Capital Shocks and UK Regional Divergence

This paper uses uniquely-detailed large-scale commercial real estate investment data
to examine how financial markets perceived the attractiveness of investing in UK
regions during the last two decades. Using data from 2003-2015, our analysis
demonstrates that prior to the 2008 global financial crisis, all regions of the UK were
perceived in a similar manner in terms of risks and expected growth rates. However, the
2008 crisis engendered a flight to safety of capital into London, largely at the expense
of other UK regions. The London economy enjoyed a surge of capital inflows at very
low prices also enhancing the collateral and leveraging positions of local real estate
owners. The recovery of investors’ confidence in London’s recovery was rapid. In
contrast, in the immediate aftermath of the 2008 crisis other UK regions shifted rapidly
into junk bond territory, and have remained there ever since. These asymmetric capital
shocks led to profound and adverse impacts on the subsequent productivity growth of
the UK regional economies