The Autumn Budget, Labour's first in 14 years, aims to deliver sustained and long-term growth with a promised significant increase in public spending. We consider the potential impact on commercial real estate financing in England and Wales.
Changes to SDLT and CGT
Stamp duty land tax on second homes, buy-to-lets and companies purchasing residential property (known as Higher Rates for Additional Dwellings) was increased from 3% to 5% with effect from 31 October 2024. In addition, the single rate of SDLT that is charged on the purchase of dwellings costing more than £500,000 by corporate bodies has also increased from 15% to 17%.
The Government expects this to result in 130,000 additional transactions over the next 5 years by first-time buyers and other people buying a primary residence, who will have a "comparative advantage" over second home buyers, landlords, and businesses purchasing residential property.
The flip side is that the change in SDLT will potentially affect demand in the buy-to-let market (by-to-let landlords have also been impacted by high interest rates and will be anticipating the passing of the Renters Reform legislation).
The Budget also increases the lower rate of Capital Gains Tax (CGT) from 10% to 18% and the higher rate from 20% to 24% on assets other than residential property (CGT on residential property remains unchanged at 18% and 24%). These increases are likely to impact investors and high net worth individuals. It is probably worth pointing out that CGT was 40% from 1988 to 2008, so the increases proposed in this Budget are fairly modest and CGT remains competitive when compared with other European countries.
Investment in housing
Building houses is an important focus of the Budget with the Government pledging to deliver 1.5 million homes. The Budget includes commitments to (1) boost the Affordable Homes Programme by £500 million to build an additional 5,000 affordable homes and (2) provide a £3 billion cash injection for small and medium-sized enterprises and the Build to Rent sector, in the form of housing guarantee schemes, intended to boost investment by allowing developers to access lower cost loans. This significant investment should stimulate the residential side of the commercial real estate market.
Planning reform
Planning reform was given a high priority in the Budget which could spell good news for developers. The Government understands that without significant reform they cannot deliver the housing promised. Although it is not yet clear what the planning reform will look like, the Government has promised a response to the National Planning Policy Framework consultation by year end and expects to implement legislative changes through the Planning and Infrastructure Bill to be introduced to parliament early next year.
The Government is also seeking views on a ‘brownfield passport’ to ensure that suitable projects get a swift and straightforward approval for development.
A simplified planning system would have a significant impact on the commercial real estate sector, facilitating the delivery of new housing and infrastructure projects. Any changes to smooth the path for developers and drive growth within the industry (bolstered by both public and private investment) would be very welcome.
Economic outlook
Interest rates remain a primary concern for the real estate sector. Whilst the Bank of England cut interest rates from 5% to 4.75%, the expectation is that future rate reductions will be more gradual, potentially leading to sustained higher mortgage costs. This could result in a cooling effect on property investment and valuation, as higher borrowing costs usually dampen market activity – along with higher stamp duty for second-home buyers and a return to previous thresholds for first-time buyers expected on 1 April 2025.
Conclusion
Despite the challenges posed by high interest rates, inflation (which rose more than expected in October to 2.3%), and increased taxation (including the well-publicised rise in national insurance), the Government's commitment to planning reform and focus on housing and infrastructure should allow the real estate sector some optimism going into 2025. Significant planning reforms, in an evolving economic and political landscape, may well pave the way for new opportunities in real estate.