On 22nd June the youngest Chancellor for more than a century presented the first Coalition budget.

It was a balancing act, not just between the risks of a double dip recession or a Greek style financial crisis, but also between the distinct, and at times disparate, policies and principles of two political parties. Initial views are that he has managed this feat rather well although it was perhaps the easier message relative to the spending cuts to be announced in the Autumn. Overall it is unlikely that the property industry will be directly or significantly impacted by this Budget, although there may be indirect consequences in areas such as rent reviews, with financial institutions and retailers potentially using the VAT increase to apply further pressure during rent review negotiations where they are unable to recover or pass on the increase.

The phased reduction in corporation tax will be welcomed by property investors with corporate and business tenants. However, the reduction in the rates of capital allowances will impact adversely although at least these have been deferred until 2012.

There is also some good news for UK REITS as the scrip dividend changes held over from the March 2010 budget have now been included. 

The VAT increase will impact the industry where contracts or leases are with entities that are unable to fully recover their VAT, including charities, financial institutions, independent schools, housing associations, doctors, care providers and the general public. The sale of new-build homes remains zero-rated, which is good news but the Government ignored calls from the industry to add renovations and repairs to dwellings to the reduced rate of VAT, which remains at 5%.

While the standard rate of Insurance Premium Tax increased from 5% to 6%, this was significantly less than had been expected by the industry. The tax rate had not increased since 1999 and is still one of the lowest in the EU.  In many cases landlords will be able to pass on increases to the tenants and the impact on commercial property investors from this is not likely to be significant. The real effects on the industry are likely to arise from the spending reviews. With the NHS and overseas aid ring-fenced, and education highlighted as an area already under pressure, it is likely that other departments will bear the brunt of the cuts. This may mean housing and infrastructure suffer funding reductions significantly in excess of the 25% 'average' indicated.  The National Housing Federation has estimated that a 25% reduction in the housing budget will equate to 250,000 fewer new homes being built over the next decade and this will have a clear impact on the construction industry.

It is estimated that 4.5 million people are on the waiting list for housing across the country.  Combined with the reduced development from the public sector this suggests an opportunity exists for private developers but only where they are able to secure the funding for the development at a price that makes the scheme economically viable. Local government will also have a part to part to play in this process by engaging with developers on planning issues.

Overall we believe the Budget is good news for the investment property sector where the key issues are linked to funding.  With the planned cuts to public spending likely to keep interest rates at historically low levels, positive reactions to the Budget from international credit rating agencies enhancing the strength of the UK AAA rating and an improvement in confidence allowing well capitalised banks access to better international credit this should create a positive environment for property investors.