When then UK prime minister Liz Truss signed off on her chancellor Kwasi Kwarteng’s mini-budget in September, it was seen as revolutionary by her supporters, disastrous by her opponents. We all know what happened next: sterling crashed, the yield on British government debt spiked and Kwarteng was out of a job within days with Truss soon to follow.
It’s rare to see markets react with such immediate venom to a western government’s move. The Bank of England’s decision to step in to stabilise the UK bond market and in effect prop up struggling pension funds in the aftermath of the mini-budget was already a reaction for the ages. Now, data from the UK property market shows another aspect of the near-meltdown caused by what the government at the time had dubbed a “fiscal event” rather than a budget.
Sales of offices in London essentially stopped during the final three months of 2022, according to data firm CoStar. Dealmaking in the sector fell a whopping 88 per cent compared to the previous quarter, to about €450 million. The drop, which was worse than at any point during the pandemic, is even more incredible when one considers that the final quarter of the year is traditionally one of the busiest as agents sprint to get sales over the line before year end.
While the Truss government’s budgetary moves have essentially been reversed at the very least by now, problems in the wider UK commercial property market continue, as rising interest rates and a struggling economy make it harder for cash-needy investors to offload real estate quickly. A slew of UK-focused property funds limited withdrawals in October and more have joined them as pensions funds and other investors seek to raise cash. BlackRock’s UK property fund is deferring withdrawals that would normally have been paid at the end of December while, closer to home, the Business Post reported that New Ireland (owned by Bank of Ireland) has slowed withdrawals from a smaller European real estate fund.
The dislocation in the commercial real estate market may have begun with Kwarteng’s mini-budget, but it hasn’t ended. There may be some way for this story to run yet.