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On March 29th, GRI Club UK members gathered to discuss the UK economy and political policy and how it pertains to the real estate market. The discussion centred around the country’s economic performance and how this affects investor feelings, as well as affordable housing and the potential for a Labour government’s election.
Some at the meeting emphasised that it is not just higher productivity that is needed for the UK economy, but also more skilled workers, who may have been prevented from entering the UK by government restrictions on immigration.
As there is a labour shortage, many would expect businesses to invest and create a digital revolution. However, this digital revolution has not yet happened to a significant extent; although, some GRI members are of the opinion that it may in the next five years.
At the moment, many are still waiting for valuations to kickstart the UK real estate market, which appear to be delayed due to the environment of high inflation and past months of uncertainty. The release of valuations is predicted to trigger deals and transaction volume to increase.
This was also emphasised heavily in GRI Club’s first main event of the year, the GRI UK & Europe Club Reunion. Read the report from this event, featuring valuations and asset class discussions.
There is now a large funding gap for commercial real estate, and there are several options for leveraging, one of which is mezzanine funds, which look to some to be ‘really exciting’ as an alternative to equity. But, this is on the basis of interest rates being reduced quickly. These are bridging loans to get back to a more normalized senior debt market. From a funds perspective, many are seeing special situations starting to be interesting, as well as recapitalization funds to come into these structures and take that gap.
GRI Club members showed concern over the wavering government policy for housing as well as the uncertainty over Conservative Party intentions. Many agreed that they were unsure where the government hoped to put capital investment, which has a multiplier effect and is therefore vital. Last year’s mini-budget, prompted by Liz Truss, frightened markets as its funding methods were unclear.
UK housing is backed by ‘unbelievable’ demand, and low supply - an issue that worsens year on year, and also plagues much of Europe. There are 1.2 million households on the social housing waiting list. It is important that, due to the nature of government changes and its 5-year cycle, there is cross-party consensus on how to achieve goals such as increasing the supply of housing.
Read: on the new housing policy in Portugal, which faces some of the highest rents on the continent.
There are approximately 50,000 affordable homes built a year, but these numbers need to be tripled. The planning system is often blamed in the UK for this supply-demand imbalance, and it is certainly a contributing factor, but affordable housing deliveries are funded in a way that means that high targets cannot be met.
Chalabala | Envato
The Conservative Party’s housing policy is complex and controversial within the party itself. In its 2019 manifesto, the Conservatives promised to build 300,000 new homes a year. This led to a relaxation of the planning system that was heavily debated. Also, attendees asserted that one issue with home development is that taxes and regulations account for a quarter of expenses when building even large numbers of homes, with planning delays creating cost barriers.
Proposals from the club meeting for ways the government could improve the existing landscape include:
- Reducing financing costs, which are an issue for many student housing investors and funds, as well as the whole bed sector, hurting investment positions due to a lack of rental growth and profit margins.
- Decreasing the corporate tax rate, which is not comparable globally. Many investors will choose other regions to invest in that have a lower tax rate, such as the USA.
- Increasing communication and coordination between different government departments, as the housing ministry needs more communication from departments such as the treasury on issues such as corporation tax.
UK polls suggest that the Labour Party may in fact form the next government at the next election, and the meeting attendees discussed the potential policies they may implement. Firstly, many assume that they will invest further in green technology and encourage ESG investment.
Many attendees expect an increase in house building under a Labour government, while it is likely that building regulations will also increase. This is because Labour will be free of the politics of small home counties that the Conservatives suffer from. Currently, the south and midlands of the UK receive fewer new homes; in 2020, the cities with the least number of homes built were Leicester, Blackpool, Portsmouth, London and Luton.
There are mixed views on whether Labour would implement rent controls if in power. An alternative would be that they encourage fair tribunals where tenants can submit complaints about the price of rent. Many feel strongly about the negative impacts of rent controls, as construction costs continue to rise while rents remain the same. Caps such as these are a considerable risk for investors, and clarity of discussion and working with investors who understand the risk of potential political intervention is key.
One of the main concerns as well as challenges for those developing in all asset classes is the effective decarbonization of UK buildings, as well as the need to make existing portfolios more sustainable as well as fire safe.
Many predict that developers will be told to prioritize decarbonization as well as safety above all, and as a result, new home development will be pushed back. This will occur in a cost-of-living crisis where developers, as well as UK citizens seeking affordable housing, cannot afford it.
Skilled labour shortages and low productivity in the UK could be a multiplier effect for obtaining government expenditures, particularly considering the decarbonization agenda. Thousands of homes need retrofitting, and skilled labourers are needed, for instance, to install air source heat pumps or insulate older homes. General government intervention could be positive in this area.
How has the relative attractiveness of UK real estate been affected by politics and the economy?
- Many are concerned about the weakening of the GBP compared to Ultimate Secure Cash (USC).
- Investors are uncomfortable without a stronger economic recovery.
- Political factors that have weakened the UK in investors' eyes are Brexit, Liz Truss’ budget, and the fact that the country has had 4 different prime ministers since 2019.
However, those still interested in the UK will look at London first, and the drop in valuations will make it more appealing to investors, as well as the fact that the UK has the ability to recover quickly.
Attend Europe GRI 2023 to discuss investors’ views on UK and European real estate, as well as to meet the most relevant market leaders.
Written by Sarah Garnett