Air Pockets Ahead for Commercial Sector After Close UK General Election

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As per usual the opinion polls got it wrong, and the Conservative party has won the election with a small majority. This is a far better result than the fractured Parliament of shifting coalitions people were led to expect, says international real estate consultant Knight Frank.

Knight Frank further suggests there is good reason to now suppose the UK economy, that appeared to slow in the run-up to the election, can now resume a strengthening recovery. This will be good news for both the commercial leasing and investment markets.

However, there remains a great deal of political uncertainty as a result of the earthquakes that occurred last week. These will influence but not derail the property market.

Firstly, the SNP's overwhelming victory has put the existence of the Union back on the political agenda. Last year there was a brief slowdown in activity in the Scottish market in the run-up to the referendum, which may be replicated in a future poll. This comes with the caveat that some investors actually saw last year's referendum as an opportunity to buy.

Secondly, a Conservative majority increases the chances of a referendum on European Union membership. If the prospect of Scottish independence caused a market slowdown, the idea of the UK leaving the EU will surely do the same, probably on a greater scale. Either a Tory backbench rebellion against the Bill or a vote sooner rather than later may be the best outcome.

Thirdly, the UK's deficit remains large, but if the Conservatives only have a slender majority they may struggle to force the necessary cuts through Parliament. If the financial markets suspect that not enough is being done to balance the books, sterling could fall in value.

This will initially make UK commercial property look attractive to overseas money, but inflationary pressures would increase and bring closer the day that interest rates rise.

Over the next five years, we believe this climate of political uncertainty will at times cause market confidence to drain away temporarily. Some investors may decide to wait until after an upcoming referendum before buying; some occupiers might shelve expansion plans because a sudden fall or rise in sterling hits profits.

In short, UK should expect the odd air pocket ahead, but overall the election outcome was probably much better for commercial property than one would have expected 24 hours ago, suggests Knight Frank.

Guy Grainger, UK CEO at JLL also commented, "A continued focus on fiscal prudence and deficit reduction will ensure that bond yields and debt costs remain low, providing support for the investment market, the housing market and the wider economy. However, the real challenge for the next government is to focus on medium-term measures to improve productivity, which has lagged behind countries such as the US, Germany and France, despite our remarkable rates of job creation. This will need to include further investment in infrastructure and skills. But there is a balance needed here; the danger is that ring-fencing health spending, for example, while attempting further fiscal retrenchment, would leave little left for the vital measures that could help our economy become more sustainable.

"Further commitments to devolving planning, housing and skills funding and decision-making to city regions such as Greater Manchester should help this agenda too.

"While most in business will be reassured by the continuity of the Conservative economic plan, there are concerns regarding the planned referendum on British membership of the EU in 2017. British businesses will remain committed to a strong position within the European Union and will need to engage in the reform debate to see if a referendum can be avoided.

"However the continuity of main policy objectives for the past five years will be very helpful for investors and developers in the housing market. Residential markets will benefit from a legacy of supportive policy from the Coalition Government. We expect markets to continue to grow in line with stronger economic prospects, particularly in the regional cities and the South East.

"The clear plan to improve supply through National Planning Policy Framework changes, which will be upheld for another five years - nevertheless will be a real need to introduce measures to ensure more housing gets built. The dearth of housing supply in the UK is not just a social problem - it is an economic problem, and one that is sure to intensify over the coming parliamentary term. Employers are increasingly concerned about the ability of their younger staff to find homes within commutable distance of work."

Adam Challis, Head of residential research at JLL comments on the impact on the residential market: "These results provide an even stronger Conservative mandate than under the previous parliament. This is good news for the housing market, particularly in London.
"We expect an immediate boost to the Capital, where Labour policy ideas were acting as a drag on activity. Price growth this year should hold at circa 5-6%.

"The real job that begins today is to set out a clear plan to boost new home supply. A stronger housebuilding sector is the only way to solve the UK's housing crisis, while also adding construction jobs.

"Continuity of housing policy will strengthen the chances that the UK will make strides to solve the housing crisis. This election result is a win for struggling renters, aspirant first-time buyers and even the bank of mum and dad.

"We expect a strong bounce back in activity in the Prime residential markets.  More than any other part of the market, Prime London activity has been affected by election in particular tax uncertainty. A decisive result with policy transparency is the best outcome London could have hoped for."

Alex Edds, UK Sustainability Director at JLL said, "The Conservatives take a far more market driven approach to climate change mitigation and we are hopeful that a renewed commitment to the pledge to become 'the greenest Government ever' will take shape. Support for the Climate Change Act legally binds UK government to achieve 80% carbon reductions by 2050, however there was little evidence in the manifesto on what we can expect in the next 5 years. The Conservatives look to demand side reductions to stimulate the low carbon economy - for example by insulating 1 million homes, invest in cycling and promoting zero emission vehicles. The Tories also plan to promote biodiversity and nature, so we will likely see changes to planning rules and land use and they are committed to protect more homes and businesses from flooding.

"The debate on sustainability over the next five years is set to grow in importance and there are clear opportunities through real estate to achieve significant gains."

Christian Ulbrich, EMEA CEO at JLL also commented, "It is encouraging that the UK voters have provided a clear mandate to one party. Now we all have to focus on convincing the British people of the benefits of being part of the European Union. In a very volatile and increasingly complex geopolitical world, we need a strong European voice and in order to do so, we need the UK to be part of the European Union."