Autumn Budget 2024: The Implications for Commercial Real Estate
10 minutes to read
A momentous budget, in scale, significance, and severity. A masterclass in the political art of riding many horses at once. But given the anticipation, an event perhaps lacking a true element of surprise, given the trailing of many measures ahead of time.
For commercial real estate, a few themes stand out:
- The government’s supply-side push majors on infrastructure investment. The devil will be in the detail, but with clear knock-on commercial opportunities
- The ‘Get Britain Working’ campaign, at the margin, could boost employment and increase occupational demand for space, but we’ll be alive to any counter impact from higher minimum wages and higher employer NICs.
- Salient tax details included a rise in carried interest, the end of the non-dom regime, and a change to the business rates regime further down the track.
Most developed economies face some version of the UK government’s uncomfortable challenge. Whether by accident or design, the UK again finds itself at the head of the queue for a dose of tough medicine. It’s a bruising process, but some health benefits are immediate: fiscal clarity, an emergent industrial strategy, and real basis on which to make long-term decisions.
More from our research specialists on the impacts for their sectors below.
ESG – Flora Harley, Head of ESG Research
We initially set out what we believed the Labour Party could mean for the UK ESG and property, and what we wrote then has been largely confirmed: GB Energy to begin with its new home in Aberdeen, support for electric vehicle adoption, although no announcement of bringing the sale ban on internal combustion engines forward to 2030 as per the manifesto, and announcement of the Warm Homes Plan with £3.4 billion funding over the next three years. This plan includes consulting on EPC C by 2030 minimum for the domestic rental sector, which was in the manifesto. However, there remains no clarity on minimum standards in the non-domestic sector, despite it being noted that the current proposed timelines (EPC B by 2030) will likely shift. We will await more detail but the industry continues to call for certainty and clarity.
London - Shabab Qadar, Head of London Research
Future growth prospects in London are highly dependent on a policy environment that encourages further investment in innovation-led growth and fosters greater employment in key growth sectors. Moreover, removing uncertainty around the tax treatment of those integral to wealth creation is essential to maintaining the capital’s position as a global gateway city.
Today’s Budget mentioned very little regarding supply-side reforms to planning and the pensions industry that could incentivise long-term public-private investment. While the potential tax changes affecting wealth creators have been well signalled, abolishing the non-dom tax regime risks accelerating the departure of non-doms to other cities. However, the decision to raise the capital gains tax rate on carried interest to 32%—rather than to the top income tax rate of 45%—will be welcomed and should help ensure that London’s growing private equity industry continues to contribute to the capital’s post-pandemic recovery.
Industrial & ports – Claire Williams, Head of UK and European Industrial Research
Today’s Budget highlights a commitment to a modern Industrial Strategy. The Chancellor pledged significant investment to support key growth sectors, including £1 billion into aerospace, £2 billion into automotive, as well as investment into life sciences manufacturing. The industrial and logistics markets across regions like the Midlands, South West, North East, and South East, with existing clusters of these sectors, are likely to feel the greatest benefits from these targeted, industry-specific investments.
While no further expansion of the existing freeports policy was announced, the Budget reaffirmed support for both the Investment Zones and Freeports programs. This includes approving the East Midlands Investment Zone and designating five new customs sites within existing Freeports, such as Liverpool, Humber, and the Inverness and Cromarty Firth Green Freeport in Scotland. To date, Freeports have attracted £6.4 billion in investment and generated an estimated 7,000 jobs, according to government figures. Today’s announcement provides firms and investors with greater certainty regarding the continuity of these programs, reinforcing confidence and stimulating additional investment. With the announced rise in employer NIC contributions, the Freeport NIC relief could become an even stronger incentive for businesses to relocate to tax-advantaged sites within Freeports.
Retail – Stephen Springham, Head of UK Markets Research
The retail sector was braced for bad news – and today’s Budget delivered it in spades. One of the supposedly good news stories of an increase in the minimum wage (+6.7% to £12.21 for the over 21s) represents a major cost burden for both the retail and hospitality sectors. Cash that may flow into the consumer economy more than swallowed up by increased pressures on operators’ bottom lines (cost inflation in retail far outstripping topline growth). Not particular to retail in any way, but retailers are by no means immune to the widely-heralded increase in Employer National Insurance Contributions (from 13.8% to 15%).
And no respite on business rates, the in-opposition proclamation that the business rates system would be scrapped now seeming little more than a distant memory. And the British Retail Consortium’s plea for a 20% reduction in business rates was clearly not heeded either. The answers to two key business rates-related questions were seemingly unavoidable, namely the multiplier and what becomes of previous relief thresholds. Clarity on the latter, fudge on the former. The current 75% discount to business rates - due to expire in April 2025 - will be replaced by a discount of 40% - up to a maximum discount of £110k. So, many businesses will see their business rates nearly double.
On the former issue an ambiguous statement in the speech itself, but some detail buried deep in the accompanying literature: “the government intends to introduce permanently lower business rates multipliers for high street retail, hospitality and leisure properties (RHL) from 2026-27. To make sure this tax cut is fiscally sustainable, the government intends to fund it through a higher multiplier for the most valuable properties. This measure will provide certainty and support for the high street”. What “most valuable” means is a moot point, but it suggests a higher multiplier on more prime stock to offset a lower one on more secondary assets. The detail: “For 2025-26, the small business multiplier in England will be frozen at 49.9p. The government will lay secondary legislation to freeze the small business multiplier. The standard multiplier will be uprated by the September 2024 CPI rate to 55.5p […] the government intends to introduce permanently lower multipliers for Retail, Hospitality and Leisure (RHL) properties from 2026-27, paid for by a higher multiplier for properties with Rateable Values above £500,000.” In essence, the industry pushed for a reduction and has largely ended up with an increase.
UK regional cities – Darren Mansfield, Head of UK Cities Research
The Budget today delivered key infrastructure announcements that benefit many UK regional cities, including the Trans-Pennine upgrade connecting York, Leeds, Huddersfield and Manchester and a commitment to the East-West Rail between Oxford, Milton Keynes and Cambridge. The most significant announcement, however, was the approval of tunnelling works for the Old Oak Common to London Euston. Without the link to Euston, people travelling between Birmingham and London would need to switch trains to continue into Central London, effectively removing any time benefit from the remaining leg of the HS2 project. Although there was no steer on improving connectivity between Birmingham and the Northern cities, each project mentioned will aid initiatives addressing regional economic disparities by attracting new investment and stimulating job creation.
Also announced was a much-needed increase in funding for local governments next year, including £1.3bn of additional grant funding to deliver essential services. Notably, Greater Manchester and the West Midlands will be the first mayoral authorities to receive integrated settlements. This move will give greater autonomy in how available funds are being directed and local responsibility as to the benefit to communities.
Capital Markets – Victoria Ormond CFA, Head of Capital Markets Research
The UK Budget today allayed several of the pre-budget concerns around significant CGT increases and other measures, with the Chancellor instead starting the budget announcement with the mantra of ‘invest, invest, invest’ and then focusing largely on shifts in employer national insurance contributions and inheritance tax, as well as other non-tax measures, including an adjustment of fiscal rules to account for assets to shore up finances and provide headroom for spending.
Despite increases in employer NIC and some changes in IHT, the degree of feared changes to capital gains tax did not materialise, with much of the bandwidth instead coming from the NIC changes, as well as adjustments to the fiscal rules to account for assets, and other tax and non-tax measures. Though time will be needed to determine any material impact on pension funds from changes to inheritance tax on pensions (as both investors in real estate and sources of wider investment), the overall announcements today help preserve the UK’s competitive edge for real estate investors as the number one global destination over the year to date for cross-border commercial real estate investment*.
The announcements today also demonstrated the government’s recognition of the value of investors to the UK and highlighted growth-focused initiatives, especially in infrastructure and regional innovation. This recognises, that like our Active Capital Innovation-led cities research, innovation is a key driver of growth, drives wealth creation and helps attract and retain talent across real estate sectors.
Multiple regional and local transport and other infrastructure investments were highlighted, such as the East-West Rail, which will connect innovation hubs like Oxford and Cambridge. This initiative, alongside increased investment into Cambridge and other local funding, presents unique opportunities for investors in the UK’s growth zones.
Leveraging local expertise will be crucial for real estate investors to understand the nuances and micro-location detail of opportunities arising from these investment announcements, as well as other initiatives such as the National Wealth Fund.
Markets responded favourably in the aftermath of the speech, although the risk free rate spiked following publication of details around a higher than expected debt raise. At the time of writing, this spike was waning however. The FTSE 350 construction & building materials sector is up over the day 1.85%, at the time of writing. The FTSE 350 real estate super sector was initially up more than one percent before moderating back to around +0.3% over the same period.
*Source MSCI Real Capital Analytics, Knight Frank Research
Life Sciences and Innovation – Jennifer Townsend, Partner, Occupier Research
The government has firmly nailed itself to the mast of economic growth, with Rachel Reeves opening her address by pledging to “invest, invest, invest” to boost growth. There were several announcements reflecting that ethos, which is positive news. Most notably, the protection of record funding for UK research and development, including £6.1bn earmarked for biotech and medical sciences and up to £520m for a new Life Sciences Innovation Manufacturing Fund. Technology featured prominently, particularly its role in enhancing public services like healthcare. This could draw increased investment from companies interested in serving the public sector, including the NHS. Additionally, money for infrastructure projects, such as the East-West rail link connecting Oxford and Cambridge, underscores the government’s recognition that innovation clusters need vital infrastructure to reach their full potential.
However, some areas remain under-addressed. The university sector, critical for fostering life sciences and innovation, received little mention, and increased national insurance contributions will further strain an industry facing financial difficulties. Furthermore, there was no confirmation around speculation that the Department for Science, Innovation and Technology is set for an effective budget cut due to additional costs related to Horizon Europe association. The government’s long-term industrial strategy is currently out for consultation, with details to follow regarding specific sub-sectors of focus. Real estate will be crucial in supporting the delivery of this strategy, ensuring that infrastructure aligns with growth objectives.