Media Briefings

Planning Restrictions Raise The Costs Of Doing Business In Britain’s Cities

  • Published Date: July 2008

Office space in Britain has been the most expensive in the world in recent years. And
according to a new study by Professor Paul Cheshire and Dr Christian Hilber,
constraints imposed by the British planning system are the main explanation.
The research, which is published in the June 2008 issue of The Economic Journal,
calculates how the burden of planning regulation affects the final cost of office space
in a range of British and continental European cities. While the largest effects are in
London, many other cities in Britain are also significantly affected by onerous
planning restrictions, including Manchester, Edinburgh and Glasgow.
For example, in 2004, office space in Birmingham was nearly 50% more expensive
than in Manhattan. This is despite the fact that building costs in Birmingham were
only half those in Manhattan. According to property agents KingSturge, office space
in Birmingham was the fourth most expensive in Europe. The two most expensive
locations were in London.
Aside from land costs, the difference between the price occupiers have to pay for
office space and the costs of building it is caused by a ‘regulatory tax’. This raises
costs for business (as the supply of new space is limited by the planning system)
without generating any revenue for the government. Developers cannot build higher
offices where there is demand, and neither can they build more offices.
The ‘regulatory tax’ averaged more than 800% of construction cost in London’s West
End between 1999 and 2005. This was twice the level in any other European city
and four times that in Amsterdam.
The authors comment:
‘Of course there are benefits to the stringent planning system. Views and
townscapes are preserved. Our point is that there are also substantial costs
that are often ignored and which very plausibly exceed the benefits imposed
by the inflexible British planning system.’
The report also explores why planning restrictions vary over time and across the
country. Although residents (voters) may oppose office development because of the
disruption and threat to house values new construction brings, this might be
countered by other factors.
In particular, if local unemployment is high, residents are more likely to be in favour
of new development to generate jobs. And if business has more influence on local
planning decisions, then they are even more mindful of unemployment.
For example, in Newcastle during the 1980s – a period with very high unemployment
in the city – the costs of planning restrictions were effectively zero. And authorities
controlled by or on behalf of business interests – such as the City of London and
London’s Docklands – are five times as responsive to local unemployment than are
those controlled by residents.
The report also shows that recent changes in business property taxes have added to
the planning burden. The introduction of the Uniform Business Rate was supposed
to help business as it prevented ‘anti-business’ local authorities taxing enterprise
(revenues went directly to central government). But it also meant that local
authorities had no incentive to grant planning applications since they would receive
no extra revenue but would have to provide more services.
The authors comment:
‘Far from having the intended effect of reducing business costs, moving to the
Uniform Business Rate had the perverse effect of increasing them. The law of
unintended consequences is powerful indeed.’
In the United States, the opposite is the case. Revenues from business property
taxes go to local authorities. And as this revenue is greater than the costs of the
services businesses demand, local communities compete to attract commercial
development. The estimate for the ‘regulatory tax’ in Manhattan was zero in 1996
and even at the price peak of 2000, less than the lowest in Europe, Brussels.
Looking more widely, there are implications for commercial property as an
investment asset. As the supply of property cannot respond to higher demand, this
leads to more volatile prices (as we are seeing in the housing market at
the moment).
Notes for editors
: ‘Office Space Supply Restrictions in Britain: The Political
Economy of Market Revenge’ by Paul Cheshire and Christian Hilber is published in
the June 2008 issue of The Economic Journal.
The authors are at the London School of Economics.
For further information
: contact Paul Cheshire on 020 7955 7586 (email:; Christian Hilber on 020 7107 5016 (email:; or Romesh Vaitilingam on 07768 661095 (email: