All change? Implications of the new government for commercial real estate in the UK
5 minutes to read
The result was expected. Manifestos have been scrutinised. But, as we wake up to a new UK government, it is worth recapping some of the most important points for commercial real estate.
We believe that the new government's recent commentary, manifesto pledges, and events in the wider world culminate in at least five key themes of significance for commercial real estate. In short, the combination of activity in these policy areas could support real estate markets in the UK by:
1. Helping to contain borrowing costs;
2. Stimulating economic growth and occupational real estate demand across the country;
3. Removing barriers to development activity;
4. Providing clarity on ESG standards and requirements;
5. Bolstering the UK's relative attractiveness in a turbulent geopolitical environment
We explore these themes in more detail below.
The prospect of a 'stability dividend' for the UK.
For a document that was (literally, on some pages) covered in the word change, the Labour manifesto contained a strong focus on continuity, at least in the fiscal sense. That should be good news for anyone still scarred by memories of the infamous unfunded tax cuts of the 2022 mini-budget, and the spike in bond yields that followed.
And if stability seems a modest victory, then one must only look to France, where bond yields have risen in response to recent political uncertainty. In the eyes of European real estate investors, the UK today looks, arguably, a little more like its pragmatic former self.
It's certainly not continuity for all. While corporation tax won't change from the current 25%, business rates will be replaced, but with what, we are not yet sure. As Stephen Springham notes, meaningful, tangible and actionable reform of business rates is perhaps highest on the retailer wish-list. Labour was seemingly the most radical in its pledge to abolish business rates altogether and replace them with a revenue-neutral system that levels the playing field between online and high streets.
Industrial strategy – but on a budget.
Much has been said of Labour's industrial strategy, but unlike the Inflation Reduction Act in the US, this is not one of the big spending promises, mainly because the fiscal capacity isn't there. There is to be a relatively small fund making investments in ports, supply chains, and green industries. Financial services are mentioned in a positive light. And, as Jennifer Townsend notes, Labour has recognised the importance of life sciences to UK growth - although some ideas may not be as far-reaching as the science community would like. Critics argue that the plan lacks the radical, transformative changes needed to achieve Labour's ambitious target of the highest sustained economic growth among G7 nations.
What the strategy does do is correctly identify that a lack of business investment has been one of the key reasons for low growth in the UK. The gamble is that economic and political stability, combined with targeted government backing in specific areas, will be sufficient to entice investors back to the UK, with knock-on effects for real estate demand.
Planning and infrastructure reform.
Labour wants to streamline the planning system, admittedly with a focus on housing rather than, necessarily, on commercial real estate. The addition of one planning officer per local authority may not move the dial too far. However, the strategy again looks to the private sector for support, with UK pension funds seen as one potential source of capital for long-term infrastructure investment. This is not a new idea but one that, if implemented well, offers significant promise.
As Darren Mansfield notes, the new government intends to relax planning policies to facilitate the construction of new data centres. This includes classifying data centres as nationally significant infrastructure projects, allowing planning decisions to be made by ministers rather than local councils. This move aims to bypass local opposition, particularly for data centres proposed on green belt land.
Meanwhile, Claire Williams highlighted several policies that should be supportive of the logistics sector. These include the manifesto pledge to invest up to £1.8bn into port infrastructure across the UK, as well as substantial investments in new roads, railways, and other significant infrastructure projects, along with a focus on fixing potholes and upgrading the electric vehicle (EV) charging infrastructure.
Environmental considerations.
Despite the watering down of earlier spending promises, the drive towards net-zero remains intact, and once again, private capital is sighted as one of the levers. The UK would be a green finance capital, with banks, asset managers, pension funds, insurers and FTSE 100 companies required to have credible transition plans.
Improvements in energy infrastructure will be crucial, according to Flora Harley. Labour's renewable energy targets would require the deployment in wind and solar to double, if not quadruple, over the next six years. Manifesto proposals include minimum energy efficiency standards tightening on private rental properties by 2030, but do not specify the level. Commercial (non-domestic) properties were not mentioned.
The new government has said that it will mandate UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement. This is aligned to the EU's recently adopted Corporate Sustainability Due Diligence directive. For commercial property, the implications could be enhanced ESG-related due diligence on lending, and stricter criteria or financial repercussions for inefficient assets.
The UK's position in a changing world.
A somewhat more centrist leadership in the UK comes at a time of rising political uncertainty in the US and large parts of Europe. Although both the Labour Party and the EU have employed careful language, a gradual tightening of trading relationships might be possible along practical, rather than ideological lines. As Claire Williams notes, Labour's manifesto emphasised plans to improve the UK's trade relationship with the EU by removing unnecessary trade barriers and streamlining border checks. This should help to facilitate smoother logistics operations and reduce costs, particularly for food and other perishable items.