Catherine Penman, head of research, comments on the Comprehensive Spending Review
Date of Article
Oct 21 2010

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"The Government’s long awaited Comprehensive Spending Review has finally been published. The focus of attention has inevitably been on major issues such as Education, Transport and Law and Order, but there are to be significant consequences too for property and the countryside. Some of these may lead to a reduction in subsidies and other income; however some could also bring new opportunities for the private sector.

"DEFRA is being particularly hard hit and required to reduce its costs by 8% per annum over the next five years. The brunt of this would seem to fall on three major bodies that come within the Department’s remit: Natural England, the Environment Agency and the Forestry Commission. There are also however almost 90 other ‘arm’s-length bodies’, or Quangos, in DEFRA’s delivery network and around a third of these are already being abolished or converted into independent committees.

"Apart from staff losses and the resulting reduction in services throughout the Department, these cuts are expected to lead also to the sale of assets, such as nature reserves, and to the partial privatisation of the Forestry Commission. Concern has already been expressed that nature reserves will be exploited, and thereby compromised, if they pass into private ownership. This suggests that they will be offered as viable investment opportunities incorporating tourism for example, even if no doubt under tight planning constraints. Privatising part of the Forestry Commission implies the sale of some of its extensive land holdings which would certainly appeal to investors at a time when forestry ownership has outperformed many other types of assets. A new strategy for forestry is due to be announced by the Government later this autumn.

"Other sales are also being considered in parallel with the Spending Review as the Government is looking at disposing some of its departmental properties. This might lead to premises being sold either with vacant possession, as staff redundancies and other efficiencies are affected, or on leaseback or even packaged up as REITs. As sales are to be implemented within a defined timescale, regardless of market conditions, they could become available at relatively advantageous terms.

"Capital funding for social housing is to be cut by £4 billion and social rents set at 80 per cent of market levels. Significantly new council tenancies will no longer be for life but limited instead to such time as the occupants are able to afford to move into private accommodation. This is intended to reduce waiting lists but it could also bring new demands upon the private housing sector and upon the proportion of new residential developments that will need to be ‘affordable’. In addition, a total of 150,000 new affordable homes over the spending review period have been pledged.

"As a result of these changes, a downward effect on land values is likely where there is a significant requirement for the scheme to provide affordable housing and in particular social rents accommodation. It is anticipated that developers with as yet uncommitted schemes may seek to renegotiate the mix of tenure in favour of shared equity and discount market housing. This will probably lead to a delay in residential sites coming forward into production. The number of houses being completed has fallen dramatically since 2007 and the rate is unlikely to recover and may indeed fall further as a result of the changes announced.

"The residential market generally may be affected by the growing number of public sector redundancies and by a reduced mobility as staff are less likely to move from one job to another. Much will depend too upon how the financial world reacts to the Review and if mortgages are to become more readily available. This has yet to be seen, but as the Review fulfils most of its original targets, it is unlikely that the international markets will now react unfavourably to it. In a rural context, if sterling were to rise it could reflect upon the future value of Single Farm Payments and upon the demand for farm based tourism as demand increases for foreign holidays. On the other hand, rising unemployment and general economic unease may lead to more staycations in the UK.

"The Spending Review confirmed the coalition’s commitment to their ‘green credentials’. Fears that the £60 million investment programme to upgrade ports to support the offshore wind infrastructure was to be cut in the review were quashed with the announcement that over £200 million will be invested in manufacturing facilities at port sites and technology innovation to support offshore wind power and energy efficiency technology for buildings. This is extremely encouraging for the UK’s offshore wind industry and will provide extensive business and employment opportunities across the country.

"The announcement that the Renewable Heat Incentive will go ahead next year was, as expected, met with compromise. Rather than being funded by energy consumers, the scheme is to be funded by the Treasury and reduced in scope by up to 20%. Nevertheless the announcement is likely to reassure the confidence in SME’s to invest in the emerging renewable heat market.

"Furthermore, fears that the Feed-In-Tariff is to be scaled back were put on hold until the next formal review in April 2013, where it is likely that the rates will be rebalanced in favour of more cost effective carbon abatement technologies such as wind and hydro. In addition, the scale back in the proposed ‘Green Investment Bank’ from £2 billion, as set out in March’s budget, to £1 billion is likely to continue the financing problems associated with progressing many renewable energy projects.

"There may be a further impact upon environmental issues too. The environmental stewardship schemes will remain open to all farmers and DEFRA will also prioritise schemes that will be most beneficial to the environment, increasing the Higher Level Stewardship by 80%. One further ripple effect of DEFRA’s budget cuts seems to be the possible postponement of the unpopular project to provide coastal access around the country. Forestry grants which have already been under budgetary pressure in recent years and thereby increasingly discretionary are likely to become more restricted. Woodland owners will continue to be required to replant sites as they are felled but may no longer be able to gain grant aid to do so. As Government departments are likely to be left with insufficient resources to run environmental and conservation schemes, they may look more to farmers and landowners to implement such initiatives under their own terms, such as the current Campaign for the Farmed Environment. One particular concern is that the cost of meeting statutory controls on animal welfare and diseases will be passed onto farmers.

"The Spending Review was presented in a single sitting of the House of Commons but it has been many months in the making and will furthermore take many years to implement. During that time much could change, not least the state of the economy and public opinion, and modifications may have to be made."