Leading Indicators | Navigating change: the UK in the political & macro spotlight

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Here we look at the leading indicators in the world of economics.

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ELECTION FEVER

Labour has scaled back its plan to decarbonise the UK economy, from a proposed annual spending of £28bn p.a. until 2030 to just £4.7bn p.a. if it were to win the general election. The party blamed elevated borrowing costs and limited fiscal headroom for the moderation. Furthermore, Labour has announced plans to reform the UK tax regime by reducing the non-domiciled tax-exemption period from fifteen to four years.

Meanwhile, Thursday’s by-elections may strengthen Labour’s position. Betting odds suggest a 96% and 94% likelihood of a Labour win in the Kingswood and Wellingborough by-elections, respectively. Overall, the policy detail, which is still to be ironed out, could be significant, but the impact of a Labour government on CRE performance is expected to be relatively minimal. Between 1997 and 2010, UK CRE achieved inflation-adjusted returns of +6.7% p.a. under the two Labour governments. The only period where UK CRE outperformed this (+8.6% p.a.) was the 2010 – 2015 coalition government, albeit during the post-GFC economic upswing.

TIGHT UK LABOUR MARKET

The UK unemployment rate contracted to 3.8% in Q4 2023, from 4.0% in the quarter prior and below forecasts of 4.0%. Meanwhile, average weekly earnings growth continued to slow in December, falling to a 17-month low of 5.8%, but above market forecasts of 5.6%. The moderation was driven by September’s robust bonus data dropping out of the figures.

A tight labour market will likely lead to more demand for office space, evidenced by the upward trajectory of our proprietary data on London office viewings and take-up. In our latest London Series article, we estimate that there is currently 11.9m sq ft of known space requirements in London, a 10-year high. Meanwhile, the under-construction pipeline (completes by 2026) is 5.3m sq ft below average levels of new and refurbished take-up, which we expect to be supportive of rents.

THE YEAR OF PE?

Private equity (PE), particularly in the US, have seen their share values rise in 2023, benefiting from rising interest rates and an influx of new assets in the credit and insurance sectors. Overall, Bain & Company estimate that global PE firms have c.$3.7 trillion in dry powder. Not all of this capital will target real estate, but if just 1% was allocated towards the sector, it would amount to $37bn in global investment. Whether it is to this extent remains to be seen. However, we do anticipate PE investment to pick up this year as pricing becomes more favourable. Following previous periods of dislocation, PE has typically rotated back into CRE. After the pandemic, the PE share of UK CRE volumes lifted from 10% to 19% in 2021.

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