UK Budget 2023: what it means for property markets

Jeremy Hunt yesterday delivered his first full budget, dubbed “a budget for growth”.

Investment zones, tax breaks, energy cost support and childcare reforms dominated the headlines.

But how will some of the other key measures impact property markets in the UK and the property sector overall? We get insight from our expert researchers on some of the significant announcements from yesterday.

For more more in-depth discussions on the Budget and its impact on real estate, listen the the latest Intelligence Talks podcast, hosted by global head of research, Liam Bailey. 

Economy

Flora Harley, head of ESG research and economy expert, analyses the key economic metrics and OBR predictions for the UK economy in 2023 and what that means for property markets.

The key economic news came from the OBR forecast that the UK will not see a technical recession. It revised up its forecast for GDP to contract 0.2% in 2023, in November they were forecasting a 1.4% fall.

The optimism surrounding economic growth should offer some support to property markets. Due to the stronger economy they also expect unemployment to peak at just 4.4% in 2024, from 3.7% currently, which is 0.5 percentage points lower than expected in November, the metric is key for the housing market.

Due to measures announced in the budget, such as keeping the energy price cap in place for an additional three months, inflation is now forecast to be below 3% by the end of the year and below 1% in 2024. This adds strength to the rhetoric that we are nearing peak interest rates with the current expectation being 4.25% - which is also the OBR assumption. The Bank of England will make its next announcement on 23rd March where it is expected to reach this level.

Residential development

Oliver Knight, head of residential development research, explores how investment zones could impact UK housebuilders and why this budget missed an opportunity.

Investment zones are potentially interesting, albeit in their proposed form only indirectly relevant for housebuilders in that they might succeed in creating knowledge clusters, or drive existing employment growth in certain areas. With each receiving just £80m over five years, the amount of funding itself is relatively modest.

The consultation on Nutrient Neutrality is welcome if it leads to a solution to free-up current blockages in the system, but currently lacking in detail.

All in all, there was a noticeable lack of policy for housebuilders to get excited about, or any announcements that are going to meaningfully boost new housing. More of a missed opportunity, perhaps, given the significant role that housebuilding can play in supporting economic growth.

Commercial real estate

Will Matthews, head of commercial research, comments on the effect of the rise in corporation tax, and what planned investment zones mean for commercial businesses.

While there was little of direct relevance to commercial real estate, and in particular, nothing more on business rates, there were some important, if mixed, takeaways:

Overall, a better public finance headline should reduce borrowing costs, although this could be counteracted by a need for higher base rates as economic forecasts improve. More on this following next week’s MPC meeting.

The jump in corporation tax, from 19% to 25%, is not ultimately conducive to inward investment, even if it only places the UK mid-table compared to other European jurisdictions.

The planned investment zones – which combine tax incentives with a focus on research and education in growth sectors such as tech, manufacturing and life sciences – contribute to the levelling-up narrative, as all are outside the south East.

However, with each receiving £80m over five years, the amount of funding is modest. More significant, potentially, is the investment in projects to store CO₂, which could amount to £20bn and lead to the creation of 50,000 jobs, according to Treasury estimates.

The bigger picture is that this budget is a timely reminder of both the challenge and the opportunity faced by the UK. The challenge is to compete with the significant investments in technology, infrastructure, and business sectors made by other countries – one that is difficult for the public sector alone to address, especially when domestic issues such as a cost of living crisis have diverted attention and spending.

The opportunity lies in the ability of the UK’s private sector, including real estate, to help make up some of the shortfall, by creating and investing in the buildings necessary to facilitate growth.

Life sciences and innovation 

Jennifer Townsend, partner, commercial research and life sciences & innovation sector specialist, describes how life sciences and innovation sectors will need continued funding in order to prosper. 

It is encouraging to hear that the Government remains focused on harnessing the UK’s leading science and technology capabilities to drive innovation and growth.

There is no doubt that the UK’s life sciences and innovation sectors are essential to the UK’s economic future. Sustained investment and Government support will be key to ensuring the sector achieves its full potential.

Accelerating patient access to treatments through regulatory reforms, catalysing the growth of focused clusters, opening up new channels of investment and offering tax incentives, are all measures that should stimulate growth and in turn further occupational demand for life sciences space which has already been increasing, across the Golden Triangle locations of Oxford, Cambridge and London and over 800,000 sq. ft of life sciences offices and lab take-up.

Life sciences and innovation companies need sufficient funding to grow in the UK and with a correction in venture capital investment it is vital to provide new sources of funding. Bruntwood SciTech calculated that plans to exclude performance fees from workplace pension caps and changes to pension investment rules would generate a £5.26bn annual boost to UK science and technology investment by 2030. The Chancellor noted that these measures will be progressed in the Autumn statement.

Investment zones

New investment zones, enhanced devolution deals and the progression of “innovation accelerators” in Greater Manchester, the West Midlands and Glasgow present an opportunity to drive sector growth across the UK, leveraging regional research and academic strengths. However the £80m on offer to chosen investment zones is relatively modest.

Research and Development tax credits

September’s mini-budget damaged start-up and early-stage growth by cutting Research & Development (R&D) tax credits. This has been partially reversed for the Biotech sector, but the requirement for broader innovation clearly extends far beyond this.

Therefore, yesterday’s announcement that companies spending over 40% of their money on R&D can claim £27 back from the treasury for every £100 they spend on R&D costs as well as the ability for companies to deduct 100% of all plant and machinery investment when calculating taxable profits are welcome steps toward a more favourable approach to R&D.

Rural 

Mark Topliff, rural research, highlights the main budget announcements affecting farms and estates.

Although there was not a lot for rural businesses directly takeaway from the budget, there were a couple of statements that were welcomed.

Firstly, there was a call for evidence and consultation to explore both the taxation of ecosystem service markets and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management. It is now open and will run until 9 June 2023. This area of policy has been unclear, and some rural businesses have held off investing in longer-term environmental agreement. The outcome will hopefully provide the clarity that businesses are craving to enable them to make those longer-term decisions around ecological management.

On the subject of inheritance tax, the government has, unsurprisingly following Brexit, decided to restrict the scope of agricultural property relief and woodlands relief to property in the UK from 6 April 2024.

Businesses will be pleased that the Annual Investment Allowance (AIA) will be permanently set at £1 million. It provides 100% first-year relief for plant and machinery investments. However, rural entrepreneurs that operate as sole traders or partnerships will not be able to benefit from the full expensing of capital expenditure in plant and machinery that was also announced.

Domestic fuel prices will remain capped for a further three months. The Energy Price Guarantee will continue until the end of June; however, the £400 winter discount will end this month. For non-domestic energy users, it was confirmed that Energy Bills Discount Scheme (EBDS) will provide a discount on high energy bills until 31 March 2024, following the end of the current Energy Bill Relief Scheme. Further details and the impact on rural businesses can be found in our EBDS article.

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