Capital shocks, the great recession, and UK regional divergence

Abstract

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. Our analysis demonstrates that prior to the 2008 Global Financial Crisis all regions of the UK were perceived similarly in terms of risks, whereas the crisis engendered a flight to safety of capital into London. Other UK regions shifted rapidly into junk bond territory, and have remained there ever since. These asymmetric capital shocks led up to a profound and adverse shift in the subsequent productivity growth of the UK regional economies.