Understanding the drivers of productivity: Land 

This blog is the fifth and final in our new series on the drivers of productivity. The drivers of productivity include skills, investment, innovation, enterprise and competition, and land. This blog focuses on land, and complements the blogs on GVA and productivity published in summer 2024. 

This series adds to our Understanding core concepts in local economic growth series, and is aimed primarily at those working in local and central government. The series provides deep-dives into various components of economic growth, and some key concepts to consider when thinking about local economic growth. 

What is land? 

In relation to productivity, land is an input into the production of goods and services. Unlike other inputs, there is a fixed amount of land. The location and amount of land cannot be changed. Uses of land include agriculture, forestry, commercial, industrial, housing, infrastructure, and public space. How land is used is key to productivity. Land use can often be changed (for example, from agricultural to industrial use) but planning regulations and development plans can act as a barrier.  

Land value partly reflects its productivity in different uses and can be affected by geography and natural assets (for example, proximity to a major economic centre, or if it is endowed with mineral resources) and the level of competition for its use. For example, land near a major port or airport will attract a premium compared to other similar land elsewhere as the economic returns on using that land will be higher. 

Why do we need to think about land?  

Using manufacturing as an example, a business in this sector will require land (and buildings) in which to manufacture their goods and to undertake other business functions (finance, marketing, R&D, etc.). Businesses can either own or rent land (and buildings).  

Land is a form of physical capital – one of the main ‘factors of production’. Businesses also need access to other forms of capital (human, other physical capital such as machinery, and intangible capital such as software, design and R&D), materials, supply chains, and customers. Businesses’ choice of location will reflect the need for, and availability of, all these factors. Historically, many manufacturers were located close to the materials they needed (for example, with steel mills located near to coalmines as steel manufacturing requires a large volume of coal) but this has become less important, especially for high value manufacturers. Access to workers, customers or supply chains are now more likely to be important considerations. 

Service businesses often require less land than manufacturing businesses, but the considerations are similar. For example, professional services (lawyers, accountants, advertising) will often be located in city centres as these are locations that offer access to large numbers of potential customers and workers.   

As a result of these interdependencies, productivity not only depends on land allocated to commercial or industrial use but also on wider land use. For example, businesses will have better access workers if there is suitable, affordable housing within commuting distance and good transport connectivity. If housing costs are too high (for example, because there are too few homes near available employment opportunities), businesses will need to compensate workers for expensive homes or longer commutes with higher wages, reducing profitability (as their labour input costs have increased, with no associated increase in what they can charge for their products).  

Effective land use can also help businesses benefit from agglomeration. Agglomeration is the geographic concentration of economic activity, which has economic benefits for businesses and workers. For example, locating in an area that already has many businesses in their sector will provide access to workers and suppliers, sector-specific assets, and networks that are not be available in other areas. Networks can make identifying and adopting new practices or processes easier or help connect businesses with funding opportunities, both key drivers of productivity improvements.  

How can we improve land use? 

The main mechanism available to local government is to identify priorities for land use and develop plans to achieve those priorities. Land planning can boost productivity by shaping efficient use of space and resources, enhancing infrastructure and connectivity, creating attractive environments for investment and innovation, and supporting labour mobility and housing affordability. As existing endowments vary, the priorities will vary across geographies. Some areas will need more or better commercial premises, whilst others may need to increase housing or invest in new infrastructure.  

Local government may also pursue policies that improve land use.  For example, investing in infrastructure or upgrading current commercial facilities.  

Government could improve certainty for businesses bringing forward development projects through reform of the planning system and regulations, as these currently lead to underinvestment and delays (with associated cost implications) for many projects. Whilst local government cannot change legislation, it can work to ensure its processes minimise uncertainty and delays for developers.   

What to consider when thinking about land? 

• Land use balance – The allocation of land between different uses including commercial, industrial, housing, infrastructure, agricultural, and green spaces, and whether this aligns with policy priorities to support economic growth and quality of life. 

• Infrastructure and accessibility – How land use integrates with transport, utilities and digital networks, supporting connectivity to workplaces, markets, and services. 

• Economic competitiveness – Whether land use is efficient and supports business development, innovation clusters, and investment. Are there any unnecessary restrictions that hamper development? 

• Price signals – As with other markets, the price of land reflects supply and demand. If demand for sites with set of characteristics is high but supply is limited, prices will increase, and vice-versa. Challenges arise when supply and demand is not able to freely adjust to these price signals (for example, because the planning system prevents new housing or commercial units being constructed). The economic benefits of investment – for example, into transport infrastructure – are often capitalised into land values. Looking at land values – both current levels and change over time – can provide insights into where investment may be needed.  

Where can I learn more about land? 

• Centre for Cities has a series of reports and studies on housing and planning. 

• Recognising the true economic effects of land-use planning, a note from LSE. 

• Housing affordability and productivity, a study for Homes England. 

• The supply-side impact of planning reforms – land value uplift and construction sector productivity, an article by the Office of Budget Responsibility (OBR). 

• The MHCLG Appraisal Guide provides guidance on calculating land value uplift.  

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