Economic context
The real estate sector faces many uncertainties in the coming months: how much will interest rates rise, what will happen to inflation, will we start to see a huge increase in bankruptcies and corporate restructuring?
Recent interest rate hikes have already had a significant impact on the real estate sector, making debt financing developments and real estate purchases less attractive. The rise in inflation has also had a considerable impact, particularly with regard to construction costs, which have risen sharply over the past year. The sector is now prepared for a wave of insolvencies and restructurings (via company voluntary agreements, restructuring plans and other similar processes), which are likely to have a significant impact on owners and other real estate players.
Implications for real estate in general
Truss looks likely to offer a support package for individuals and businesses to help them deal with escalating energy costs. This support is much needed, particularly in the hospitality, construction and life sciences sectors, although, unfortunately, in a blow to the ESG agenda, part of the energy support program offered by the new Prime Minister understands the suspension of the “green levy” on energy bills. However, it is unclear whether any proposed package will be sufficient to avoid major insolvencies and restructuring, especially since the cost of energy is only one of the issues affecting these sectors. Soaring inflation and rising cost of borrowing are also having a significant impact on the real estate sector.
The new Prime Minister has also indicated that she intends to cut VAT, although this could exacerbate the UK’s current inflation problems in the medium term. Some are predicting that the new prime minister’s immediate economic plans could drive interest rates up to around 7% over the next few months. While some savers without mortgages or other loans may be reassured by this news, such a rise in interest rates could have a significant and costly impact for many players in the real estate sector.
Besides news headlines, can we identify specific policies that will impact the industry? Let’s start with planning.
Planning: Abandoning “Stalinist” Housing Targets with Simplified Planning Zones
Truss is reported as wanting to “rip the red tape that holds back housing construction and empower local communities.” This would include the removal of centralized housing targets in favor of “opportunity zones” to encourage faster and easier development on brownfields. Prime Minister suggests identifying areas ‘ripe for transformation across the country’ that would benefit from lower taxes and easing of planning restrictions, opening ‘the floodgates to new waves of investment’ .
Zoning should sound familiar to those who remember the Town Planning White Paper 2020. However, zoning (along with many other proposed planning reforms) has been heavily criticized. It did not feature in the reduced planning reforms proposed in the Leveling and Regeneration Bill published in May 2022 and currently going through committee stage. Many will be intrigued to see if it makes a comeback – especially given the controversy with many residents of the Tory heartland the first time around.
Development: New approach to green belt development?
Truss has long been an advocate for loosening green belt policies, saying as part of his 2019 leadership bid that “we need to build a million homes on London’s green belt near train stations and around ‘other growing cities’. Although no such claim has been heard in the current contest, Jacob Rees-Mogg, current frontrunner as Upgrade Secretary, is also a proponent of green belt development near the centers of transportation.
This marks a firm move away from the position of green belt protection in the 2019 Conservative Manifesto, and it seems likely that there will be some sort of attempt to water down green belt protection under the 2019 Conservative Manifesto. investment and growth of the new Prime Minister.
Energy: Reopening the Door to Hydraulic Fracturing and Other Energy Initiatives
Despite the clear commitment in the 2019 Manifesto, Truss has indicated a willingness to lift the moratorium on fracking “where local communities support it.” From what we’ve seen so far in terms of local opinions on fracking, it looks like a somewhat empty offering. While Truss has made clear his opposition to solar farms, there has been support for exploiting “all the gas in the North Sea” and the decision to speed up the delivery of nuclear power.
And then ?
Once Cabinet appointments are confirmed, we can expect a flurry of proposals and expanded promises. Only time will tell how well these reflect the opinions expressed by Truss over the past few months. What is clear is that significant changes will likely be required to the current leveling bill and that the real estate industry will need to monitor proposals impacting the industry during what is sure to be a turbulent time.
