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.