The OBR has already outlined a slowing in economic output during the second half of 2024 with modest economic growth expected to persist set against a backdrop of cooling inflation. The IMF’s latest forecast point to likely growth of 1.5% next year, whilst the OBR anticipates growth to average just 1.1% during 2024 before rising to 2% in 2025. Despite this unemployment remains low and average earnings have outpaced inflation in recent months, providing some wiggle room for much needed fund raising. Throughout the rest of 2024 and into 2025 it is expected that two cuts of 0.25 percentage points will further release the breaks on demand across the economy and hopefully spur an uplift in spending, although economic scarring and fatigue will slow the transmission. This has made it hard to pinpoint exactly how spending plans for the remainder of 2024/2025 and 2025/2026 will impact the market as a whole.
Real Estate
A tightening of the treatment of profits made on second properties and commercial properties may affect behaviors and hold periods within the investment market. Rachel Reeves has been an advocate for investment, citing it as the key protagonist of economic growth. Earlier in October Reeves pledged to transition the UK Infrastructure Bank into a National Wealth Fund. The aim for this is to act as an aggregator and catalyst for private investment and partnership with pensions funds for scaling growth sectors such as gigafactories, green hydrogen and carbon capture.
- Collaboration between pension funds and the national wealth fund, may encourage a divergence of private and pension fund investment into high growth areas, and lead to pockets of occupier demand for the green-economy.
- A broader lapse of the 75% business rates relief for retail and hospitality and leisure that had been in place since the Covid-19 pandemic is likely to be further exacerbated by a simultaneous 6.7% rise in the minimum wage rising to £12.21 an hour.
- However, a new 40% relief on business rates for retail, leisure and hospitality is set to benefit the sector in the short term before two permanently lower multipliers are enacted following the 2026 revaluation. The small business rates multiplier will also be frozen next year to safeguard the SME ecosystem from higher rates liabilities.
- Conversely this rates reform from 2026 must be funded by a higher rates multiplier for larger value properties with a rateable value exceeding £500,000, whilst this will affect many properties and sectors, some are expected to be hit harder than other namely the Logistics and Industrial sector. This may disincentivize investment into these sectors and increase occupier costs in the long term.
Housing
Rebuilding Britain has become a campaign pillar of the Labour Party, putting the housing market firmly on the agenda. As part of their pledge to deliver their housing plan, Reeves has announced funding of more than £5bn, with a £3.1bn boost to the Affordable Homes Programme, and £3bn worth of support and guarantees to increase the supply of homes and support small housebuilders. She has also unveiled investment to renovate sites across the country including at Liverpool Central Docks for 2000 homes.
- Buy to let landlords will be temporarily relieved by no increase in Capital Gains Tax (CGT). However, the surcharge on Stamp Duty Land Tax (SDLT) for second homes will increase from 3% to 5% effective from tomorrow, which may affect new rental supply coming onto the market or result in higher costs for tenants as landlords recoup cost.
- There has also been no extension to the discount for home buyers on SDLT that is set to expire next year. This may further shrink the pool of willing buyers at a time in which mortgage rates, and availability of first-time mortgages remain restrictive.
- A reduction in the right-to-buy discounts will aid local authorities to retain a greater share of receipts in turn aiding further investment into social housing.
- The abolishment of non-domiciled status from April 2025, affecting approximately 74,000 people, will be replaced by a new residence-based scheme. The Temporary Repatriation Relief will be extended to three years. While this is expected to raise £12.7bn over the next five years, it is expected to have some impact on prime real estate markets.
The Consumer
Consumer spending accounts for circa 60% of GDP, and the Treasury is aware of this, but must grow its income with the squeeze expected to be shouldered by middle income and wealthier households. Overall, the budget outcomes were relatively positive for the retail sector and should not de-rail the anticipated recovery in consumer market conditions.
- A freeze on fuel duty tax rises next year twinned with maintaining the existing 5p cut for another year will provide continued support for households still adjusting to the higher cost of living.
- A release of the income tax and national insurance threshold freeze will also help to protect disposable incomes from further fiscal drag aiding consumer spend and limiting tax impacts for households.
- The National Living Wage (for over 21s) will increase to £12.21 and for 18-20 year olds the minimum wage will rise to £10 - a 16% increase from April 2025, paving the way for a movement to a single minimum wage rate.
- Extension to the inheritance tax threshold rate freeze on property values for a further two years to 2030. However, Inheritance tax treatment of pensions is also to be enacted. Currently pension pots are exempt of inheritance tax, which has driven retirees to first run down ISA’s and current accounts before drawing down on pensions. Some early withdrawals were noted by providers in the lead up to the budget.
Business
Whilst protecting households has been made a main stay of messaging, a significant portion of fund-raising efforts were placed on businesses. Businesses have been hit by rising costs in recent years, and many are fatigued by ongoing uncertainty which has resulted in business investment sitting in line with 2016 levels. However, some targeted support for SME’s will provide re-assurance for smaller businesses.
- A 1.2% uplift in Employer national insurance contributions rising to 15% from April 2025 will impact business cost bases. This becomes particularly relevant to low margin businesses that have already seen significant cost pressures, such as hospitality and leisure.
- For SME’s a doubling of the employment allowance from £5,000 to £10,500 will offset some of the higher costs of National Insurance employer contribution, and help to support job creation by the SME Ecosystem.
- For the hospitality sector some relief was announced, whilst alcohol duty will go up inline with RPI a cut to draught duty by 1.7% will result in a 1p saving on every pint served. Increased support for the retail sector through funding for shoplifting prevention, and a reversal of the low value shoplifting impunity will also support the retail sector.
- The autumn budget sustained its commitment to the transition to electric vehicles (EVs), this time targeting an increase in the differential between petrol and diesel cars via first year excise duty. EV related components have been a key proponent of demand for some Logistics and Industrial markets, such as the North-East where Envision and Nissan have committed to significant development.
- An increase in Capital Gains Tax (CGT) from 10% to 18% on the lower rate, and 20% to 24% on the higher rate, as well as an increase on carried interest to 32% from April 2025 and April 2026. Although this will likely raise the liability for private equity managers, the rate of the business asset disposal relief will remain at 10% this year before rising to 14% in 2025, and up to 18% from 2026/27.
Infrastructure, Investment & Innovation
An earlier released Industrial Strategy green paper from the Department for Business, Energy & Industrial Strategy provided a more targeted approach relative to its 2017 predecessor. This is in addition to the earlier announced National Wealth Fund outlined above, which targets to bridge the gap between private investment into key sectors.
- Changes to the fiscal rules and the working definition of public debt, from Public Sector Net Debt to Public Sector Net Financial Liabilities, may create between £10bn to £50bn of financial headroom that can then be invested as capital expenditure.
- Talk of government departments’ budget settlements was focused on both Education and the NHS with a £22.6bn increase in day to day spend, and a further £3.1bn capital increase combined with a 10-year plan expected to reverse the strain incurred by the healthcare system in recent years. Capital expenditure will specifically target £1.5bn into new surgical hubs and an improvement in diagnostic scanning capacity which may result in further demand from the public sector and private medical industries within logistics and industrial real estate.
- In October the Government pledged a £22bn multiyear investment into the establishment of two carbon clusters located within Merseyside and Teesside. This bolsters significant progress made within the Humber region and was followed up during the budget with the announcement that a further 11 new green hydrogen projects are to be funded.
- As well as a continuation of the innovation acceleration program in Glasgow Manchester and the West Midlands specific support for some sectors was announced. (£1bn aerospace, £2bn for automotive and EV automotive, and £520m for life sciences).
- Transport also featured heavily within the budget, confirming the extension to Euston for HS2, a sustained effort and funding for the East-West rail connectivity which will benefit the life sciences and biotech sector, and further funding for the Trans-Pennine upgrade, which will encourage greater labour mobility in the North of England.
In summary, the first Labour budget didn’t raise any severe surprises, with the only unexpected announcements such as fuel duty and a lifting of the income tax freeze providing upside for consumers and households. As anticipated much of the burden will be shouldered by businesses in the short-term, which may have an impact on organic business growth and profitability. However, the delivery of the budget clearly communicated the need for economic stability as a protagonist for much needed investment and economic growth. Which combined with refreshed principles surrounding responsible investment and improved transparency on government spend will be seen as a positive. Although there is likely to be some impact to both tenant demand, and investment into the sector, merit can be taken from some support provided to the SME community, and the renewed focus on long-term structural growth sectors.
Authors: Edward Bavister & Vivienne Bolla
