Repeated warnings of ‘hard decisions’ and ‘fiscal black holes’ have left investors guessing as to how radical Keir Starmer’s Labour really is. The first 100 days is the traditional yardstick of early political success, but we will need another 100 days to get the measure of this government.
A prime minister’s first 100 days in power are when they should be most effective.
They are still fresh, undiminished by the messy compromises of governing. Financial market volatility tends to ease, and returns climb. It’s called ‘the honeymoon period’ for a reason.
So, what are we to make of the fact that, fresh from winning a 174 seat majority, Kier Starmer’s Labour Party spent so much of its first 100 days chipping away at businesses and consumer sentiment?
From ‘hard decisions’ to ‘fiscal black holes,’ Starmer and chancellor Rachel Reeves spent a lot of political capital laying the ground for the October 30th Budget that, according to the Institute for Fiscal Studies, will require £25 billion in tax rises to avoid another round of austerity. I asked representatives from our national and London teams how the world’s biggest investors perceive this government. All said hesitancy had crept into decision-making amid a lack of clarity on taxing and spending, particularly regarding Capital Gains Tax thresholds and Stamp Duty Land Tax.
This approach may still prove to be politically astute in the long run. Global investors find the UK’s long-term outlook very attractive relative to peers. A moderate approach to raising taxes on October 30th with few surprises could set off a sustained rally in sentiment. Indeed, reporting in UK media suggests that, after consulting with industry, the party will opt for relatively light touches on issues like non-doms.
Showing Momentum
Franklin D. Roosevelt passed 77 laws in his first 100 days as president, thereby solidifying the period as the political yardstick for early success. Labour won’t match that level of productivity – Roosevelt’s first 100 days put the wheels in motion for the New Deal - but they haven’t rested on their laurels either.
Ministers have laid the groundwork for long-term reforms, showing momentum in housing, environmental policy, and energy independence. The government’s plans for housing are perhaps most ambitious, particularly the pledge to build 1.5 million homes over the course of the parliament. This will have knock-on effects for commercial real estate. We estimate you need roughly 69 sq ft of industrial space to serve every new home, for example.
The party is lighter on policy that will have direct impacts on commercial real estate. Labour committed in its Manifesto to reform business rates, which could offer relief to retailers and other businesses. Streamlining planning for developments like data centres by classifying them as nationally significant is an important step.
Investors love the broad message: that Labour will get Britain building again and invest in infrastructure, but they want to know more about the how. Development risk continues to rise – construction and debt costs are high and exit yields are still very difficult to underwrite. A light hand on the tiller is no bad thing, but some risks - both economic and political - need to be taken off the table to support a fuller recovery. Some investors are increasing their weightings towards equities at the expense of alternatives, particularly real estate, because they can achieve target returns in what they perceive as safer, more liquid asset classes.
These are often fine margins. Some clarity and commitment from government will tip the scales back in favour of real estate. The industry works best when it understands the parameters it must function within.
A Creaking System
Of course, there are areas in which the government could and should do more. Ministers have rightly promised to hire three hundred planning officers to support local councils. The difficult truth is we need many, many more…and a proper conversation on where these officers will come from.
The UK also desperately needs more skilled tradespeople to deliver the promised homes and infrastructure and to fuel the inevitable uptick in commercial development we’ll see as rates fall. The Construction Skills Network puts that number at a little more than a quarter of a million by 2028 to meet levels of work anticipated by the industry. That looks fanciful given the numbers that have left since Brexit or retired early since the Covid-19 pandemic.
Clarity on Minimum Energy Efficiency Standards is now well overdue, too. The industry needs to get to grips with where assets stand relative to what will be required before determining the path forward. A decision has the potential to place more pressure on planning departments, too.
Finally, new towns have the potential to be transformative when it comes to easing pressures on housing, but they must be underpinned by road, rail, broadband connectivity, plus the right leisure, shops, medical services, schools and places of worship. A critical infrastructure classification for data centres demonstrates that the government is aware of the shortcomings of the planning system, but it’s creaking after several years of below-average development. Much of Labour’s vision for the future must be underpinned by a high-functioning planning system that we don’t have… at least not yet.
The Economic Backdrop
In just a few weeks, we’ll know much more about how the country may look at the end of Labour’s first term, five years from now. By January, global central banks will be well into their monetary easing campaigns. The Budget will (hopefully) be a distant memory, forgotten as the government’s policy framework takes shape. The weeks following Budgets tend to be revealing as it becomes clear which pledges might suffer at the hands of parliamentary approval, fiscal rules or a shifting economic outlook.
Barring any unforeseen shocks, the economic backdrop will likely be supportive for the government in any scenario. Landlords that aren’t forced sellers tell us they are generally minded to wait until Spring next year to launch asset sales, when the economic backdrop – and likely political stability - would support higher values.
That looks a good bet, though with debt costs now trending downwards and prime yields stabilised at higher levels, buyers able to invest today may be able to achieve historically-compelling returns. The UK economy returned to growth in August following two flat months, supporting OECD forecasts that suggest the UK will be among the fastest-growing economies in the G7 both this year and next.
Perhaps a second 100 days could be a better metric of early success. It certainly would be in this case.
