An election call, an inflation fall and confidence improves as economic growth returns
As the major parties start to lay out their election policies, what are we likely to see? How will these policies impact the industrial and logistics sector? And will the needs of the sector be addressed?
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Rishi Sunak calls UK general election for 4th July
Despite having until January 2025, Prime Minister Rishi Sunak announced a General Election for the 4th of July, giving just six weeks' notice. Autumn was previously thought to be the most likely timing, but this announcement caught both the opposition and his own (Conservative) Party off guard.
While the major parties have yet to release official election manifestos, they have dropped hints and promises over the course of the past few years, which offer a clue to their vision for the country.
The primary election pledges are not likely to focus on the industrial and logistics sector. However, every government has an industrial strategy, and policies around national infrastructure, housing, wages and the broader economy will all have implications for operators, investors and the wider requirements of the sector.
The Labour Party is expected to win the election, with Oddschecker currently showing an average of 1/40 for a Labour victory; meanwhile, odds for a Conservative win average 12/1. The Financial Times general election model currently shows Labour receiving 44.3% of the national vote share, compared with 23.6% for Conservatives.
So, what would a Labour government mean for the industrial and logistics sector? We take a look at some of the proposals and their implications for the sector.
Policies and Implications of a Labour Government
1. Ports and National Infrastructure
Last year, the National Infrastructure Commission laid out the scale of the task awaiting future governments to fix infrastructure in the UK over the coming decades. It calculated that £30bn a year was needed from the taxpayer, with a further £40bn to £50bn a year from the private sector.
Last year, the (Conservative) Government set an ambitious target to grow rail freight by at least 75%. The Labour Party has also expressed their commitment to increasing rail freight, and whilst it has outlined plans to nationalise consumer routes, it has stated that it has no plans to nationalise rail freight companies.
Labour plans to merge the NIC (National Infrastructure Commission) and IPA (Infrastructure and Projects Authority) to "better support the delivery of major capital projects." This new, combined body (to be called the National Infrastructure and Service Transformation Authority) would stipulate from the outset how projects are planned, designed and costed.
Labour has pledged to invest up to £1.8bn into port infrastructure across the UK if it comes into power after the forthcoming General Election. However, the specifics of the locations and projects this spend could target are yet to be defined.
Labour have announced they will set out a 10-year infrastructure strategy within their first year in power. They have announced plans to grow infrastructure investment, which will rely on increasing private-sector financing. They also aim to streamline the planning system for nationally significant infrastructure projects (NSIPs) such as major housing developments, power plants, railways, road networks and health centres.
2. Housing
Both Conservatives and Labour are targeting 300,000 new homes per annum. However, the approach (Labours New Towns vs Conservatives brownfield sites) and stringency of the targets differ slightly.
This target of 300,000 homes per annum would mean 1.5 million new homes over the next five years. Meeting these targets would mean around a 50% rise in housing deliveries, based on current delivery levels.
More dwellings will mean a greater need for industrial and logistics property and infrastructure. As more households mean more customers and increased demand for goods, which need to be produced, stored and delivered. Additional dwellings mean more delivery addresses and thus, greater demands on logistics networks.
Our Future Gazing research, released earlier this year, found that for each dwelling in Britain, there is 109 sq ft of industrial and logistics space. If this relationship holds true and the housing targets are met, a further 163.5 million sq ft of industrial and logistics floorspace would be needed over the next five years.
3. Business Taxes
Labour has previously announced plans to replace business rates with a framework of "business property taxation", aimed at aiding high street retailers by levelling the playing field between traditional brick-and-mortar businesses and their online counterparts. However, details about how this plan would work have not been forthcoming, which may suggest that plans have since been shelved.
Both Labour and Conservatives have ruled out increasing corporation tax.
More noise than signal from April's inflation figures
UK inflation has fallen to 2.3%, just above the target rate of 2%, down from 3.2% in March. It's the lowest it's been in almost three years, but while the latest dip, driven by energy prices, has sparked some hope for future interest rate cuts, the drop is smaller than anticipated.
Prices rose in most other sectors. Services inflation, the most critical indicator for the Bank of England, came in at 5.9%, down marginally from 6% in March and much higher than expected (5.4% consensus forecast) due to several annual price hikes.
This persistent services inflation reduces the chances of the Bank of England cutting rates at its next meeting in June. Oxford Economics has revised its expectations around the timing of the first cut, which is now expected to come in August rather than June, with two 25bps cuts anticipated by year-end.
Confidence improves as economic growth returns
The UK economy has exited its technical recession, with Q1 GDP estimates suggesting it grew 0.6%. The outlook for 2024/25 has also improved. Oxford Economics revised up their forecast for 2024 to 0.9% (from 0.6% previously), with a further 2% growth forecast in 2025.
Last year saw a robust rebound in real incomes, but high inflation coupled with tighter financial conditions led to caution from consumers. While mortgage rates have come down, the lagged impact of tighter monetary policy will continue to impact disposable incomes. Many borrowers with fixed-rate mortgage deals expiring this year will face significant rises in interest payments.
Yet, falling inflation, the prospect of looser monetary policy and an improving economic outlook are beginning to boost consumer confidence. The GfK Consumer Confidence Index two points in May, to -17. With an improved outlook for personal finances (up five points) and a boost for views on the broader economy in the coming year (up four).
As we look to the second half of 2024, lower inflation coupled with ongoing wage growth should support real household incomes and improve sentiment, which will, in turn, help boost consumer spending.
The amount of warehouse space taken up by retailers has fallen back quite considerably in the past couple of years. Yet as the consumer economy improves, the post-pandemic correction for online retail sales eases, and the economic picture improves, retail businesses will become more acquisitive as their confidence to enact their expansion plans grows.
Delays on route
With an election on the horizon and interest rate cuts now not expected until late summer, we will not likely see a significant pickup in activity in either the investment or occupier markets until then.
In the investment market, higher financing costs have impacted investor sentiment. However, many buyers are well-capitalised and continue to target the sector's strong fundamentals. Yet, a lack of motivated sellers has meant far fewer options available for buyers and, thus, lower levels of investment activity.
In the occupier market, some businesses have prioritised cost-consciousness due to inflationary pressures, which has led to a decline in demand for space. Many occupiers have opted to maintain their current footprints rather than expand their network or upsize facilities and incur significant capital expenditure for fit-out costs. Also, occupiers seeking to use debt to fund expansion plans or investment into new facilities may be delaying their plans in the hope of finding cheaper funding options later in the year.