Kingsturge - UK Budget 2003 & The Impact On Commercial Property
The following sets out some immediate thoughts on the implication of the Chancellor of the Exchequer's Budget on 9 April 2003.
Economic Growth
As widely predicted by King Sturge, both earlier this year, and at this time last year, the Chancellor has had to downgrade his forecast for the economy. With economic growth in 2002 having been at 1.8%, forecasts for 2003 are 2%-2.5% (downgraded from more than 2.5% six months ago and more than 3% twelve months).
A modest improvement in economic growth is in line with the King Sturge forecast.
Stamp Duty
Stamp duty for housing and commercial property frozen. However, Chancellor will close tax avoidance loopholes.
The Chancellor's decision to introduce a 1% on Stamp Duty on leases was widely forecasted although as this will not come in until December 2003. Following consultation with industry, there is still time for the Chancellor to change his mind. Whilst this is clearly not good news for investors, it does mean that there will be even more creative structures invented to mitigate the impact of Stamp Duty.
However, the mitigation of Stamp Duty in 2000 Election Wards is to be welcomed and shows that the concept of tax breaks (as well as removing town planning red tape and extra 'phoenix' tax allowances), similar to those invented for Enterprise Zones in the 1980s to stimulate deprived areas, is embraced by New Labour despite its political rhetoric against the use of such Conservative tax payers money in the past.
In the housing market (where the Stamp Duty exception has increased from £60,000 to £150,000) the review of the housing market is to be welcomed, but with the dearth of public housing construction, the lack of public money in this sector has contributed to wards the recent increase in house prices by exacerbating the house shortage.
Government Borrowing - property implications
As widely expected, the economic slowdown will result in even more government borrowing.
The Chancellor has announced that expenditure will be borrowing £27 billion (up by £2.5 billion) in 2003 and £24 billion (up by £4 billion) in 2004. This borrowing has mixed implications for property. A necessity to borrow more than previously forecast means that gilt yields are likely to rise, as the supply of gilts increases, and, subject to demand, gilt prices fall. This may have a negative impact on secondary property where the investment yield is frequently linked to the yield on gilt-edge securities, and also certain 'bond type' properties.
However, it means that property is more likely, than earlier this year, to outperform the gilt market in 2003, and yields on prime property investments are unlikely to be influence by the Chancellor's need to raise more money in the gilt market.
Investment Return
Despite this Budget, the King Sturge view is that the total return from commercial property investment will be in the region of 8%-10% for 2003.
Expenditure Forecast
The increase in government expenditure is already having an impact in the property market with increased demand for property in the education sector, health sector and at a national government level. At a time when commercial private occupational demand remains relatively muted (likely to be pick up in 2004) demand from the government should hold up occupational values and investment returns over the near term.
Relocation
The Chancellor's objective to relocate 20,000 out of London to lower cost regions should take place any way: London is a very expensive location for Civic Servants. Perhaps this part of the budget is more addressed to civil servants than taxpayers.
Retail Property
The recent increase in National Insurance payments will hit the luxury and tourist end of retail sales, and property relating to this end of the market, such as London's Oxford Street and Bond Street. Middle and lower ends of the market will suffer less. Although consumer expenditure growth is slower than last year, rental values on average are still likely to increase very modest in 2003.
For further information please visit www.kingsturge.co.uk.