The £140m cost of the government's 'tough decisions' strategy
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
The Budget and the US election made for a turbulent month. The inflationary potential of the two released a new bout of pessimism, particularly among homebuyers. Asking prices fell 1.4% during the four weeks to November 9th, Rightmove said this morning. That compares to a typical drop of 0.8% for the period.
This is understandable. Lenders initiated a round of mortgage rate hikes last week to account for the changed outlook for the base rate, which is now expected to fall to around 4% - 4.25% by December 2025, compared to 3.5% just two months ago. As Knight Frank's Tom Bill notes this morning, we do expect growing downwards pressure on prices and transaction volumes as these higher rates take their toll.
Sentiment will probably take another knock later this week, too. A new set of inflation figures due out Wednesday will show prices climbed 2.2% during the year to October, according to a median set of 24 forecasts gathered by Bloomberg. That's up from 1.7% last month, which was the first below-target reading in more than three years.
Will it hold?
Tom likens these post-Budget/US election conditions to a bout of indigestion: "nobody knows how long it will last or what it could morph into." That's true, we're in another period of acute uncertainty, but you can make the case that markets have overreacted - particularly when it comes to what Trump may or may not do next, as the FT's Robert Armstrong argued last week.
The outlook for UK interest rates will continue to ebb and flow as we get more data and the government's plans get codified, but there are undeniable tailwinds in both residential and commercial markets if you look beyond the short term volatility.
In the housing market, buyer enquiries rose modestly for the fourth consecutive month in the latest RICS survey of estate agents, out last week. Transaction volumes also increased again, which was the third consecutive positive reading. Near-term sales expectations series posted a net balance of +34% in October, up from a figure of +22% beforehand. A net balance of +36% of contributors foresee sales volumes rising over the next twelve months, down from +44% last month.
Both appraisals and new instructions are rising steadily, and a healthy net balance of +20% see house prices rising over the twelve month time horizon.
Returning to growth
For an optimistic view of the future, look to the London office market. Landsec and GPE reported half year results last week - both said the value of their respective portfolios of offices and retail had increased by 0.9% and 0.8%.
"Six months ago we also said that we expected yields to stabilise and values for the best assets to return to growth," said Landsec chief executive Mark Allan. "This is what happened."
Leasing activity is fuelling the recovery. Landsec said successful leasing activity had driven 2.1% growth in estimated rental values. GPE said ERVs had climbed 1.1%. You can read about the recovery in lots more detail in Knight Frank's latest London Office Market Report. There, Shabab Qadar reveals that take up in the London office market rose by 23% in Q3 to 3m sq ft, more than 10% higher than the same period last year. The level of leasing activity is approximately 5.8% above the long-term average, and momentum is likely to be maintained in Q4 - 3.4m sq ft of deals are under offer, which is more than a quarter’s typical take-up. The team has upgraded its forecasts for prime rental growth.
Attractively priced
Current floorspace requirements are above pre-pandemic levels and are at third highest they've been in the past decade. Active demand at the end of Q3 was 11.6m sq ft, a rise of 3.9% from Q2 and 26.4% above the 10-year long-term average. While total requirements are at decade highs, near-term demand for occupation within the next 12-18 months is 7.9m sq ft, as occupiers begin their search well ahead of lease events.
The development pipeline is unlikely to ease the strain on the provision of top-quality space. Although recent completion levels are broadly in line with long-term averages, they fall below the expected future take-up of new and refurbished space. Speculative space under construction totals 11.3m sq ft, with completion anticipated by 2028. This pipeline implies a shortfall of 13.4m sq ft over the next five years.
Investment activity remains subdued - volumes hit £1.3bn in Q3, more than 60% below the long-term average, but a shift is underway. Institutional investors notably increased purchases in Q3, and there has been a rise in the availability of core and core-plus assets for sale, Shabab reports.
These lower-risk profile assets have decreased by nearly 30% in value from previous peaks, and with strengthening expectations for the leasing market, they now appear attractively priced. Prime yields remained unchanged during the quarter and have been stable for more than a year.
Unintended consequences
The government spent an unprecedented amount of time laying the ground for the bad news it intended to deliver during the Budget. These kinds of strategies always come at a cost as investors delay making decisions, but it's often hard to quantify.
Well, in figures shared with the Telegraph, Knight Frank estimates that the Budget resulted in a shortfall of 107 deals between £5 million and £10 million and 35 transactions above £10 million, leading to the theoretical loss in stamp duty revenue of just over £140 million.
In other news...
Governments need to shake up the delivery of new housing or face falling behind on economic growth, by Knight Frank's Katie O'Neill.