Are Startups Being Priced Out of London?

March 3, 2016

11:03 am

Britain was recently hailed by EY as the fintech capital of the world, while the 2015 Global Startup Ecosystem report ranked London as the world’s sixth leading tech cluster overall.

The British capital has been recognized on more than one occasion as the “tech capital of Europe”, it competes with New York for the title of fashion-tech capital of the world, is on its way to becoming a world-leading hub in the field of cybersecurity, and is already recognized as a world leader in Smart Cities technologies.

According to the 2016 Global Cities, Global Talent report from Deloitte, a major reason the British capital has achieved its position as a world leader in the digital economy is because the city is “the high-skills capital of the world”, employing 47 percent more high-skilled staff than the second ranked city, New York.

However, one very bricks-and-mortar trend risks making London a victim of its own digital success: escalating property prices.

There’s No Place Like Home

Tech City UK’s Tech Nation 2015 report revealed that a full fifth of the estimated 228,572 digital companies in Inner London started up during the previous two years. That’s an impressive business birth rate by anyone’s reckoning.

But while this fast-growing group of creative, innovative, tech-savvy startups is great news for London, those digital companies need real-world talent. And that talent needs somewhere to live.

The Only Way Is Up?

The average London house price now stands at more than half a million pounds, while the average rental price in the capital is now more than £1,500 per month. For comparison, Graduate Labour Market statistics from the British government’s Department for Business, Innovation and Skills suggests average graduate salaries in the UK stood at £25,000 in 2015, reflecting an annual increase of just 4 percent.

By contrast, a recent 2016 Housing Market Forecast from London accountants Accounts and Legal suggests British house prices will continue to rise throughout 2016, possibly by as much as 10 percent. The same report indicates rental prices will also experience a significant rise this year, with many real estate agents suggesting a rise of five to ten percent is likely.

As the chasm between graduate incomes and London’s cost of living continues to widen, graduates could increasingly rule the British capital out when deciding where to take their newly minted skillsets.

London’s Not Calling

In fact, recent research from the British bank Lloyds Banking Group suggests this trend may have already begun, with less than 10% of graduates and undergraduates indicating they are planning to move to London.

While some of London’s leading technology entrepreneurs stress that a looming digital talent shortage represents the biggest threat to London’s tech sector, and have offered up a range of policies and initiatives to tackle the problem, sky-high property prices in the capital are only serving to exacerbate the shortage by discouraging new talent from coming to London.

Talent Be-Gone

Meanwhile, data from the Office of National Statistics suggests younger workers that have already been living and working in London are abandoning the capital in record numbers and moving to the UK’s smaller, cheaper cities. As a report published in The Guardian last year pointed out, “the underlying problem is the chronic housing shortage”.

Rohan Silva, the former technology advisor to David Cameron, believes Lisbon and Berlin are also well positioned to steal digital talent from London, due in large part to their lower cost of housing.

As British graduates take their digital skills to other cities, a 2015 report from the global professional services firm KPMG confirms that two thirds of companies in London are already beginning to experience a significant shortage of digital and creative talent.

Let’s Get Commercial

While sharp increases in residential property prices will continue to exacerbate London’s skills shortage, commercial property prices are also a major concern for startups in the capital.

The spiralling cost of office space in and around Tech City has already begun to push startups out of London’s main tech cluster and towards the capital’s other, less well known ‘tech cities’.

In addition, a report from Tech London Advocates suggests around 25 percent of startups and technology companies in London have even begun thinking of moving their operations outside London.

Starting Up Elsewhere

While moving an existing company’s operations beyond London represents a big decision for a startup that has already established London-based teams, customer relationships and professional networks, new startups don’t carry this baggage. With cities from Bournemouth to Manchester and Bristol to Liverpool increasingly seen as viable (and thriving) tech clusters in which to launch new digital startups, thanks in part to Tech City UK’s Tech Nation reports, startup founders may increasingly look beyond the British capital when deciding where to launch their new startups.

As the 2015 report from Tech London Advocates stressed: “price isn’t driving start-ups out of London. It might be stopping them from coming here.”

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Philip Hoey is a freelance business and technology journalist based in London, UK. He has written for Tech City News, Irish Tech News, AlleyWatch, and DeveloperTech, and has been quoted as a business source by The Guardian, The Scotsman, The Daily Mail, Money Observer, The Daily Express and The Telegraph.

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