In our pre-Budget recommendations, we said the Government’s “primary concern should be the delivery of economic stability, which demands a disciplined focus on the reduction of borrowing costs and inflation”. We believe this was broadly achieved as reflected by the currency and bond markets positive movement on the day, with Sterling trending up against the US Dollar and Gilt yields trending down.
In sum, we see this as principally a statement of political policy that delivered some economic stability but with limited growth initiatives, which Labour had promised would be the central mission of its government.
The pre-budget leaks and speculation, that included the Chancellor making a speech to ready the Country for tax increases, had led us to fear the worst. As it happened, the funding gap was not as big as had been suggested and the tax raising measures, whilst significant, were not as penal as many had been preparing for. Therefore, the budget was a bit of an anti-climax. On a positive note, the Chancellor’s fiscal headroom target was raised from £10bn in March to £22bn for 2029-30, which should continue to be taken positively by the bond / gilt markets.
The Office for Budget Responsibility (OBR) has revised the GDP growth forecast from 2026 to 2029 to 1.5%, with CPI inflation forecast to fall from 3.5% in 2025 to 2.5% in 2026, reaching the 2% target in 2027. Analysts now expect further BOE rate reductions so that the Bank Rate reaches 3.0-3.5% and the markets are pricing in a rate cut this December. This also means that the UK is in a favourable economic position relative to the rest of Europe and in the middle of the G7 pack when it comes to expected GDP growth.
At Moorfield we do not underwrite assuming market-led yield compression. Nonetheless a lower cost of capital is positive for real estate and should undoubtedly stimulate activity within the real estate market and act as a catalyst for transactional volumes. Indeed, we do now expect a material increase in activity as many transactions in both the commercial and residential sectors have been on hold pending the Budget news.
Given the ongoing economic backdrop, we remain confident with our strategy of focusing on needs-based essential real estate sectors – Living & Storage – that have structural rather than cyclical demand drivers and strong inflation-linkage.
Within the Living sectors specifically, we expect there will continue to be a lack of capital availability for developers, and we will look to create best-in-class investments in high quality, well-located schemes that we expect will have a scarcity premium.
There will be an ongoing (and likely increasing) chronic under-supply of high-quality rental housing and the continuing mismatch between rental demand and supply will be supportive of residential rental growth, underscoring the sector’s defensive, counter-cyclical and inflation-hedging qualities.
As highlighted in our pre-Budget recommendations, the Renters’ Rights Act needs careful implementation to ensure that tribunals are not overwhelmed with contested rent rises in the way the Building Safety Regulator has been challenged in assessing new developments.
A more operationally complex rental landscape does create barriers to entry for new market participants but is an opportunity for established players. For long-tenured managers like Moorfield, which has been active in the UK living sectors since 1997, investing in c.25,000 living units and developing c.10,000 purpose-built student accommodation (PBSA) and build-to-rent (BTR) units, we continue to see current market conditions as offering an opportune entry point to UK living real estate.