By Charles Ferguson-Davie and Marc Gilbard
Against an increasingly fraught geopolitical backdrop, the Spring Statement compounded our belief that while the investment community has good reason to have reservations, it can also feel encouraged by certain aspects of Chancellor Reeves’ policy agenda.
The economic picture is a mixed one. The downgraded growth forecast for 2025 – from 2% to 1% – should be tempered with revised GDP expectations: from 1.8% to 1.9% in 2026, 1.5% to 1.8% in 2027, 1.5% to 1.7% in 2028 and 1.6% to 1.8% in 2029. The Bank of England’s inflation target (2%) is assumed to be reached by 2027, with markets pricing in a Bank Rate reduction in May 2025 followed by further reductions, ending at sub-4% in 2026.
It is good news that the UK is currently facing lower tariffs than many other countries, but the effect on global trade may cause a recessionary environment. It is too early to tell how countries will react in terms of possible retaliations and what the effect will be, with both inflationary and recessionary possible consequences. In what is already a low growth environment in the UK, we think that Bank Rate reductions will continue in order to support the economy.
However, we continue to believe that investors should not rely on central banks to lower the cost of capital, that would ordinarily result in gilt yield and real estate yield compression to drive capital returns. We have based our investment strategy on searching for structural, rather than cyclical, drivers of demand, to try and mitigate exposure to a weak economic climate. Therefore, we remain focused on assembling a high-quality portfolio of needs-driven, under-supplied real estate producing inflation-linked income growth.
Living and Storage remain our two areas of focus, and we are encouraged by some of the Chancellor’s plans for housing delivery. The OBR predicts that changes to the National Planning Policy Framework, the creation of the ‘grey-belt’ and introduction of housing targets could help deliver up to 1.3 million homes over the next five years. This suggests this government is serious about transforming a planning framework that has long been an issue for investors in UK real estate.
In order to meet these housing targets, increased institutional investment will be required. This includes investment in residential-for-rent, where Moorfield has been an early mover, with active strategies across the Living sectors in single-family housing, multi-family build-to-rent, student housing (both purpose-built and HMOs), co-living, and nursing/care homes.
The National Insurance increases announced in the Autumn budget continue to weigh heavily on businesses and it is some comfort that the Spring Statement passed without any further material business or investment inhibitors. However, the Government will need to introduce more measures to try to stimulate private sector investment to meet the shortfalls of many of the government departments, especially now that defence spending is set to increase.
In summary, the UK has an opportunity to return to a favoured nation status for business and investment if it acts in a timely and appropriate manner. Lighter regulations to help ease the frictional costs of business and encourage investment are still needed, but the efforts to improve planning and infrastructure investment are welcome.