Labour Brings Stability And Planning Zeal, But Jury Still Out On Property And Economic Growth

When Chancellor of the Exchequer Rachel Reeves sat down at 1.52pm last Wednesday after unveiling the first budget from a Labour government in almost 15 years, real estate and the country got their first chance to form a view on whether it would deliver on its election promise of helping the country grow.

The address came four months after Reeves, Prime Minster Keir Starmer and Deputy Prime Minister Angela Rayner led Labour to a landslide election, laying out the party’s economic and social policy in full and building on announcements on planning and investment outlined during its first 100 days in power. 

Government investment will rise, crucially for property in areas like transport and housing. But so will government borrowing, in a move that could push up inflation and slow the pace of interest rates fall. Taxes will also rise, which could dampen economic growth and lead to knock-on effects for real estate take-up. 

For the property market, a stable government that is willing to invest and focus on facilitating development is broadly a good thing for investors, both domestic and international. But all eyes are on how the government’s optimistic take on its economic strategy will play out in practice.

“If you want international investors to invest in the UK, or domestic investors to increase their spending, they want to clearly see that they are operating in a growing economy,” Arboria Capital CEO and founder and British Property Federation President Jessica Hardman said. 

“Labour won the election with the claim that they would focus on growth, and this budget was intended to show that the economy was at the forefront of its mind. In some ways it lived up to that, and in others it didn’t.”

In the minds of investors, a huge factor in the new government’s favour is the stability it brings, Hardman said, and that manifests itself in different ways.

At the big picture level, a clear direction was welcome after four Conservative Prime Ministers came and went in the three years between 2019 and 2022, leaving many feeling the country lacked leadership. 

But international investors, in particular, will also be drawn to the clarity of Labour’s policies.

“[Housing Minister] Matthew Pennycook has said that now they’ve changed the planning policy framework, they won’t keep picking away at it, and the government has said the same about changes to corporation tax,” Hardman said. “If they can do that, that stability is appealing to investors.”

International investment will be vital for the completion of large-scale infrastructure and real estate projects, which domestic investors don’t have the financial scale to fund, Hardman said.

Labour has raised taxes, including capital gains tax and the national insurance contribution paid by employers, a move it hopes will generate up to £40B. Government borrowing will also rise, which Labour said is required to ensure that public services like the NHS, schools and local authority budgets are not subject to large cuts. 

The increases are designed to spur broad economic growth, but they also raise uncertainty about how effective Labour’s policies will be. Economic growth will jump from 1.1% in 2024 to 2% in 2025 on the back of government spending, according to the Office for Budget Responsibility, though it predicted that will slip back to 1.6% in 2029, the last year of Labour’s term in government. 

The increase in National Insurance contributions could have a dampening effect on employment, and that could, in turn, hold back growth, the OBR said. Investment in people also moves companies to take more space, driving leasing in commercial sectors like office, retail and industrial, so any pullback there would be felt.

“Whether you’re an established or a new company, when there’s an increase in the cost of employees, people look at offshoring, technology and corporate restructuring,” Hardman said. “People start underinvesting, and that can weigh on growth.”

Bond markets also reacted with some dismay to the amount of borrowing outlined in the budget, which the OBR said could be inflationary. 

“Labour has got the best intentions, in terms of investing in areas like the NHS, schools and social care, trying to kick-start the economy and reduce the national debt,” Re:shape Living Partner and co-founder Jermaine Browne said. “The challenge is when policies can have a negative impact. If inflation starts going up, that means interest rates will come down slower than anticipated.”

The OBR forecasts that interest rates will now fall by 100 basis points rather than 125bps, and they'll fall more slowly. That's not a huge change, but rising rates have been detrimental for real estate investment values and volumes, and rates coming down is seen as a key factor in helping the market recover. 

On the investment side, increased taxes and borrowing will be used to help fund improved rail links between Oxford and Cambridge and between northern cities like Manchester and Leeds. It will also ensure the HS2 rail link goes to Euston in central London. All of those improvements had been in doubt under the previous government.

In her address, Reeves also announced that the government budget to fund new science research will increase to £6.1B. This will help companies that occupy space in the growing UK life sciences sector. 

“I think it’s impressive that they are focusing on long-term projects, not just things that provide an immediate gain,” Grainger Chief Executive Helen Gordon said. 

Gordon will be a member of the government’s New Towns Taskforce, which will look at how the government can facilitate the creation of large new urban areas and how private capital can be corralled to fund them. She was previously involved in the development of large areas of Milton Keynes, about 50 miles northwest of London, one of the most successful of a previous iteration of the new towns initiative. 

The new towns strategy is part of a wider overhaul of the planning system by Labour, which includes the reintroduction of housing targets for local authorities, the possibility of central government taking planning decisions for large schemes away from local authorities and more funding for affordable housing. It also includes funding for more planning officers and a mechanism for local authorities to retain the receipts from homes sold to tenants under right-to-buy legislation.

Labour has set a target for 1.5 million new homes to be built in this five-year term while speeding up the delivery of major infrastructure and regeneration projects. Despite the dubious reaction of financial markets, Reeves said that streamlining planning would boost growth above OBR forecasts. 

While the new government hasn’t done everything the property industry might want in terms of speeding up planning, the moves have been mostly welcomed by the industry. Changes involve iterating on the previous system rather than trying to start again from scratch, which creates inevitable teething problems.

“There’s no easy fix, otherwise someone would have done it already,” BPF Director of Finance Policy Ion Fletcher said. “It’s no one single thing, it’s a collection of measures that are needed.”

The target of 1.5 million homes in this parliament is ambitious, he added, but if the trajectory is going in the right direction at year 4.5, Labour will be happy.

“There’s been a shift in mindset in the government towards the need to build more,” Arbor's Hardman said.

Browne said that Re:shape, which develops co-living and student housing, had seen that shift in attitude among London boroughs, which have become more open to new development. 

“There’s an acknowledgement that there’s a genuine housing crisis that needs to be addressed,” he said. 

As a former planner, funding that will allow the employment of 300 new planning officers was welcome, he said. But those already in the job need to be better paid as well, he warned, adding that planning officers have been taking better-paid jobs in the private sector, creating a brain drain for planning departments at local authorities. 

And now that the new government’s thesis has been laid out, it is about the execution for the real estate industry.

“As an investor, you want to know about the financial philosophy of a country — what are you trying to achieve, and do I want to be a part of it,” Hardman said. “It will take time to decide where people will put their money, but they can now see the direction of travel.”