Budget 2025 – now we can move on
The Chancellor’s Autumn Budget, thanks to the sheer volume of leaks to the media, contained few surprises. However, for the property market there were two key takeaways:
- According to the Office for Budget Responsibility (OBR), the Chancellor’s fiscal headroom is now set to more than double to £22 billion.
- Debt as a share of GDP is forecast by OBR to fall in every year during the rest of this Parliament.
The importance of these two factors was demonstrated by the reaction to the Budget from the financial markets. While the Chancellor spoke, and after she finished her address, the 10-year gilt yield hardened, plus the pound strengthened. This is in marked contrast to the Autumn 2024 Budget, when yields rose abruptly in response.
So, the Chancellor has managed to reassure the financial markets, and done so while throwing a major concession to the Labour backbenches by ending the two-child cap on child benefits. If we are moving into a period where financial markets maintain their faith in the government, we may now see a strengthening of the real estate market cycle.
A huge strain on government finances in the last year has been the increase in the cost of servicing the national debt. If (as looks to be the case) the government has won over bond investors, this pressure might stabilise, or even improve, next year. Add on the doubling of the fiscal headroom, plus the Bank of England Base Rate cut of 25 bps we are forecasting for next month, and fears of a ‘doom loop’ of deteriorating government finances should start to recede in the coming months. Consequently, the government may by summer next year start to look less embattled, and some sense of optimism could start to return to the economy.
Nevertheless, there are significant tax increases in the Budget, which could mean consumers tighten their purse strings. Also, firms must now find the money to fund the increase in the minimum wage, and based on the experience of this year, much of the cost might be passed on to the customer.
As a result, we are downbeat on the contribution the consumer will make towards economic growth in 2026, but on the wider economy we are more optimistic. The government has begun investing heavily in infrastructure, research and development (R&D) and defence, and there are already signs of this starting to move the dial in the everyday economy. We expect this positive impact to be far more noticeable in 2026 and 2027. So, the business world in our opinion will drive economic growth in the coming years, and we expect real estate demand to lean towards assets that typically serve firms in the business-to-business sector – so industrial property, data centres, offices and scientific laboratories.
However, perhaps the best part about the Autumn Budget is that it has now been made public. The constant media briefing, u-turns and speculation has persuaded many firms and consumers to go into ‘wait-and-see’ mode in trepidation on what the Budget might contain. This has been reflected in business and consumer surveys that point to slowing activity this autumn. Now everyone knows where they stand, business-as-usual can resume.
The Budget measures will come into effect in April next year, and that month in our opinion will see the economy hit a pothole. However, our forecast is the infrastructure and R&D investment spending mentioned above, plus lower interest rates thanks to reduced gilt yields and Bank of England Base Rate cuts (we are predicting reductions of a further 50 bps in 2026), should mean the economy resumes growth in May and then moves on successfully.
Overall, we believe this is an economic backdrop that will be supportive for real estate investment, and are projecting by summer of 2026, commercial property will see higher sales volumes. By autumn 2026, our forecast is that prime yields in core markets will be hardening.
