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Why SMEs thrive in the south despite the costs

At a glance

  • London and the south east continue to have the strongest performing SMEs
  • The capital is still the UK’s economic powerhouse, accounting for nearly a fifth of all UK jobs, 19% of all UK SMEs and a quarter of the country’s total economic output
  • Innovation comes out of necessity as the increased cost of living, housing and office space all make it a pressurised existence for the south’s SMEs

Content provided exclusively for Zurich by Centre for Cities.

This is the second article looking at the UK SME market and the economics behind the north-south divide.

Cities Outlook 2014 — the latest report from Centre for Cities — continues to observe economic polarisation, with London and surrounding cities leading the recovery as other parts of the country continue to struggle.

SMEs aggregating in London and surrounding southeast

Seven out of the top ten performing cities are within 50 miles of central London. Businesses in these cities share several common characteristics: many are highly productive, highly innovative and operate in global markets.

The capital now accounts for nearly a fifth of all jobs, 19% of all UK SMEs and a quarter of the UK’s total economic output.

Two out of five SMEs in London and surrounding cities are in sectors like financial and professional services, media and publishing, and communications. SMEs in these sectors rely on their ability to recruit highly skilled individuals, a factor that is clearly reflected in internal migration flows to London.

The south’s key industries are knowledge intensive

SMEs in southern English cities ask for a certain skills profile and have the ability to attract this talent. In recent years, one in three people in their twenties in the UK who decided to relocate moved to London.

London’s ability to attract and retain talent means that fewer firms there report skills gaps.

Over a third of all jobs in the capital are graduate jobs compared to just 26% in the UK’s large cities. Other cities in the south-east also attract and retain graduates; more than a third of residents in these cities are qualified to at least degree level.

Long-term challenges remain

This kind of city growth can present challenges as well as opportunities for SMEs. In particular, increasing costs in London and other cities in the south-east threaten existing businesses, inhibit start-ups and erode the remunerations used to attract and retain highly skilled people.

  • The costs of living in London in particular are becoming prohibitively expensive for many. The average house price in London in 2013 (£461,100) was almost five times the average house prices in Burnley (£97,000) and house prices are rising by an average of £40,000 per year. The buying price per meter squared in London is the highest in the world, topped only by Monaco.
  • Increasing house prices may not only make it more difficult for business to attract new talent, they’re also likely to discourage would-be entrepreneurs. The likelihood of someone starting their own business tends to diminish as the level of their mortgage debt increases.
  • Expensive office costs may also restrict future economic growth in some of the UK’s most successful cities. After staff costs, property is often the largest cost to businesses. The West End of London knocked Hong Kong off the top spot last year as the most expensive office market in the world. Prices in the West End are being driven up by small financial businesses, and oil and gas companies.

SMEs need space to grow

The key issue for SMEs is the lack of quality office space in the most sought after locations. And this isn’t just confined to London. Despite having high rental values, signifying high demand, cities such as Reading and Cambridge have seen very low growth in office floor space. Despite the costs, London remains the dominant force in the UK economy, and together with other cities in the south of England, is driving the current economic recovery.

Clearly the south’s economic success has also brought pressure to those places where demand is highest and costs are rising. As the cost of living and doing business in the south continues to increase, brokers can support SMEs by improving their insurance and risk programmes to underpin sustainable long-term growth plans.

Image © Getty

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