A year on from the mini Budget: Finding clarity in chaos

A year ago, a so-called mini Budget from then-prime minister Liz Truss and then-chancellor Kwasi Kwarteng made a massive mess of the UK’s economic and political outlook. A package of measures including some £45bn of unfunded tax cuts drew criticism from the International Monetary Fund. Truss and Kwarteng were gone within weeks. The event continues to have a “long-lasting” and “hugely significant” effect on the credibility of the country’s policymakers – and that in turn hits the real estate industry hard, according to Ben Sanderson, managing director for real estate at Aviva Investors. “If you think about the past 20 years, one of the reasons we’ve had low inflation is the credibility of central banks, the credibility of policymakers, the clear framework that allowed decisions to be made by the likes of those on this panel and everyone in this room,” said Sanderson, who was joined by other real estate professionals on a panel held to discuss the impact of and lessons from the mini Budget, arranged by the RICS and chaired by EG editor Samantha McClary. “The damage to credibility and policymaking was huge and significant, and, in my view, at the margins, it means interest rates are higher than they would have been because the credibility of institutions making policy has been damaged by that,” Sanderson continued. “I think it was significant and very bad.” Passing thunderstorm But not all of Sanderson’s fellow panellists agreed that Truss’s measures have had a lasting impact. “The storm was here and the Budget caused it to rain,” said Clarence Dixon, global head of loan services at CBRE. “But it was a thunderstorm that passed. It passed much faster than most people thought it would. And the effect of the storm more or less subsided quicker than most people thought it would.” British Land chief executive Simon Carter also chose to look on the bright side, highlighting the Bank of England’s swift efforts to deal with issues in the liability-driven investments market, as well as the fact that a “failing government” was replaced in just 49 days, as evidence of rapid course correction. And that meant the impact on the UK’s reputation – at least among real estate investors – was less dramatic than it could have been. “We spend quite a lot of time speaking to international investors about where they want to invest,” Carter said. “We shouldn’t forget that geopolitics is very bumpy at the moment and there are lots of places in the world where they can’t invest. They still see the UK as a really good place to do business.” Nonetheless, Sanderson sees parallels between the mismanagement of the mini Budget and the current government’s U-turn on parts of its net-zero carbon strategy. “We were in a world whereby major changes happened in a way that was done through consultation,” he said. “Economic policy was fairly predictable. There was a signalling that went on in big policy changes and in economic policy, which I think, on balance, was pretty good. When you have a shift like we’ve seen with the announcements on changes of strategy in relation to how to achieve net zero, I don’t think it’s helpful. The debate is not about the changes necessarily, it’s about ‘is it tactics, is it political, will it last?’ “At the margins, that’s the sort of damage that I see has happened through things like the mini Budget, which was a perfect example of how not to make policy.” JLL UK chief executive Stephanie Hyde said the net zero shifts underscored precisely the lack of certainty that business hates. “What do businesses take from that? Are they [government] going to back away on the commercial properties on EPC as well [as residential]? Are we going to see more change coming? Are we going to get any clarity? It’s an election vote-winner. It feels like it’s in advance of the party conference. It’s playing to [Rishi Sunak’s] party. It’s playing to the voters, perhaps playing to the Red Wall as well. Business likes certainty. You can’t plan without it. “The only positive thing is that I do think that businesses have really stepped up in the past decade with this chaotic approach from politicians – particularly in the past five years.” Cycle path Prestbury Investments’ Nick Leslau, an industry veteran of four real estate cycles now, knows to take troubles in his stride. For many real estate professionals and politicians alike, he said, there is no playbook. “We as a society have faced so many black swan events of such enormous consequence that we are kind of making it up as we go along,” he said. “The febrile nature of markets is such that the policymakers are doing things with hindsight. They’re trying to look forward but it’s very difficult. Anyone who’s under 40, for example, doesn’t know what a reverse yield gap is. They’ve never had to experience that. They’ve known free money. A lot of politicians are quite young and a lot of politicians haven’t had to deal with this sort of environment before.” However, a new cycle is nothing to be feared, either in real estate or the wider economy, said CBRE’s Dixon. If anything, he added, low rates were in place for far longer than they should have been. “The low interest rate environment had to come to an end at some point, it was not sustainable forever – it actually lasted way too long,” he said. “The problem is that due to inflation and other things, the interest rate increases just kept coming and coming – much too fast, much faster than they should have, and definitely much faster than anyone expected them to. “But I don’t think anyone can deny the fact that the world we were living in was not sustainable over time. Real estate lives in cycles. That cycle should have ended five years ago, seven years ago, eight years ago, who knows?” As Leslau put it, “We don’t control cycles, cycles control us.” But the current turning point feels different to past events, he said. “They come at us in different ways, and this one came at us in a way that we weren’t braced for,” Leslau added. “On the way up, making money is not problematic. When you get to the end of that cycle, traditionally we’re used to seeing a big lurch downwards. And we haven’t really. We’ve seen 20% off values, maybe another 10% to come. And there’s still these waves of capital that are out there waiting to find the clearing level.” It’s a positive development that real estate players will hope politicians and policy cannot disrupt, even as the country heads into an election year. For Hyde, who moved into the real estate industry from a role at PwC, shifts in the market are already leading to a more varied, exciting field in which to play. “If you’re looking for silver linings, I came into the industry two and a half years ago and it felt like there were two or three things that people were investing in,” she said. “Now it’s much more interesting. I find a lot more exciting conversations around where people are heading and much more differentiation between strategies. People are looking for those niches. They’re looking for the opportunities. They’re differentiating themselves.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Image © Tom Campbell