My colleagues in Rating and Capital Allowances have, as ever, been quick to assess the technical changes and implications of Labour’s first Budget in over a decade. A week on from this momentous event my take-away on the wider implications for commercial property is beginning to feel more like a shrug than a shocked face. Indeed, the overall tone feels about as cut-and-paste from a classic Labour budget as it would be possible to imagine.

At a macro-economic level I am left with three questions: Firstly, am I more or less confident in a steady economic recovery than I was before the Budget? GDP and productivity growth have been underwhelming for some time, and the latest OBR forecasts don’t really suggest that this is going to change. While there’s no doubt that a recovery is underway, the scale of forecast GDP growth looks unlikely to correct the estimated 15% decline in business investment since 2016.

In a typical Labour Government fashion, growth in investment will be easier to find in the public sector, and I have no doubt that capital spending on infrastructure will benefit commercial property owners and investors either directly or indirectly.

Final uncertainty has been removed

Another factor around investment that is worth mentioning is that with the first Budget out of the way, and the tone for future budgets well-established, some of the uncertainty around investing in the UK has been removed. While UK bond yields have risen over the last week, I do not think that this is negatively affecting non-domestic investors’ perception of comparative risk in commercial property markets, and the UK arguably now looks lower risk than some of our major European neighbours.

The path for interest rates remains unchanged

The second question is around interest rates, and whether the Budget actively suggests a slower pace of cutting than we might have anticipated. Your response to this question probably should start from how optimistic you were before the Budget, and I still see that a quarter point cut every quarter is achievable. Even if this turns out to be optimistic, I don’t think that it will prove much of a drag on the commercial market recovery, and might even give more investors a chance to capture the bottom of the pricing cycle.

Will increased growth outweigh higher operating costs for businesses?

The final question, somewhat inevitably, is the most complicated one: Will the Budget prove inflationary and/or kill off some growth that could have happened without it? There’s no doubt that through a combination of tweaks to business rates reliefs, National Insurance changes, and the increased minimum wage, the operating costs of many businesses (particularly those in retail and leisure) will rise. The Chancellor has suggested that businesses will pay for this through efficiency gains, but I expect that many of these hits will be passed onto employees through smaller pay increases, or customers through higher prices. Both of these trends imply that business confidence and decision making over the next 12 months is likely to be weaker than we expected before the Budget, and over the medium term they may well lead to slower expansion than we had hoped for.

Ultimately, as with all the Labour Government Budgets that I’ve worked through, the proof of the policies will be whether taxpayers feel that the increase in what they pay is aligned with the improvement in the public services that they receive. From the perception of a commercial property investor the question is pretty similar: Will additional Government spending on infrastructure create an environment in which the private sector can flourish, despite the slightly higher costs of operation that are implied by the Chancellor’s announcements?

Further information

Contact Mat Oakley

Market in Minutes: UK Commercial