After some time now to digest the UK budget announcements from last week, our team has also considered the impacts of the UK budget on some of the prevalent market themes emerging from Expo, with a focus on some of the asset classes which featured heavily in Expo discussions.

In Depth

Offices – A Return from Exile?

Questions around the future of offices remain relevant at a point three years after the end of the pandemic. There is an undeniable split between amenity-rich, ESG-compliant Grade A offices deemed as essential to attract future occupiers and their workforce and secondary older offices requiring significant capital expenditure to achieve Grade A status.

Within those challenges however, with the gap between seller and buyer pricing aspirations at both prime and secondary points in the market narrowing, the perception of offices as a buying opportunity was an increasing trend. This has been borne out by a marked uptick in investment activity in Q3 and Q4 2024, and a growing development pipeline to take advantage of occupier demand and rental growth.

The UK budget contained little to alter this general market sentiment, although the confidence investors may take from increased government spending on key infrastructure, including the completion of HS2 at the Euston terminus, may be tempered by the impact on interest rates of the bond market’s reaction to the budget.

Logistics – An Increased Focus on Ultra-Urban Logistics?

This remains a very attractive distraction for investors seeking to deploy capital to serve the continuing growth in e-commerce and structural demand for final mile and ultra-urban logistics. Although there were no specific measures in the UK budget pertaining to logistics, the continuing focus of occupiers and investors on sustainable, ESG-compliant buildings remains a key market theme which may put pressure on some of the older secondary stock. The availability of suitable land and the accessibility of green power will be key factors driving future development and decision-making, including with regard to which infrastructure projects receive government funding.

Another key topic at Expo was the recent change in consumer habits to expect immediate delivery, which is driving the trend for repurposing light industrial facilities in densely populated urban areas as ultra-urban logistics developments. Balancing demand for industrial land against the need to increase the pace of house building on brownfield sites will be a key factor in the growth of this sector, driven in part by the specifics of government policy and funding priorities.

Operational Real Estate – Continued Appetite?

Appetite at Expo for operational real estate remained high, particularly with regard to student accommodation, multi-family properties, and data centres. Looking at each of these in turn:

• Student Accommodation (PBSA): The PBSA sector remains strong, driven by an undersupply of beds and high demand, especially from international students. Investment in this area has increased due to resilient rental growth and occupancy rates and a continued shortage of supply, with the new budget further disincentivising private landlords through increases in capital gains tax rates and in the Stamp Duty Land Tax (SDLT) surcharge on second homes. This brings the affordability of new PBSA developments for occupiers into starker focus, if rents are pushed higher and there is an increased reliance on premium pricing as a hallmark of PBSA that could limit domestic student access and affect viability.
• Multi-Family: Sentiment from investors towards the multi-family sector remained positive at Expo, driven by strong rental demand as further fuelled by the likelihood of interest rates staying higher for longer as a consequence of bond market reaction to the budget. The increased pressure on private landlords from the rises in capital gains tax and SDLT on second homes, when considered together with limited support for construction and affordable housing measures, may further reduce the supply of private rental properties and fuel further rental increases. While this places further economic pressure on individual tenants, from an institutional investor perspective it may serve to reinforce the potential for stable, long-term returns in multi-family investments, with an increased emphasis on single-family rental and affordable housing.

• Data Centres: Demand for data centres is rising exponentially in the UK and Europe and was at the forefront of many investors’ minds at Expo. Sustainability is a key pillar and requirement of such growth, as data centres are power-intensive. As a result, investors are exploring energy-efficient options, and renewable energy sourcing is a priority. The budget did not introduce new specific incentives for data centres, but the overall focus on green infrastructure aligns with the sector’s investment trends.

  More generally, the ability of the sector to further develop data centre offerings at the requested scale will be contingent upon strong support from governments, through funding, adequate general policies and favourable regulatory frameworks. The UK has recently shown some obvious signs of encouragement to the industry when the UK’s Department of Science, Information, and Technology (DSIT) announced that data centres are to be designated as critical national infrastructure (CNI) as part of the government’s drive for economic growth. It will be interesting to keep on eye on the next steps taken by the UK in this direction.

Conclusion

The recent budget did not significantly change the outlook for any of these key real estate sectors. While it included modest support for affordable housing and infrastructure, it lacked direct stimulus for logistics, offices, or operational real estate sectors like PBSA and multi-family. The high cost of debt and inflation remain challenges, especially for sectors reliant on new construction or refurbishment. In summary, the budget’s influence on these sectors is likely to be indirect, with macroeconomic measures and infrastructure investment and government funding a key factor.