Predicting the future: How the result of General Election may impact the Real Estate finance market
Following the results of the 2024 General Election, Marcus Kaye, Partner in the Real Estate team at Blacks Solicitors, shares his insight into the potential impact of Labour manifestos and various policies on the real estate finance sector.
Impact on developers
The newly appointed Labour Government has committed to building 1.5 million new homes in England within the next five years. This means building 300,000 new homes each year, a target which the previous Conservative Government failed to meet1. So, how does the new Government plan to tackle the UK’s housing shortage? By implementing the following;
- Immediately updating the National Planning Policy Framework.
- Funding 300 additional planning officers, through increasing stamp duty by one percent on purchases of residential property by non-UK residents.
In practice, these are positive and good ideas. If the planning system is more efficient and less costly, development costs will decrease and developers may not be as hesitant to carry out new construction projects. However, it will take time to raise the funds, recruit and train the additional planning officers, so it may be years before we see their appointment result in tangible benefits.
Commercial property owners
The volume of unoccupied commercial premises in England has risen significantly in recent years, due to many companies switching to a remote working structure and the increase of e-commerce businesses.
The reduced demand for commercial properties means that property owners are likely to have empty premises, and the expense of having to insure and maintain them, as well as paying rates will be an additional financial burden.
Labour’s manifesto states that the current business rates system disincentivises investment and places burdens on UK high streets. To incentivise investment in high streets, the Labour Government promises to overhaul the current business rates system in England and replace it with a new system that they claim will level the playing field between the high street and online giants, thereby supporting entrepreneurship.
Labour’s proposal is a ‘business property tax’, although details of how this is to be structured are yet to be released.
This overhaul should positively impact commercial property owners, owner-occupied or not, and revitalise town centres. For many commercial property owners, lower business rates should result in better profit margins. For many commercial landlords, more profitable tenants may facilitate an increase in demand and higher yielding commercial properties.
The impact on the industrial and online distribution warehouse sector is likely to result in less demand and growth, and we may see the online giants diversifying the way they operate to reduce their rates of liability.
Lenders
In May inflation sat at two percent, this is a 0.4 percent drop on the previous month where we saw a 2.5 percent inflation rate, and is the lowest rate since July 2021. The Bank of England base rate is holding at 5.25 percent and inflation is one of several factors that could influence an increase or decrease to the base rate.
In times of higher interest rates and higher inflation, lenders tend to be risk averse and adopt cautious lending policies. Government spending can influence interest and inflation, so it is important to consider the approach Labour will take to spending.
Labour’s spending plans appear to exceed the amount of new revenue by around £1bn between 2025 and 20302. This is in line with what the Conservatives predicted for their own spending, so the figure alone is not a red flag. However, we need to assume there will be increased revenue from tax rises and closing tax avoidance loopholes.
The Office for Budget Responsibility highlights that anti-avoidance measures are uncertain as they ‘target a subset of taxpayers who are already actively changing their behaviour to lower their tax liability’ 3.
Under Governments with larger spending plans, we may see increased interest rates, which will lead lenders to apply their policies in a stricter manner. Some businesses may find that they need to revisit growth plans, particularly those that planned to prioritise investing in real estate or refinancing to release equity needed for other projects and expenses.
Looking ahead
Assuming Labour implements its manifesto proposals, we are likely to see an increase in the number of new homes constructed, which will have a positive impact on the development finance sector.
The impact on other areas, such as bridging or term finance, is more difficult to predict as the business rates overhaul may simply lead to a shift in the properties being transacted as opposed to the number of properties being transacted. However, the intention is growth of the economy and entrepreneurship, so we are likely to see an overall increase in transactions.
Despite insight on Government spending, in terms of inflation and interest rates, with inflation near the Bank of England’s two percent target, it is anticipated that Labour will be in a fortunate position to be the Government in power as mortgage rates continue to decrease. It is expected that there will be two interest rate cuts of 0.25 percent each before the end of 2024.
If interest rates come down, commercial property buyers will be able to borrow more based on the same income, which will subsequently stimulate growth, enhance consumer and business confidence, resulting in economic recovery and financial stability.
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