Spending Review to drive economy and property demand
Today’s Spending Review will boost long-term growth for the UK economy, which in turn is good news for real estate, as property investors typically have a long-term mindset. The encouraging aspect of this review is its £113 billion worth of infrastructure projects, which will boost the economic prospects for the geographies they serve. Property assets located near these infrastructure projects should see improved capital growth further down the line.
Also, the £39 billion of funding for construction of affordable housing will both give the economy a Keynesian boost, and help ease social inequality and community pressures.
Cities like Birmingham and Manchester are set to benefit from the extension of existing tram lines, while Leeds will be the centre of a new mass transit system for West Yorkshire. New rail connections have received the go ahead, such as the proposed Liverpool-Manchester line, while new stations will be built in Wales, including in Cardiff and Newport. This will accelerate productivity growth in regional cities, which should draw inwards investment and boost leasing demand for commercial property. Also, plans to expand and modernise the UK’s nuclear power generation capacity promises cheaper and reliable energy in the future, lowering costs for UK businesses.
Property investors will be interested to see the government’s pledges to boost spending on research and development (R&D), given growing leasing demand lately for lab space in science hubs, like Cambridge, London, Manchester and Oxford. The R&D budget is set to hit £22.5 billion per year by the end of the current Parliament. The commitment to increase defence spending is good news for parts of the country that are defence and aviation industry hubs, such as Bristol, the North of England and Scotland.
The extra spending on the NHS – whose day-to-day spending budget will increase by 3% p.a. until the next general election – will reverberate through the economy as more orders for drugs and medical equipment are placed through the NHS supply chain. This will eventually lead to more leasing demand in the property market, particularly in areas like logistics and light industrial units.
One concern is that the above spending will require significant gilt issuance. This will leave the Chancellor’s fiscal headroom vulnerable to any unexpected deterioration for GDP growth. Were this to occur, the government may have to look again at tax increases come the Autumn Budget.
We view today’s Spending Review as broadly positive for the property investment market, which has been seeing a gradual return of interested buyers following the price corrections recorded since 2022.
Values for industrial and retail property have tentatively returned to growth in recent months, and we believe a turning point for office values is close.
The boost to the economy from the capital projects announced in the government’s Spending Review have added to the case for UK property as an investment.
