Building Bridges: How the Autumn Budget can drive Invest 2035 for UK Construction & Real Estate

The first budget of the new Labour government will mark a pivotal moment for the construction and real estate sector, following the glaring omission of Construction as one of the eight key growth sectors in the governments recently unveiled Invest 2035: UK Modern Industrial Strategy.

Sector Performance and Outlook

As we move into the autumn the construction and real estate sectors continue to experience a mixed landscape of growth and uncertainty. The Construction Purchasing Managers' Index (PMI) has maintained a position above 50 for several consecutive months and exceeded market expectations with a jump to 57 in September, marking a two-year high and the fastest upturn in construction output since June 2021 indicating continued expansion and reinforcing the sense that the sector is on the path to recovery, buoyed by improved supply chain conditions and a notable reduction in labour shortages.

This steady performance is particularly noteworthy given the backdrop of economic uncertainty and policy shifts on infrastructure spending, as well as higher interest rates and sustainability regulations.

However, there are several headwinds facing the sector. While the announcement of Labour’s housing plan has been welcomed, our clients are telling us that the uncertainty as to further announcements in this month’s Budget is causing a delay with investment decisions.

All eyes will be on the Budget at the end of the month as we wait to see if the Chancellor can conjure up a fiscal stance that will add more fuel to recovery across the economy.

Real Estate Sector

The real estate market, while still under pressure, has shown considerable resilience in the face of a cost-of-living crisis and rapidly rising interest rates, which accelerated sharply throughout 2023. House price data up to September 2024 indicates a modest increase, with average prices rising by 2.8% year-on-year, while average UK private rents have increased by 8.4%.

New mortgage lending commitments in Q2 of 2024 were up by 12.5% on the prior year, reflecting the cautious, but more optimistic approach of both lenders and borrowers contending with higher borrowing costs. The Autumn Budget may also include measures to stimulate the housing market, such as tax incentives or other financial support for first-time buyers and property developers.

The build-to-rent (BTR) sector, along with affordable housing, purpose-built student accommodation (PBSA), and retirement living, is expected to remain robust. These segments have shown strong demand despite broader market challenges, driven by demographic trends and a shift towards more flexible living arrangements. Additionally, the ongoing focus on sustainability is likely to further influence the market, with energy-efficient and environmentally friendly properties becoming increasingly desirable.

Autumn Budget and the Invest 2035: UK Modern Industrial Strategy

With a strong majority and ambitious manifesto commitments, the government launched its Invest 2035 strategy on 14th October 2024. Billed as the UK’s Modern Industrial Strategy, the initiative aims to drive economic growth through regional development, skills investment and planning reforms. However, it's particularly striking that the construction sector, despite its critical role in addressing the housing shortage and supporting infrastructure development, is not listed among the eight key growth sectors.

For the construction industry’s pivotal role to be fully recognised, the upcoming Budget must formally include the sector in growth plans. Achieving the government's housing targets will require planning reforms and significant investment in infrastructure, such as transport, schools, and healthcare, along with policies to attract businesses and create local employment opportunities.

The industry also faces an urgent skills shortage. The Construction Industry Training Board estimates a need for 152,000 more workers to meet housing targets, while the Home Builders Federation survey highlights that one in five builders is over 50, underscoring the need for fresh talent in the sector.

Recognising construction as a key growth sector in the Budget would ensure access to the necessary investment and policy support. This includes funding for skills development, incentives for sustainable 'green' construction practices, and streamlining planning processes to make it easier for firms to meet the government's housing target of 1.5 million new homes and a new generation of towns.