Investors confront another policy vacuum

UK government borrowing costs touched new multi-decade highs yesterday due to a combination of political uncertainty and signs that the US/Iran ceasefire is wobbling.

Investors in UK real estate across sectors must once again make decisions with little clarity as to how their investments or tenants will be taxed in the coming months, which will undoubtedly weigh on activity. For now, investors seeking direction can only piece together a hodge-podge of speeches, leaked memos and think tank policy papers in an attempt to gauge what the government’s long-term strategy for growth and taxation might ultimately look like.

In a leaked memo, Angela Rayner has called for raising the banking surcharge from 3% to 5%, for example – a move that JP Morgan chief executive Jamie Dimon told Bloomberg TV yesterday would lead the bank to reconsider its new 3 million square foot London headquarters. That investment is set to contribute £9.9 billion to the local economy and create 7,800 jobs, according to the bank's estimates.

Fiscal restraint

Dimon is one of very few business leaders willing to make those kinds of statements outright, but his sentiments will be shared by others. How long the prevailing uncertainty is likely to last is hard to say – as the Times explains, despite more than 80 MPs calling for Sir Keir Starmer to quit, he doesn't have to grant a contest. A leadership election would only be required once an individual candidate has been nominated by 81 of their colleagues.

Should an MP gather the votes, others will be given time to do the same – less than a month, the Times writes. Andy Burnham – despite being ineligible to stand – is currently the bookies favourite and the bond market's most feared candidate, according to a small tally of fund managers carried out by the FT. He's followed by Rayner and Wes Streeting – the latter is viewed as most likely to maintain the fiscal restraint shown by Starmer and chancellor Rachel Reeves (not a high bar).

The papers connect the soft-left Tribune group with Rayner and Burnham. That group released a set of policy proposals yesterday that included stripping the Treasury of responsibility for economic growth alongside broad-based reforms to property taxation, including scrapping stamp duty in favour of a “national property and land tax”. Council tax could be “significantly reduced,” according to the proposals. Labour Growth Group, which according to the Guardian "has connections to Streeting", wants to raise capital gains tax to pay for a cut in National Insurance. Three progressive thinktanks – the Institute for Public Policy Research, the New Economics Foundation and the Joseph Rowntree Foundation, "are all expected to publish papers calling for the government to introduce rent caps," the paper adds. 

Crying out

New-build home registrations, a good leading indicator for housebuilding, fell to 26,959 in Q1, down 6% compared to the same period a year earlier, according to the National House Building Council (NHBC). Private sector registrations fell 7% to 18,072, while the rental and affordable sector saw a 4% fall.

Much of this is beyond the government’s control – geopolitics and rising mortgage rates, for example – but a stronger regulatory response will be needed if housebuilding activity is to recover, particularly as surging energy prices threaten to push build costs even higher. The recent rise in gilt yields has yet to feed through into mortgage pricing, but the risk is growing.

"The market is crying out for some targeted stimulus, such as a new buyer incentive, to help those who need it most get on the housing ladder," Daniel Pearce, Corporate Strategy Director at NHBC, said in the release. At present, there is little incentive for developers to accelerate building. Easing certain regulatory requirements, at a time when other costs are rising beyond their control, is a lever that could be pulled to support home builders, particularly SMEs. Accelerating planning reforms is also crucial to help house builders deliver high-quality new homes at volume. The impact of the recent planning changes has yet to be felt.”

Financial risks

Rents across prime London markets climbed before the Renter’s Rights Act came into force on May 1st. The new legislation covers a range of areas designed to protect tenants, including tighter rules around setting and collecting rent, the repossession process and restrictions on landlords selling their property.

As a result, a number of landlords sold or took back possession of their property before the new rules came into effect, while others have increased rents to reflect the new financial risks they face.

Average rental values in prime outer London (POL) increased 3% in the year to April, which is the highest figure since June 2024, a period when annual growth was still coming down from the double-digit highs of the pandemic. See Tom Bill's update for more.

Tom also has the latest from the prime central London sales market, where geopolitical volatility, rising borrowing costs and the adverse tax landscape kept a lid on activity during April. The number of offers made in London last month was 9% below the five-year average and the number of transactions was 12% down.

Average prices in prime central London (PCL) fell 3.8% in the year to April, which was a marginal improvement on the revised figure of -4% recorded in March.

In other news...

Canary Wharf returns to profit as office values recover (FT), and finally, almost half of UK homes listed for sale failed to find a buyer (Times).