliers of temporary and permanent staff, but more and more of them are discovering low-cost alternatives online. The rules of the game are changing and the old structure of a highly people-dependent recruitment organisation is breaking down.

As ever, the technologists will be the winners. If I were to invest in another recruiter, I would only do so if the firm were at heart offering an online service to both worker and employer. I'm afraid to say that old-school staffing companies are likely to get crushed in the coming years.


Where are the witty books about business life in the 21st century? In the 1930s there was the marvellous Where Are the Customers' Yachts? by Fred Schwed, mocking Wall Street. The 1950s saw classic texts like Parkinson's Law and How to Succeed in Business Without Really Trying published.

In the 1960s there was The Peter Principle and the 1970s we had Up the Organisation.

But now we seem too busy to be able to laugh at the stupidity of office politics, the latest management fads and the bizarre behaviour of corporate executives.

I was recently sent The Bluffer's Guide to Your Own Business. This is a short yet amusing booklet that helps fill the gap. But we need more comic writers to help relieve the grind and put pen to paper - I, at least, promise to buy a copy.

- Luke Johnson is chairman of Risk Capital Partners

This diary appeared in the June edition of MT

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