How could property markets be impacted by UK Prime Minister appointment?

Liz Truss has been named the successor to outgoing Prime Minister Boris Johnson.

As the new PM contends with immediate problems including sky-high energy bills and a cost-of-living crisis, there will also be impacts on various property markets as she announces her policies in the next few weeks and months. 

Our industry-leading research teams have put together some analysis on how property markets could be affected and how they will respond. 

Residential property 

Tom Bill, head of UK residential research 

With inflation already in double-digits, the stakes are high and management of the economy will be the most critical issue for the housing market between now and the next election. 

If unemployment stays historically low, inflation doesn’t spiral further and we avoid the Bank of England’s prediction of a recession lasting more than a year, house prices should continue to rise modestly and transaction volumes will gently descend from the heights of the pandemic. 

A lot will hinge on Liz Truss’s balancing act between populism and pragmatism. While she cannot have failed to notice the adverse reaction of financial markets to some of her proposals, she also has a “red wall” of voters to hold together before the next election in 2024.

Conservative governments like creating homeowners because they believe they are more likely to vote Tory. 

We should therefore expect announcements that are designed to address the very real affordability problems people face, especially first-time buyers. Help to Buy, the Mortgage Market Review and various stamp duty changes have all left their mark, among other initiatives. 

But attempting to fundamentally alter a market that is driven by the laws of supply and demand rather than controlled by the state is ultimately futile. A good start for the new government would be to acknowledge this fact and instead take a more targeted and low-key approach.

Economy

Flora Harley, residential research 

Liz Truss faces a myriad of challenges Furthermore, rising interest rates and a currency under pressure to name a few, will add to their in-tray.

Inflation has and is continuing to rise across the globe, but the UK is taking the brunt with double digits reached in July, 10.1%. The Bank of England expect a peak of 13% later in 2023, some, such as Citigroup and Goldman Sachs, expect much higher at 18% and 22% respectively, given the recent rise in gas prices and 80% rise in the price cap on energy bills due in October.

Inflation will continue to climb into 2023, the new chancellor is expected to unveil an emergency budget which may offer some respite. Many suggestions of forms of support have been mooted but pros and cons for each - capping prices may counteract trying to reduce consumption.

A reduction in VAT may also add a small amount of disinflationary pressure but won’t move the dial with energy costs as they are. Other tax cuts, such as the reversal of National Insurance, could end up adding to inflationary pressures as spending will not be as constrained. Either way forces are in motion for higher inflation in the coming months.

The Bank of England, like its counterparts at the annual gathering of central bankers at Jackson Hole, are committed to tackling inflation. The rhetoric is that it may inflict some economic pain now, but this is to prevent much more hurt if we see the return to 1970s if inflation continued to run riot. Markets are now pricing in a base rate of 4% by the middle of 2023, from 1.75% currently.

There are three decisions remaining in 2022, the next in mid-September has expectations of a 50bps rise to 2.25%. It is likely we will see the base rate at a minimum of 2.5% before the year is over. However, at some point, the Bank will need to assess where it has influence and if the tightening is working in those areas before taking it too far.

Commercial property 

Will Matthews, head of commercial research 

After a period of uncertainty both domestically and globally, real estate decision makers will be looking to new leadership, first and foremost, for clarity.

From a commercial real estate perspective, the announcements delivered over the summer allow us to divine a set of potential implications that fall broadly into three groups. 
 
First, an ‘emergency budget’ is expected to address immediate economic challenges, most obviously a need to ease the pain of inflation and soften the consumer squeeze.  
 
As part of this, measures such as a reversal of the recent national insurance rise and potential support mechanisms for households have been mooted, and while welcome, will have an indirect effect on commercial real estate.  
 
Commitments not to introduce new taxes, to reverse the planned rise in corporation tax, and to remove green levies from energy bills are likely to have a more direct impact on business sentiment, and therefore commercial real estate, as would a suggested review of business rates.  

Taken at face value, the cost of these measures would be significant. Financial markets will therefore be alive to the possibility of a further weakening in sterling and rises in UK government bond yields – the former boosting the attractiveness of UK assets on the global stage, the latter at risk of raising the cost of debt to finance them.         
 
Medium term ambitions include a broader desire to deregulate and remove or replace existing EU legislation.  If done thoughtfully, this plays well to an international perception of the UK as a flexible and efficient market in which to operate, attracting global corporate and investment demand for commercial real estate.  

Specific industries, such as finance and insurance, have been mentioned in recent commentary, offering a further potential point of differentiation for the City and the businesses it is home to.   
 
Longer term, there is a desire to raise the UK’s trend growth and productivity, through a mix of improvements to education, a focus on strategic growth sectors such as life sciences, and infrastructure investment. 

As well as offering opportunity for real estate development, leasing and investment in these specific sectors, this approach chimes with our research which shows that places which are home to strong innovation cultures are more economically resilient, and offer superior real estate returns.  
 
With a new leadership strategy focused at its heart on economic growth, commercial real estate should have a fundamental role to play – the challenge for the sector will be to ensure that its suggestions and requests are heard amongst the many issues vying for space at the top of the new PM’s in-tray.  

Agriculture

Andrew Shirley, head of rural research 

The appointment of Liz Truss is unlikely to unsettle the farmland market which has enjoyed growth of 16% over the past 12 months despite the many uncertainties currently facing the world of food and farming. 

Given her approach to policy so far it seems unlikely that removing any of the tax-planning benefits offered by farmland would be a priority. 

Tinkering with the government’s new system of agricultural support payments, largely based around environmental outcomes, to the detriment of landowners and farmers also seems unlikely and the demand for nature-based solutions to climate change and the like is set to continue.  

Even her promise to cut back on the number of solar PV parks created on farmland won’t have a significant impact given most are built on land acquired under long-term lets rather than vacant possession.

If sterling weakens further it could encourage overseas buyers to re-enter the farmland market, offering further support to values.

Industrial & Logistics

Claire Williams, Industrial and Logistics research 

The Autumn Budget from the new Prime Minister is likely to deliver several tax changes for businesses and will likely enhance the initial capital allowances benefit after the end of the super deduction.

The super-deduction allowance, which gives relief at 130% of the qualifying cost compared to the usual 18% writing down allowance for investment in main pool plant and machinery, was introduced in April 2021.

The super-deduction has benefited and incentivised companies expanding their logistics infrastructure in the UK, though it is due to come to an end in March 2023.

However, the incoming relief is unlikely to be as generous as the super deduction for expenditure on plant and machinery. 

Her policies will need to ensure that firms have the incentive to develop their UK-based production and build capacity into their supply chains and logistics operations.

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