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News Release

FEATURE ARTICLE

General Election 2015: The most uncertain in living memory?


No Slowdown

It is received wisdom in the property market that elections lead to a slow down – even a 'pause' – in transactions – even though there is little historical evidence of this from previous polling days.

Indeed, JLL's most recent statistics demonstrate that despite the high uncertainty around the upcoming election, activity was actually higher over the first quarter compared to the same period last year – and in the case of the investment market, considerably higher.

Some 2.6m sq ft of office space was let in Central London over the first quarter, 9% above the 2.3m sq ft recorded for the same period in 2014. Meanwhile, investors purchased some £3.4bn of offices in the West End, City and Docklands over the same periods – 81% above Q1 last year.

Admittedly, take-up in the big regional office markets[1] dropped slightly (-11%) to 0.99, when comparing the first quarter of each year. However, this reflects an unusually strong start to 2014 – the strongest since 2009 – rather than weakness so far this year. Meanwhile, investment volumes for these cities totalled £575m for the quarter – 61% ahead of the total for the same period in 2014.

Thus far into the second quarter there is little sign of investor appetite diminishing. There is a huge weight of global capital looking for a home, and the reasons why so much of this is directed towards the UK – particularly London – are mostly unchanged by the election, whatever the result. These partly relate to the strong economy and growth profile, but are also a result of transparency, liquidity, the legal system, the landlord-favourable lease structure and the English language. Unsurprisingly, none of the party manifestos are proposing to change any of these.

The situation is rather different in the residential market – at least in Central London. The existing government has already removed some of the advantages provided to overseas investors, notably removing some of the stamp duty loopholes and charging capital gains tax. With the Labour party proposing to remove (or reform) non-dom status and introduce an annual tax on properties worth over £2m. This does appear to have dampened appetite, particularly at the top end of the market. It shall be seen whether this is temporary.

Meanwhile, none of the manifestos present a viable solution to the housing supply crisis. While Labour's provides an admirable headline target it falls short on the detail of how this will be achieved. Meanwhile, the Conservative proposal contains some measures that will help individual groups but are unlikely to affect the market more generally – and the expansion to right-to-buy could actually be counterproductive.

It is also disappointing that the election campaign so far has not focussed strongly on the economic performance of the UK, or indeed some of the problems facing the UK in areas such as skills, productivity and international trade – although there is a long-overdue focus on infrastructure and regional potential. Housing affordability continues to be treated as purely a social issue, rather than one which has the potential to reduce the UK's competitiveness.

Uncertainty

 Nevertheless, the General Election 2015 is set to be the most uncertain UK election in living memory. The nearest comparison in this country is perhaps the confusion caused by the rise of the Labour party and the decline of the Liberal vote in the early part of the last century. Even during the unstable governments of the late 1960s and 1970s, control was always going to rest with one of the two main parties – and in any case, until the rise of Margaret Thatcher, both parties were espousing relatively similar versions of the post-war consensus, known then as Butskellism. While the gap between the parties is not as large as in the 1980s, it is perhaps wider than before the financial crisis – a gap that could be widened if the smaller parties gain greater power.

Despite this slight divergence, it is the rise of the minor parties, notably the Scottish National Party (SNP), the UK Independence Party (UKIP) and the Green Party, that is the main cause of uncertainty. Of these, it is only the first that is likely to have real impact; despite a low percentage of the overall UK vote, the SNP are likely to win a disproportionately high number of seats, a result of the First Past the Post system rewarding geographic concentration of support. Indeed, if Lord Ashcroft's poll is to be believed, the coming landslide against Labour in Scotland will be one of the most significant electoral events in British history.

The polls are currently implying that the two main parties are neck-and-neck, with recent suggestions of a more clear Conservative lead. It is still possible that, over the next few weeks, this could increase, leaving them with enough seats to gain a majority, either by themselves or with the support of a combination of Liberal Democrats, UKIP (potentially) and the DUP. However, as things stand, a coalition – probably informal and conducted on an issue-by-issue basis – between Labour and more left-leaning parties, primarily the SNP but also, potentially, the Greens, Liberal Democrats and Plaid Cymru.

 What does this all mean?

The Labour Party's manifesto contains some (arguably) anti-business measures, including regulation of the energy market, the now notorious mansion tax and rent stabilisation measures. Given the party's commitment to social spending, public borrowing could increase (or simply stop decreasing), which could lead to a rise in bond yields and increased borrowing costs – which would damage the economy in general with particular implications for the investment market.

 On the other hand (or perhaps in tandem), there might be calls for further tax increases, which as well as implying further anti-business sentiment, could stymie economic growth. This seems unlikely as the party appears to be keen to recover a reputation for fiscal prudence. Consequently, Labour is likely to favour more 'dirigiste' interventions – such as energy price controls or rent stabilisation[2]. While this will not be beneficial, it will not be disastrous either.

The danger, of course, is that a coalition with smaller, more left-wing party's such as the SNP forces them to adopt policies that imply greater borrowing and higher taxes – with the latter aimed at businesses and wealthy individuals, who tend to be more congregated in the South East and London. This is a significant risk but with the SNP unlikely to go into a formal coalition with Labour, not one that necessarily results from a Labour minority government.

While a Conservative majority would generally lead to more pro-business policies, the certainty of an EU referendum – promised by David Cameron – is unsettling. London's attraction for many financial services companies – and its position as a financial capital – is linked to it being within the Eurozone. While there are other factors at play, notably our time zone and language, leaving the EU would undoubtedly have an effect on volumes in both investment and leasing markets – hopefully a short-term one. There may well be advantages to being outside the EU, but these would surely take some time to become evident to businesses and investors. Clearly, with the UK electorate split into thirds on whether to stay, whether to leave or undecided, the outcome is unclear – but this uncertainty would be toxic.

Given this background, the best outcome for property would be a continuation of the current Con-LibDem coalition, which would provide business-friendly policies without a definite referendum. Apart from the effects on the general economy, it is hard to see any policies in either manifesto that directly impact the commercial market. However, the differences are rather more apparent in the residential market – hardly surprising.

Labour's proposals for a 'mansion tax' – an annual charge on the owners of property valued at over £2m – are impractical and iniquitous. It would not raise a significant amount of revenue, certainly not enough to make a difference to NHS funding, as is suggested. It is true that the property tax system requires a fundamental overhaul, but reform should be focussed on additional council tax bands and a revaluation. However, together with the proposal to reform the tax benefits of non-doms, the implication is that Labour is strongly averse to foreign and business investment in the UK. This is deterring activity at the higher end of the market, which will have a knock-on effect on development volumes.

Meanwhile, while both manifestos recognise that housing is an issue, the measures proposed to increase supply and affordability are either marginal or lacking detail. Conservative plans to help first-time buyers are admirable but can only help a small minority of those aspiring to purchase. It is disappointing that their plans continue to focus on increasing demand rather than addressing the real issue of supply. Labour's plans for garden cities could deliver more in numbers terms but the numbers involved in this totemic policy (also supported by the LibDems) are small when compared with overall housing need.

There is a welcome focus on a realistic housing target but, as with the Conservative manifesto, little detail on how this will be achieved. The overall implication is that both parties are keen to be seen to be talking about housing, but without little intent of pushing through the controversial measures that are required to achieve real progress in supply.

 



 

[1] Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester

[2] Rent stabilisation – measures aimed at providing tenants with some certainty over rent