On Tuesday the youngest Chancellor for more than a century presented the first coalition Budget in a little under an hour.

This 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 this was perhaps the easier message relative to the spending cuts still to be announced in the Autumn (that are to account for the remaining 77% of the deficit reduction plan).

Overall it is unlikely that the property industry will be directly impacted by this Budget to any significant degree, 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 and the relatively business friendly nature of the Budget will be welcomed by property investors with corporate and business tenants.  The reduction in the rates of capital allowances will impact on the industry but at least these have been deferred until 2012 –presumably to encourage continued investment in the short term and avoid applying a brake to economic growth until the recovery is more established.

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 (more bad news for banks), independent schools, housing associations, doctors, care providers and the general public.  The sale of new-build homes remains zero-rated, which is good news for house builders but the government has ignored calls from the construction industry to add renovations and repairs to dwellings to the reduced rate of VAT, which has remained at 5%.

While the standard rate of Insurance Premium Tax has 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 the new rate will still be 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.

While the new levy will hit the banks with a £2bn a year tax, this is not as bad as many feared.  The market reflected this with increases in the share prices of Lloyds and RBS.  By focussing the levy on bank liabilities and excluding Tier 1 capital this will provide encouragement for banks to restructure their balance sheets to increase capital reserves, which will enhance the credibility of our UK banks and should increase access to funding.

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 by George Osborne during the Budget 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 during the Budget speech.  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 above 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 this 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.