ECONOMY

OBR forecasts save Chancellor from a painful Budget

The Chancellor managed to avoid a particularly painful Autumn Budget, largely thanks to a more optimistic economic outlook from the Office for Budget Responsibility (OBR). Prior to the Budget, widely publicised downgrades to the OBR’s productivity forecasts and the reversal of welfare spending reductions had led many to expect a significant fiscal shortfall. Instead, the OBR’s upgrades to inflation and wage forecasts improved the government’s revenue outlook, reducing the scale of fiscal repair required.

Rather than increasing income tax rates, the Chancellor opted for smaller tax adjustments. The most substantial measures – freezing income tax thresholds (£8bn) and NIC charges on salary-sacrificed pension contributions (£5bn) – will not come into effect until 2028–29. Overall, the OBR estimates tax changes will raise £26bn by 2029–30, offsetting an £11bn spending increase and resulting in a net tightening of fiscal policy.

Larger fiscal buffer built on shaky foundations

The key pre-Budget question was how much the Chancellor needed to hike taxes or cut spending to comply with the government’s fiscal rule to fund day-to-day spending from tax revenues by 2029–30. At the time of the Budget, the Chancellor was already on track to meet this rule, with a £4bn margin. Headroom was expanded to £22bn, above consensus expectations. This extra buffer is designed to shield government finances from future shocks and calm speculation about tax rises at future fiscal events. By reinforcing fiscal responsibility, the Chancellor aims to minimise the risk premium in government bonds and help lower borrowing costs.

The market reaction was muted, suggesting investors broadly accepted the announcements. However, questions persist about the implementation of these measures, particularly given the delayed timing of tax increases and spending cuts. Long-term debt sustainability still requires a more fundamental rethink of fiscal policy, as governments face growing demands to increase defence spending, supporting an ageing population, and supporting the green transition. Nonetheless, the government’s plans are considered sufficient for now and should help build credibility with investors. The UK’s stable debt trajectory compares favourably with countries such as France and the US, where debt pressures are more acute.

Lower inflation strengthens case for rate cuts 

The Budget is unlikely to change the UK’s growth outlook significantly. The OBR suggests government consumption and investment could provide limited short-term support. As a result of the fiscal giveaways announced, we nudged up our 2026 GDP forecast from 1.0% to 1.1%. From 2027, the impact of Budget measures fades as higher taxes weigh on consumer spending, as reflected in OBR forecasts.

Policy interventions like the energy bills support package and extended fuel duty freeze are estimated by the OBR to lower CPI inflation by 40 basis points in 2026–27. This supports the case for further interest rate cuts in the coming months, but these measures are unlikely to prompt a deeper easing cycle as they mainly affect headline inflation rather than underlying price pressures. As a result, we maintain our view that the Bank of England will lower its base rate in December and again in the first quarter of 2026 to 3.50%.

REAL ESTATE

Autumn Budget: Greater clarity (for now) 

The government’s Autumn Budget comes amid a period of economic uncertainty and political turbulence for real estate investors. Leasing conditions are supportive of robust income growth which keeps pace with or exceeding inflation. However, a cautious approach has characterised the investment market this year. Commercial investment volumes (excluding Beds) are over 20% below the post-GFC average, despite average annual asset value growth in these sectors (as measured by MSCI) hitting a strong 3.2% in Q3 2025.

Most Budget policies were widely trailed, resulting in a muted market reaction. The Budget’s moderately disinflationary stance reinforces expectations of at least two base rate cuts in the next six months. Investors have a clearer policy environment, at least for now, along with improved fiscal headroom and lower-than-expected bond issuance. These factors should support the real estate investment market in the near term by stabilising rates volatility and extending the downward trend in the cost of capital.

…but fiscal fears cloud the long-term outlook 

Nonetheless, the Budget falls short of easing worries about long-term fiscal sustainability. Many tax increases are back-dated and aligned with the next General Election, and much of the additional spending is aimed at welfare and debt interest, which do little to boost growth or productivity. Compared to the Spring Statement, borrowing is higher in nearly every year of the OBR forecast, making long-term real estate underwriting challenging as the spread between property yields and risk-free rates remains narrow.

Sectoral winners & losers 

The government’s ongoing commitment to planning reform remains critical for UK real estate, aiming to make development less risky and more predictable in high-demand areas. This should support land values and spur new-build activity. The Office for Budget Responsibility forecasts a 30% rise in annual housebuilding by 2029, with 170,000 new homes annually by 2034–35, promising improved prospects for investors in residential and mixed-use sectors. While increasing planning capacity is a positive step, delivering on these ambitions remains a challenge.

Business rates reform marks a key structural shift for commercial property, as shown by the draft 2026 ratings list and new multipliers for retail, hospitality, and large buildings. Industrial assets, which have enjoyed strong rental growth since the pandemic, will see some of the steepest rate rises, with large warehouses with rateable values over £500,000 potentially facing double-digit increases. Retail, hospitality and leisure will benefit from lower multipliers, but rental growth and the phasing out of pandemic-era relief schemes means many will still see their rates bills rise considerably over the next few years. Additionally, further increases in the National Minimum Wage and Living Wage, off the back of previous above-inflation rises, means salary growth remains a more consequential factor for many retail and logistics businesses’ occupational strategies.

In our view, the institutional residential sector emerges as a clear winner from the Budget. Higher property income taxes for taxpayers are expected to exacerbate the current trend of landlords exiting the market, driving greater rental demand towards build-to-rent and other professionally managed rental sectors. As a result, rental income growth should stay strong, underpinned by ongoing wage growth, tight mortgage affordability, and rising working-age populations in major cities.

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