02 Aug 2018 3 min read

Locations for real estate

By Bill Page

Geography matters for real estate. Understanding why employment growth differs from one area to the next allows investors to focus on locations with better long-term potential.


I did a geography degree and before you ask, it wasn't just colouring in maps. To be fair, there was a reasonable amount of measuring glaciers and rivers, but the colouring pencils were definitely left behind at GCSE. Definitely. Another area was human geography – essentially why cities are what they are and how human decisions interact with the environment. This is very relevant to real estate investment and it's been a pleasure to apply some of the learnings of my distant past to my job today.

Geography matters for real estate. An area with higher employment growth is more likely to have stronger investment potential. This is because the income return – which drives 75% of total returns on average – depends on the health of the occupier market. The more space people need to sell, work or make things, the better.

An area with higher employment growth is more likely to have stronger investment potential

Employment growth depends on output growth. Local differences in output growth can be explained by productivity. For a geography geek this opens the door to thinking from celebrity geographers and economists like Paul Krugman (the Krugman index) and Edward Glaeser (among other things a champion of investing in education above all else). Taking the productivity factors identified by academia, adding some of our own and regressing them to explain differences in employment growth between local areas over time provides a decent framework. We use this to identify the expected growth potential of different areas, based on attributes measured today.

Doing this across 380 local areas and 70 or so cities is no mean feat and we recognise that a framework cannot and should not give a final answer. There are qualitative factors which matter such as the strength and ability of local governance. A regeneration plan can lift an average area into an outperforming one, but will not feature in economic data. Furthermore, making a decision based on a top-10 list may exclude a great opportunity in location-11 that is ignored.

With these caveats in mind, we believe the framework provides an edge in identifying areas and directing the right questions to ask of prospective investments. It can also be used to match opportunities with cost of capital and risk tolerance. For instance, a risk-averse fund may be advised to be overweight locations in the first quartile. These may already be fully priced in the short term, but could offer the right fundamentals for more stable long-term growth. 

Investors with requirements for superior returns over a longer horizon may prefer to invest in, or piggyback on, regeneration areas in weaker towns where they believe a missing ingredient for long-term growth can be created. The retention of students in the workforce is often the missing piece for many areas.

We’ve called this project 'local heroes'. Not only is this a more engaging name than the previous incarnations of 'growth hubs' or 'demand dynamics', it also portrays how looking beyond the usual suspects can offer investors meaningful upside potential at less competitive pricing – a pretty heroic role in today’s investment environment.

Bill Page

Head of Real Estate Markets Research

Bill is LGIM Real Assets' Head of Real Estate Research. He has responsibility for the formation of house views and inputs into fund strategy. He has 20 years’ industry experience. He is a voting member of the Real Estate Investment Committee and actively contributes to the platform’s office and industrial strategy.

Bill joined LGIM Real Assets in October 2012, having spent seven years at JLL where he was EMEA Head of Office Market Research. Prior to JLL Bill worked at Estates Gazette Group. He chaired the British Council for Offices’ Research Committee between 2015 and 2018 and sits on the IPF Research Steering Group.

Bill graduated from Lancaster University with a first class degree in geography. He holds the IMC certificate and IPF Diploma.


Bill Page