Real Estate Markets and the Location of Economic Activity

Preliminary and incomplete version

Karolien De Bruyne European University College Brussels Catholic University of Leuven

Abstract

In determining the location of their economic activity, firms take many factors into account. According to neo-classical theories, natural advantages are the most important determinants of location. According to new economic geography theories (Fujita, Krugman and Venables (1999)), market access and low-cost access to intermediate goods matter most for location.

The availability and affordability of industrial terrains is another key factor for firms that want to set up their production. It is obvious that this key factor combines both existing strands of literature. Regions with abundant land will have lower land prices, therefore attracting more firms. However, often these regions will be less favourably located as far as the access to the markets for final and intermediate goods is concerned. Firms will therefore have to trade off terrain costs against transportation costs.

For governments willing to attract firms it is highly important to know what drives their location decisions. The purpose of this paper is to get a better insight in the link between the real estate market and the location decision of firms. In doing this we focus on the Flemish market. If a government wants to attract firms to its country it is clear that it will have to compete as far as the availability of attractive industrial terrains is concerned. The central question we address in this paper is whether a government should opt for a region-specific policy – investing in a region as a whole - rather than for a sector-specific policy – directed towards a sector irrespective of the region it invests in. Using investment data of different manufacturing sectors we provide a first answer to this problem.

1. Introduction

In determining their location outcomes firms take several aspects into account. Neo- classical theories argue that natural advantages determine location outcomes. The New Economic Geography theories state that location is endogenously determined. According to Krugman (1991), closeness to consumers is the key factor for location. Firms are drawn to regions with a lot of consumers. Moreover, consumers follow the firms to get a job - thus reinforcing the ‘pull factor’. Venables (1996) on the other hand states that closeness to other firms determines the location outcome. Firms want to be close to both their intermediate suppliers and the buyers of the products.

However, none of these theories pays particular attention to the availability and affordability of industrial terrains. A certain region might be perfectly located from the point of view of its closeness to consumers and/or other firms but it might be too expensive to set up production. The focus of this paper is to investigate the link between the availability and affordability of industrial terrains on the one hand and the location of firms on the other hand.

2. Literature overview

In a recent survey by Kings Sturge (2007) on industrial and office rents, Belgium does not turn out to be such an expensive country to set up production. This contrasts with what is commonly argued. Indeed, firms are often said to delocalise because of high costs - in the broad sense of the word i.e. including among others labour costs, taxes, location costs etc. Kings Sturge’s property consultants calculated total occupation costs (net rent, service charges and local taxes) for different regions in the world. Belgium – and more in particular Brussels and Antwerp - turns out fairly cheap compared to other Western European countries ánd not significantly more expensive than Eastern European countries.

This rather remarkable result could lead to the conclusion that space to invest is not really a problem in Belgium. However, a recent study by Cabus and Vanhaverbeke (2006) for the Flemish association of employers leads to a completely different conclusion. In their study they analysed the current and future stock of industrial terrains in Flanders. Ceteris paribus, it turns out that within 3 to 5 years there will be a shortage of industrial terrains in all Flemish districts. The authors therefore state that it is time for the Flemish government to take action in order to tackle this problem. In order for firms to get a better idea of their location possibilities, they constructed a database where all current and future industrial terrains are to be found.

While the construction of such a database is a precarious and very useful job the authors are not really able to answer the question how the government should intervene. That is – partly - the topic of this paper. By analysing the investment decisions of different manufacturing sectors we want to get a better insight in possible ‘problem’ districts. Indeed, higher investments in these districts imply more production and therefore a higher demand for industrial terrains. Defining these ‘problem’ regions is important to make recommendations concerning the most designated policy that a government may apply. If the problem is mainly related to the district considered – and therefore common to all sectors producing there – the government might best opt for a region-specific policy. Immediately entering the real estate market and providing affordable industrial terrains is one option. Another one is investing in infrastructure in order to make initially less favourable locations more attractive. If however the problem turns out to be for only one sector in a few regions, a sector- specific policy might be more appropriate.

3. Industrial terrains and investments in the Flemish market

In our study we focus on the manufacturing sector in the Flemish market1. The reason for this is first of all that the largest part of production takes places in this region. Indeed, for most industries, more than 70 % of the production takes place in Flanders. Moreover, Flanders – as well as Wallonia – can conduct it’s own regional policy such that it is relevant to analyse government intervention at this level.

In what follows we first have a look at the existing and future industrial terrains in Flanders. In order to get a better insight in possible ‘problem’ districts we have a look at the investments of the different manufacturing sub-sectors in the different districts. Since investments reflect future decisions and actions of firms they should be able to shed some light on future bottlenecks in these districts.

3.1 Availability and affordability of industrial terrains

We want to analyse the availability and affordability of industrial terrains2 in Flanders. In Flanders, 2.7%3 of the surface goes to industrial terrains. Table 1 illustrates that within Flanders, Antwerp is the province with the largest share of industrial land. We will point out however that this is also the province with the largest shortage of industrial terrains.

Table 1: Share of industrial land in total land use in the different Flemish provinces

Antwerp 3.8 % Limburg 2.6 % Oost-Vlaanderen 2.7 % Vlaams-Brabant 1.7 % West-Vlaanderen 2.4 %

Source: Statistics Belgium, FOD Economie, KMO, Middenstand en Energie and own calculations

In order to get a better – and more detailed - insight into both the availability and the affordability of industrial terrains in Flanders we combine two data sources. First of all, we calculated the average sales price of industrial terrains in each Flemish district from 2003 to 2006. This gives us an indication of the average price per squared meter.

1 Belgium consists of Flanders (Northern part of the country) and Wallonia (Southern part of the country). Flanders itself consists of 5 provinces and 23 districts. Cfr. Appendix 1 2 Land on which mainly manufacturing activities are pursued, including all auxiliary grounds, such as private roads, parkings, storage grounds, office grounds, etc. 3 Data NIS: land use in Belgium (2005) In order to get information on the availability of industrial terrains we refer to the study of Cabus and Vanhaverbeke (2006). They calculated the expected shortage of industrial terrains within 3 to 5 years in the different Flemish regions. The authors used the “terrain-coefficient-method” to do this. The method estimates the expected demand for terrains in the future using data on the current use of terrains. More specifically, using the ratio of the surface of a terrain and the amount of people working on it, they predict the amount of industrial land required in the future. Given the supply of industrial terrains they can therefore calculate whether an agglomeration will be confronted with an excess or rather a shortage of suitable industrial terrains.

The price data as well as the estimated shortages/surpluses are to be found in Table 2.

Table 2: Availability and affordability of industrial terrains in Flemish districts

Land ready to be Land ready to be built on within 3 built on within 5 years (ha) years (ha) Price per m² Antwerpen -105.2 -193.1 91 Mechelen -112.0 -192.1 97 Turnhout -81.6 -172.8 6 Halle-Vilvoorde -163.9 -292.0 102 Leuven -70.7 -127.1 40 Nijvel n.a. n.a. 38 Brugge -19.4 -45.5 23 Diksmuide -7.1 -12.4 22 Ieper -19.2 -38.1 36 Kortrijk -28.0 -52.8 72 Oostende -17.5 -38.3 49 Roeselare -32.8 -58.3 33 Tielt -36.3 -63.3 65 Veurne -7.8 -13.0 21 Aalst -24.3 -41.6 24 Dendermonde -9.9 -28.5 48 Eeklo -12.3 -20.5 21 Gent -98.1 -173.1 189 Oudenaarde -21.3 -35.4 40 Sint-Niklaas -42.6 -73.3 30 Hasselt -3.1 -47.9 31 Maaseik -18.4 -42.0 23 Tongeren -1.9 -21.2 50

Source: Cabus and Vanhaverbeke (2006), Statistics Belgium, FOD Economie, KMO, Middenstand en Energie and own calculations

From Table 2 it is easy to determine the possible ‘problem’ districts. First of all it is obvious that all districts will have too few industrial terrains available within 3 to 5 years if the government doesn’t intervene. There are however districts where the shortage of terrains is more stringent than in others. Antwerp, Mechelen, Turnhout, Halle-Vilvoorde, Gent and to a lesser extent Leuven are districts where the shortage of industrial terrains is substantial. Not surprisingly, these are generally speaking also the districts with the highest prices. Apart from Turnhout, the districts with the most severe problems to be expected within 3 to 5 years are also the districts that have had high prices for terrains in the last 4 years. Indeed, the correlation between price per squared meter and land ready to be built on within 3 (5) years is -0.64 (-0.61).

In order to get a better insight in possible ‘problem’ districts and to try to determine the most appropriate government intervention we now have a look at the investments of the different manufacturing sub-sectors in the different districts.

3.2 Manufacturing investments in Flanders

In what follows we analyse the (current and) future importance of the large NACE- BEL sectors in Flanders. We decided to focus mainly on the most important sectors for Flanders. We therefore calculated the share of employment of each manufacturing sector in total manufacturing employment. Table 3 summarizes the results.

Table 3: Share of manufacturing employment of different manufacturing sectors

Manufacturing sector Manufacturing employment share (%) DA Manufacturing of food products, beverages and tobacco 15,90 DB Manufacturing of textiles and textile products 6,22 DC Manufacturing of leather and leather products 0,25 DD Manufacturing of wood and wood products 2,02 DE Manufacturing of pulp, paper and paper products; publishing and printing 7,42 DF Manufacturing of coke, refined petroleum products and nuclear fuel 0,84 DG Manufacturing of chemicals, chemical products and man- made fibres 12,29 DH Manufacturing of rubber and plastic products 4,27 DI Manufacturing of other non-metallic mineral products 5,3 DJ Manufacturing of basic metals and fabricated metal products 16,51 DK Manufacturing of machinery and equipment n.e.c. 7,52 DL Manufacturing of electrical and optical equipment 7,01 DM Manufacturing of transport equipment 10,51 DN Manufacturing n.e.c. 3,95

Source: Statistics Belgium, FOD Economie, KMO, Middenstand en Energie and own calculations

The eight most important sectors we will focus on are therefore: food industry, chemical industry, metal industry, production of transport equipment, textile industry, paper industry, machinery and electronic and optical equipment. Together they represent 83 % of total manufacturing employment.

Since we are mainly interested in the future availability and affordability of industrial terrains we pay more attention to the future rather than the current location of activities. Therefore, instead of looking at production or sales data, we analyse investment data. Figure 1 illustrates the share of investments of each sector in each of the Flemish districts.

Figure 1: Manufacturing investments in different districts in 2006

Manufacturing

25 20 15 10 5 0 e e e el de nt d elt elen ord jv trijk ar s Tielt Ge iklaas ch euven Ni ruggemui Ieperor Aalst Eeklo L B K Veurne naar N Has TurnhoutVilvo iks oesel Maaseik Me D OostendeR int- Tongeren Ant werpen e- Oude S all Dendermonde H

Manufacturing of food products, beverages and tobacco

16 12 8 4 0 e e e el de nt d elt elen ord jv trijk ar s Tielt Ge iklaas ch euven Ni ruggemui Ieperor Aalst Eeklo L B K Veurne naar N Has TurnhoutVilvo iks oesel Maaseik Me D OostendeR int- Tongeren Ant werpen e- Oude S all Dendermonde H

Manufacturing of textiles and textile products

30 25 20 15 10 5 0 e e e el de nt d elt elen ord jv trijk ar s Tielt Ge iklaas ch euven Ni ruggemui Ieperor Aalst Eeklo L B K Veurne naar N Has TurnhoutVilvo iks oesel Maaseik Me D OostendeR int- Tongeren Ant werpen e- Oude S all Dendermonde H

Manufacturing of pulp, paper and paper products

20 15 10 5 0 t e s n ut n el e e r e l lo a n e v g id e ie ne k nt el o g p lare r e rde la re h h u end e T G a sselt c rn Nij Ie Aalstmond Ee a a ge e Leuve Br smu Kortrijkst Veu r n H n Tu o t-Nik Maaseik M Dik O Roes To Ant werpen ude ende O Sin D Halle-Vilvoorde

Manufacturing of chemicals and chemical products

50 40 30 20 10 0 t e s n ut n el e e r e l lo a n e v g id e ie ne k nt el o g p lare r e rde la re h h u end e T G a sselt c rn Nij Ie Aalstmond Ee a a ge e Leuve Br smu Kortrijkst Veu r n H n Tu o t-Nik Maaseik M Dik O Roes To Ant werpen ude ende O Sin D Halle-Vilvoorde

Manufacturing of basic metals and fabricated metal products

15 10 5 0 t e s n ut n el e e r e l lo a n e v g id e ie ne k nt el o g p lare r e rde la re h h u end e T G a sselt c rn Nij Ie Aalstmond Ee a a ge e Leuve Br smu Kortrijkst Veu r n H n Tu o t-Nik Maaseik M Dik O Roes To Ant werpen ude ende O Sin D Halle-Vilvoorde

Manufacturing of machinery and equipment

30 25 20 15 10 5 0 t e s n ut n el e e r e l lo a n e v g id e ie ne k nt el o g p lare r e rde la re h h u end e T G a sselt c rn Nij Ie Aalstmond Ee a a ge e Leuve Br smu Kortrijkst Veu r n H n Tu o t-Nik Maaseik M Dik O Roes To Ant werpen ude ende O Sin D Halle-Vilvoorde

Manufacturing of electrical and optical equipment

Manufacturing of transport equipment

Source: Statistics Belgium, FOD Economie, KMO, Middenstand en Energie and own calculations

Investments in manufacturing in general mainly take place in Antwerp, Hasselt, Turnhout and Gent. However, the regional dispersion of investment varies quite a lot among the manufacturing subsectors. Manufacturing of food is more or less spread out over the whole of Flanders with a larger concentration of investments in Gent, Antwerp, Leuven and Halle-Vilvoorde. The textile industry mainly invests in East- and West-Flanders – more in particular in Kortrijk, Gent, Tielt and Dendermonde. Investments in manufacturing of paper products mainly take place in Halle-Vilvoorde, Antwerp, Gent and Turnhout. The chemical industry concentrates its investments in the province of Antwerp – more particularly in the districts of Antwerp and Turnhout – and in Nijvel. Investments in the metal industry are again spread out over the whole of Flanders with a concentration in Kortrijk, Hasselt, Mechelen, Turnhout, Maaseik and Antwerp. Manufacturing of machinery mainly invests in Antwerp and Hasselt while manufacturing of electrical and optical equipment prefers to invest in Antwerp, Leuven, Brugge and Hasselt. Investments in manufacturing of transport equipment finally are clustered in Gent, Antwerp and Halle-Vilvoorde.

Table 4 provides an overview of the most important districts that the different subsectors invested in.

Table 4: Main investment districts of manufacturing subsectors

Manufacturing sector Main investment districts Total manufacturing Antwerp, Hasselt, Turnhout, Gent DA Antwerp, Gent, Leuven, Halle-Vilvoorde DB Kortrijk, Gent, Tielt, Eeklo DE Halle-Vilvoorde, Antwerp, Gent, Turnhout DG Antwerp, Turnhout, Nijvel DJ Kortrijk, Hasselt, Mechelen, Turnhout, Maaseik, Antwerp DK Antwerp, Hasselt DL Antwerp, Leuven, Brugge, Hasselt DM Gent, Antwerp, Halle-Vilvoorde

Source: Statistics Belgium, FOD Economie, KMO, Middenstand en Energie and own calculations

3.3 Investments and industrial terrains

After gathering the data regarding the current and future availability and affordability of industrial terrains on the one hand and the investments of different sectors on the other hand we can try to answer the central question in this paper. If the government wants to help out firms in their search for terrains to invest in or produce on, which policy would be preferred: a region-specific policy or rather a sector-specific policy?

If a region has little terrains and high prices and all sectors invest in it, it is obvious that the government should provide region-specific help. The government should try to provide terrains at an affordable price for all sectors in the district. If several regions however have few terrains and high prices and only one sector invests in them the government can consider sector-specific help to that one sector.

Recall that Antwerp, Mechelen, Turnhout, Halle-Vilvoorde, Gent and to a lesser extent Leuven are districts where the shortage of industrial terrains is the most substantial and the prices of industrial terrains are generally speaking highest. From Table 4 it is obvious that the district of Antwerp is the one where all sectors apart from textiles have heavily invested in. This implies that this ‘problem’ district will become more of a problem in the future. Indeed, industrial terrains are already scarce and expensive but due to higher investments by almost all sectors we expect terrains to rise even further in price. Of course the location close to the harbour is very appealing to firms. If the government wants to have a positive impact on the location decision of firms on the Flemish market it should tackle the problem region of Antwerp. In other words, a region-specific policy would be advisable here. The government could for instance subsidise industrial terrains in Antwerp or loosen the law in order to turn more land into industrial terrains. Of course physical limitations play a large role here.

It is clear that the high prices in Antwerp are driving firms away from that district. Prices in Turnhout are still very low although one predicts a large shortage of land ready to be built on within 3 to 5 years. Moreover, our investment data show that for at least 3 manufacturing subsectors – i.e. chemical, paper and metal industry - Turnhout is an important investment district. This implies that large price increases are to be expected in Turnhout too.

Finally, Gent is also a top investment district for 4 manufacturing subsectors. Given the high prices and the expected shortages of industrial terrains, the government could also focus on a region-specific policy for this region.

As far as industry-specific policies are concerned there is only one subsector that looks eligible for such a policy. The textile sector locates itself mainly in East- and West-Flanders. These provinces are not the most stringent problem districts. A policy directed at these districts therefore seems less adequate. However, in this case policies oriented towards the sector itself could alleviate the problem of increasing land prices.

4. Conclusion

This paper analysed the possible problem districts in Flanders as far as the availability and affordability of industrial terrains is concerned. It is obvious that for firms to decide upon their location they also take the real estate market into account. A recent study by Cabus and Vanhaverbeke (2006) illustrated the shortage of industrial terrains to be expected in Flanders within 3 to 5 years. Government intervention is thus called for.

The purpose of this paper was to analyse which manufacturing sectors mainly situate their activity in these ‘problem’ districts. This in order to get a better insight in the appropriate government policy, being it region-specific or sector-specific. If a district has few industrial terrains and high prices and all sectors invest in it, it is obvious that the government should provide region-specific help. The government should try to provide terrains at an affordable price for all sectors in the district. If a district with few terrains and high prices has only one sector investing in it, the government could consider sector-specific help to that one sector.

It turns out that Antwerp is a district where region-specific government aid might be advisable in order to keep the district attractive for both Belgian and foreign firms. One way to alleviate the pressure from Antwerp is to make districts surrounding the harbour district – like Turnhout and Mechelen - more attractive by investing in infrastructure that facilitates the connection to the harbour from these districts. Another district that calls for region-specific government intervention is Gent. Finally, the textile sector is a sector that qualifies for sector-specific government aid.

Several lines of future research still lie open. Note first of all that this paper only looked at the preferred government policy in order to keep the sectors in the Flemish region. The question of whether some sectors are worthwhile to be invested in to prevent their delocalisation is another question however that falls outside the scope of this paper.

Furthermore we assumed the importance of affordable industrial terrains to be an important determinant of location for firms. One possible line of future research is to provide a theoretical model underpinning this statement. Another line of research is to estimate the importance of affordable industrial terrains in the location decision of firms compared to other location determinants such as final demand or input-output linkages.

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Appendix 1: Flemish provinces and districts

Provinces Districts Antwerp Antwerpen Mechelen Turnhout Flemish-Brabant Halle-Vilvoorde Leuven Nijvel West-Flanders Brugge Diksmuide Ieper Kortrijk Oostende Roeselare Tielt Veurne East-Flanders Aalst Dendermonde Eeklo Gent Oudenaarde Sint-Niklaas Limburg Hasselt Maaseik Tongeren

Appendix 2: NACE-BEL industries

DA Manufacturing of food products, beverages and tobacco DB Manufacturing of textiles and textile products DC Manufacturing of leather and leather products DD Manufacturing of wood and wood products DE Manufacturing of pulp, paper and paper products; publishing and printing DF Manufacturing of coke, refined petroleum products and nuclear fuel DG Manufacturing of chemicals, chemical products and man-made fibres DH Manufacturing of rubber and plastic products DI Manufacturing of other non-metallic mineral products DJ Manufacturing of basic metals and fabricated metal products DK Manufacturing of machinery and equipment n.e.c. DL Manufacturing of electrical and optical equipment DM Manufacturing of transport equipment DN Manufacturing n.e.c.