Effects of the August 2024 Budget
This article was first published in Property Investor News, November 2024
So, Rachel Reeve’s long-awaited budget has happened and, if you’re like me, you will be feeling some relief about the fact that this is all now out in the open after weeks of speculation.
But is this Budget (and this party) good for business? Well, the markets have certainly been rattled as they did the sums on borrowing vs proposed investment and found it difficult to stack. Whilst gilt yields (effectively the market’s confidence in the Government) remain high, markets seem to have calmed (at the time of writing), although I certainly wouldn’t rule out jitters in the weeks and months to come.
All the commercial property market actually wanted from this budget was a boost to both business confidence and investor confidence. Firstly, business confidence, because the occupiers of commercial property are (obviously) businesses, and anything that is bad for business is therefore potentially bad for commercial real estate. Secondly, investor confidence to provide nervous overseas and domestic investors the confidence to invest in commercial after the market being in the doldrums for the last two years (after Liz Truss’s mini-budget funnily enough!).
Did Mrs Reeves deliver? Well, I think we can probably say that on balance it was more a negative for the commercial market than a positive. Below, I break down the various announcements and how I think they will affect both business and investor confidence.
Occupier Costs
Businesses’ fixed costs are very important for commercial property, as rent affordability is directly related. When assessing the affordability of units to rent, tenants will treat it as a residual of their fixed costs – i.e. staff costs, business rates, energy costs, costs of merchandise etc. Businesses have had a double whammy in the budget. Both national insurance and minimum wage increases are going to escalate staff costs substantially; It also looks like the Labour Party are not going to deliver on their manifesto promise of a full-scale overhaul of the business rates system. The current 75% discount to retail business rates – due to expire in April 2025 – will be replaced by a discount of 40% – up to a maximum discount of £110k. So, many businesses will see their business rates double, rather than quadruple – still not a great story! The Government has pledged to introduce permanently lower business rates multipliers for high street retail, hospitality and leisure properties from 2026-27, but the detail on this is not currently clear and it is going to be achieved by higher rates on ‘more valuable properties’ – the detail of which we don’t know. Business rates contribute a significant share of the tax bill, so it is difficult to see more radical overhauls being forthcoming, affecting affordability into the future.
It’s clear that the retail, hospitality and leisure sectors are going to be most affected by the Budget announcements, as are small businesses. Despite a new Government that professes to want to support the high street it seems that the pain in that sector will continue for the foreseeable future. And of course, cost rises will mean that any potential price reductions that may have been on the horizon won’t be able to be passed to the consumer any time soon.
As commercial property investors we need to take heed of this as there will be impacts on the rents achievable when letting, particularly, retail properties. Additionally, if business confidence is low, there is often also an unwillingness from tenants to take longer leases as they want more flexibility in their business model. This will be very sector specific and governed by supply and demand in the location and sector you invest in. Research into your chosen niche is essential!
There is also a knock on impact as to how you can ascertain ‘covenant strength’ of operators going forwards. It is notoriously challenging to determine the covenant strength of, particularly smaller, tenants who have limited track record. I would recommend looking at taking additional security from tenants, including personal guarantees, guarantors, rent deposits etc.
And, lastly, there will be an impact on capital markets which continues to be split into the ‘haves’ and the ‘have nots’. If occupancy continues to be subdued in certain sectors this will continue to have an impact on capital values for some time to come. Choose your niche carefully!
Stamp Duty and Capital Allowances
The stamp duty regime has stayed the same for commercial (non-domestic) property whereas it has changed for residential, and the stamp duty rate for purchasing second homes and buy to let property has increased to 5%, with immediate effect. Whilst this will probably have limited impact in lower cost locations, in high house price locations this could make some buy to let investments unviable. A better way of achieving residential could be commercial to residential conversions. The Government hasn’t announced any changes to permitted development rights in England, but I am absolutely sure this is coming, and suspect that these could also include an element of affordable housing going forwards.
On the plus side, the government has committed to maintaining full capital allowances on commercial buildings – which is one of the many hugely attractive aspects of it as an asset class. Additionally, a consultation on relief for pre-development expenditure is planned, which could benefit investors involved in property development.
Infrastructure Investments
This Government was always going to major on infrastructure and housing growth, and a huge raft of initiatives were announced in this regard. This will undoubtedly have knock-on effects for localised commercial property. The Chancellor also announced £1bn investment into aerospace, £2bn into automotive, and investment into life sciences. There also appears to be no change to the Freeport and Investment which will provide confidence to those areas, and she announced other investment zones including the East Midland Investment Zone, and new customs sites in existing freeports – including Liverpool, Humber, and Inverness. According to Government figures, freeports have already attracted £6.4 billion in investment and generated an estimated 7,000 jobs.
Whilst it will be worth investigating these locations as potential investment locations, I generally temper this with a note of caution – I am old enough to remember previous Enterprise Areas and Investment Areas and they do tend to be relatively short-lived boosts to a local economy – time will tell if these initiatives as any different.
Investor Confidence
Changes to CGT, IHT, pensions and non dom tax status won’t have boosted the UK’s appeal as an investment location, but time will tell the degree this may harm the market. The commercial real estate market, in particular, is boosted at its top end by overseas money and, having spoken to high-net-worth overseas investors recently, there are definitely some jitters about UK commercial investing at present. However, the introduction of Reserved Investor Funds (RIF), a new unauthorised fund structure, is expected to be particularly attractive for commercial real estate investments. Detailed legislation is anticipated before April 2025, offering potential new avenues for investment structuring.
Conclusions
The market isn’t breathing a sigh of relief at this Budget in the slightest- whilst it ‘could have been worse’ it could certainly have been much better for the commercial property market
However, despite this policy context, the clear direction of travel for myself and my clients is to ‘control the controllables’. Find a profitable niche and buy property at the best price you can. One of the expected benefits to come out of this budget is that the ‘Window of Opportunity’ in the commercial market will continue well into 2025. Prices will continue to be much lower than they were two years ago, and there will be continued motivation in the market from vendors to dispose of their properties quickly. When the market improves, prices will increase relativity quickly, so now is the time to find some great commercial opportunities in your chosen niche.
