UK business investment resilient despite Brexit


The contractors have almost finished pouring the three huge concrete building cores for Three Snow Hill in Birmingham, one of the largest commercial property developments under construction outside London. When the cores are finished, scheduled for the end of June, the builders will start on the steel wrapping that finishes the exterior, the steel and concrete to make the seventeen floors and finally they will spend nine months putting in the electrical and mechanical fittings that will make it a usable office block.

This staggered process spreads the investment spending by the developer over two years of official figures produced by the Office for National Statistics, smoothing out the effect on economic growth of the original decision to redevelop the land.

After the UK voted to leave the EU last June, economists expected business investment would be one of the first parts of the economy to suffer.

But the effect has been more muted than expected: the ONS recorded that total investment spending rose 0.5 per cent in 2016, following growth of 3.4 per cent the previous year.

And in the first three months of this year, business investment — in real assets used in production rather than financial assets — grew 0.8 per cent, after contracting at the end of 2016.


Software not satanic mills
In the UK’s modern service¬oriented economy, business investment is very different from the “dark satanic mills” of the industrial revolution. Today, office blocks such as Three Snow Hill and software are much more important than factories.

Investment spending makes up about 17 per cent of UK national income and business investment is more than half of this — the rest is residential property and government investment.

Business investment can be roughly split into four parts: residential property, commercial property, intellectual property — which includes software, and transport and machinery.

“The thing about real estate investing is it’s quite hard to move quickly,” says Tony Brown, head of real estate investment at M&G, which is funding the development of Three Snow Hill.

You have to look beyond short-term factors such as elections, he says. Construction on the development began in May 2016, before the UK voted to leave the EU, and is planned to finish towards the start of 2019, possibly after the country has left.

These time lags mean investment can appear in the official figures for a long time after the initial decision was made, so a fall in investment intentions after the Brexit vote may not show up for a while in the growth figures. But Mr Brown believes there are structural reasons for commercial property investment outside London to continue, including low interest rates and businesses looking to save on rent and wage bills by moving certain functions away from the capital.

It’s all about borrowing costs
Kristin Forbes, a member of the Bank of England’s interest rate setting committee, said last year that the impact of uncertainty on the economy was often overstated and that it only has an impact when borrowing costs go up. This was what happened to the construction of earlier parts of the Snow Hill estate in 2009, when the global financial crisis briefly cut off property developers from bank funding. But since the EU referendum and the interest rate cut — from 0.5 per cent to 0.25 per cent — in August, borrowing costs have stayed close to record lows.

Some big companies are “sitting on their hands” at the moment because of the uncertainty, said Richard Probert, head of marketing at Ballymore, the property developer responsible for the office block. That is making it a little bit harder to rent out the space. But “business goes on,” he said, sometimes businesses cannot stay where they are because the landlord wants them to move or the company’s needs have changed.

Investment to keep the lights on
A certain amount of capital spending is necessary for an economy to keep functioning. Older assets gradually degrade and become less productive while technological improvements mean that existing equipment goes out of date and needs to be replaced.

About half of Britain’s capital stock is in the form of buildings, says Jonathan Haskel, a professor of economics at Imperial College London, but software is a growing share of investment. “Buildings last 50, 60 or 70 years, software lasts three,” he says. George McKay, chief operating officer at Allianz.

Global Investments, an asset manager, classifies certain kinds of software investment as “business as usual”, essential for “keeping the lights on”. Cyber security software is an example. “You continuously have to upgrade to stay ahead of anyone trying to get into your system,” he says Prof Haskel says: “When you measure investment it depends on what you want to measure.”

Accountants are likely to care about the resale value of an asset and the ONS cares about the amount spent, but economists also care about the way investment can be used, by workers, to produce goods and services.

Productivity growth has been much lower since the financial crisis than before, so wages have stagnated as employment has risen. This is partly because, while investment has increased, the capital is being used less productively. “Firms seem to be accumulating all this capital and this labour but don’t seem to be doing much with it,” Prof Haskel says.

Source: FT News