Skills gap

A skills gap exists when an employee is deemed not to be fully proficient at their job by their employer.

The UK Commission for Employment and Skills’ (UKCESS) report shows UK employers believe that 5% of employees are not fully proficient, whilst the sector with the highest skills gap was engineering and advanced manufacturing at over 7% (Graph 1). With a number of contractors and associated consultants looking to expand in Birmingham off the back of HS2, and other large infrastructure projects underway, we expect to see the supply of labour for this sector become even more stretched in the short to medium term.

Over the next 10 years, the UK is expected to create a net additional 971,000 office based jobs, according to forecasts from Oxford Economics. However, there remains a mismatch between the sectors that apprentices are being trained in, and the sectors which will be delivering jobs. Public services accounted for 26% of all apprenticeship starts in 2015–16, although public sector employment is expected to fall by 112,000 across the UK over the next five years. Professional, science and tech employment on the other hand, is set to grow by 411,000 jobs, although the number of apprenticeships being trained in this sector is proportionally lower.

^{Source: UKCESS}

Investing in employees

Part of the problem comes from comparatively low levels of investment in training. Data from Eurostat indicates that UK employers invest half as much per employee in vocational training as the EU average and UK employer investment in skills has fallen by 9% in real terms over the past 10 years. With uncertainty surrounding the free movement of labour after the UK leaves the European Union, employers must reinvest in their staff to close the skills gap.

PwC estimate that up to 30% of UK jobs could be at high risk of automation by the early 2030s. The levels of automation are highest in sectors such as transportation and storage (56%) and lowest in health and social work (17%). Automation is of course, an opportunity and will create new jobs in the digital technology sector, but adjusting to this is the key differentiator for individual workers.

Brain drain

One of the increasing concerns for the key regional cities is the 'brain-drain' of graduate talent from regional universities to central London. Figures from the Higher Education Statistics Agency (HESA) indicate that London retains 77% of its graduates in the city upon graduation. However, the regional universities struggle to hold on to the same proportion of graduate talent. Manchester (51%) and Birmingham (49%) retain the highest proportion of their graduate talent outside London (Graph 2). With no tuition fees for Scottish nationals, the Scottish universities attract a more local student catchment than other UK universities and therefore retain a higher proportion of graduates.

Several universities are now looking to commercialise research and provide seed funding in order to retain graduates after graduation. Oxford University Innovation and Cambridge Enterprise now both provide financial support to new businesses to facilitate growth.

Savills Research indicates how the closer that universities are located to London, the lower proportion of graduates stay on to work in that city upon graduation. London’s pull of graduate talent is particularly strong from the universities in the South East, with Reading, Oxford and Cambridge each retaining less than 20% of their graduates.

^{Source: HESA}

Apprenticeships

A university degree, however, is not the only way into a professional services career. Investment banks, accountancy firms and technology and media companies are all now offering apprenticeships which provide salaries and training to ‘earn while you learn’. The government’s apprenticeship levy of 0.5% on company payrolls over £3 million was introduced during April 2017 in a bid to facilitate the training of three million apprentices by 2020. Employers are then able to use this fund to invest in apprenticeship training and it is hoped that the levy will give employers more control over designing training to suit their requirements. We have seen a marked increase in the number of apprenticeship starts in recent years, particularly from the over 25 age group, which accounted for 44% of the total apprenticeship starts during 2015–16 (Graph 3).

Despite the growth in apprenticeship starts and the increase in tuition fees from 2012–13, university applications have also continued on a steady upward trend. YouGov's survey showed that only around 20% of employers believe graduates recruits are "work-ready". By studying whilst working, apprentices reduce both the cost of labour for employers and cost of training for the employee. We expect the introduction of the apprenticeship levy to encourage large businesses to invest in young workers earlier.

^{Source: HESA}

So what can be done to reduce the talent shortfall?

Provision of appropriate space

Developers need to ensure that the appropriate sort of space is being provided to develop talent. Partly funded by Scottish Enterprise, Scotland currently provides more incubators (2.5) and accelerators (5.8) per 1,000 new businesses than all other UK regions, providing a platform for business growth.

However, all other UK regions provide fewer accelerators per 1,000 businesses than London. Accelerators base their business model on equity from startups, with a strong emphasis on growth over a fixed duration programme, usually around six months. In order to retain homegrown companies who are looking to scale up, the regional cities must increase accelerator provision.

What's more, part of the reason for the shortfall in floorspace is that high-growth companies are offered favourable rents and are not moved on to conventional office space quickly enough. If existing start-ups were offered subsidised rents in the first and second years, leading to harder commercial terms in subsequent years, this would free up more space for incomers.

Improving labour mobility

Mobility of labour remains one of the major labour markets constraints within the UK. Compared with other European countries, workers are considerably less footloose, which can be partially accounted for by increasing house price disparities between London and the UK regions.

Savills What Workers Want survey indicates that workers wanted to change the length of commute to work more than any other factor. Proximity to the workplace is what workers are most concerned about, and investing in infrastructure projects in the regional cities, from HS2 to local bus routes will help improve regional labour mobility and attract talent away from London and the South East.

Employees' perspective

With significantly higher living costs for workers relocating into the capital, the northshoring argument is becoming even more compelling for employees.

The first time buyer house price to earnings ratio in London now stands at 10.2, almost twice the national average, according to Nationwide. With an increasing disparity between the most expensive and least expensive UK regions, many workers in London are resigned to the fact that home ownership is becoming a pipedream. Burberry plans to relocate finance, HR, IT and procurement to Leeds, where the first time buyer house price to earnings ratio is 3.7. If one of workers' key priorities is "climbing the housing ladder", it is no wonder that anxiety levels are significantly higher in the capital than in the rest of UK regions, according to ONS figures (Graph 4).

We expect the net inflow of graduates to London to ease off as regional infrastructure projects are delivered and workers take advantage of higher living standards by working and living in the regions.

^{Source: Nationwide, ONS}

Employer's perspective

Indeed, the case for office occupiers ‘northshoring’ roles out of Central London to the regions has become as compelling as ever. The British Council for Offices (BCO) estimate that staff costs account for around 55% of total business costs, whereas property costs represent only 15%. By relocating roles out of London and into the regions, this indicates savings of c.£10,000 in staff costs and c.£10,000 in property costs per employee per year. The Government Property Unit's (GPU) regional consolidation strategy has been a catalyst for redevelopment across the regional cities and we expect more private companies to follow suit.

Many of the regional cities’ economies are more balanced across a number of sectors and consequently more resilient to the threat of Brexit, which could ultimately draw more jobs away from the capital.

HSBC, for example is on track to relocate over 1,000 jobs from London to Birmingham in an approach to reduce costs. The bank has also received large volumes of applications from other regions for roles as Birmingham strengthens its position as a regional financial services hub. Deutsche Bank has expanded in Birmingham, with now over 2,000 employees in the city as employers take advantage of the financial services talent pool outside London.

Greater London's financial and insurance sector's economic output per head has fallen by 1% over the past five years. With increased banking regulation resulting in increased headcount within the sector, occupiers are taking advantage of cost-cutting opportunities in the regions. Although we don’t expect to see a swathe of Central London occupiers upping sticks and moving their entire staff, we expect to see more organisations splitting operations across lower cost locations, whilst still retaining a London presence as they become increasingly cost conscious.