Pre-Budget 2026 insight: Property capital is plentiful. Is it pointing the wrong way?

A market holding its breath ahead of the Budget

The property finance market has adopted a wait-and-see approach ahead of this year’s Budget, with enquiries down and completions slowing. Lending appetite remains, but credit committees are increasingly cautious about committing until they understand the implications of John Healey’s announcements on 28 October and how the market responds.

Sentiment across the property finance market is close to binary with few expecting a neutral statement. It will land as hope or it will land as despair and the goodwill towards the Government going in is thin.

Waiting is a position and it is the one most of the market has taken. We think the more useful exercise is to set out what the Budget is likely to do to the flow of capital through UK real estate and what owners and developers should be doing about it before the detail arrives.

Revenue from property, delivery from the private sector

We expect the Budget to lean towards raising revenue from property and wealth while simultaneously trying to stimulate housing delivery and attract institutional capital.

However, those aims pull against each other. The fiscal arithmetic points towards assets while capital gains tax is widely reported as the front runner among the revenue options, with talk of aligning it with income tax over time. The surcharge on homes worth more than £2m is due to start in April 2028. The Treasury is reviewing how short-term lets are taxed. The one lever the market most wanted pulled, stamp duty, has been ruled out for this Budget by the Prime Minister himself.

Each of those measures can be defended on its own terms. Taken together they raise the cost of owning and holding property at the moment the Government needs private owners to fund, build and hold more of it. 

The unintended consequences could be significant: increased tax or holding costs may prompt disposals and dampen investments.

There is a second order effect worth naming, however. Disposals driven by tax rather than strategy tend to cluster around the same deadlines and clustered disposals reset valuations. A lender sizing a development exit for 2028 will price that risk into terms agreed today.

A housing target without the sites or the hands to build it

The supply side is where this Budget will be judged and it is where the problem is hardest. Several developers have mothballed sites this year. Finding new land that works at current build costs and sales values is the real constraint on the new homes target, and planning reform has yet to change that arithmetic at site level.

Even where sites are found, the industry does not have the people to build them at the pace promised. A Budget that funds delivery without tackling the construction skills shortage is paying for a pipeline that cannot be built on schedule.

On the demand side, the Your First Home scheme set out at party conference in September of this year is the most concrete housing measure on the table. It offers a 20% equity loan, interest free for an initial period, to first time buyers putting down 2.5% on a new build, with developers contributing to the running costs. Help for first time buyers is the intervention most likely to arrest the slowdown in the housing market and the lending market wants to see it.

The familiar objection is that demand support without new supply simply lifts prices. True, in a market where supply is fixed. On many stalled schemes today, the binding constraint is sales risk on the later phases. A scheme that de-risks absorption can move a mothballed site back into the viable column. That is the test Your First Home has to pass, and the income and price caps still to be published will decide whether it does.

The rate market may be pricing the wrong shock

The Bank of England held Bank Rate at 3.75% on 17 September, its sixth hold in a row, with three of the nine members voting for an increase. CPI inflation rose to 3.1% in August 2026. Markets now expect a first rise as soon as November, driven largely by energy prices pushed higher by conflict in the Middle East.

That expectation has already done damage. New business was meant to be the focus for lenders this autumn. The shift in rate expectations has stalled it, and pipelines built on the assumption of easing through 2026 are being reworked.

Our reading is less hawkish than the curve. The wider economic research is still finding limited evidence that higher energy costs are feeding through into underlying inflation. A weaker labour market, slower wage growth and productivity improvements are offsetting some of that pressure. If that holds, the tightening now priced in may prove shallower or shorter than the market assumes.

For borrowers, this is a question of timing. Fixing a five-year facility at today’s priced outlook is a bet but so is deferring a refinancing in the hope of cuts that may not arrive. Neither should be made by default, and both deserve a view on inflation that goes beyond the headline print.

Two capital markets and a widening gap

UK real estate remains investable. For the right deal, investors still see UK bricks and mortar as a sound home for capital and the living sector in particular, spanning build to rent, single family housing, student accommodation and later living, is regarded as a positive allocation.

That appetite is real. It is also narrow.

We see pension capital continue to favour income-backed living assets over speculative development. This risks widening the gap between capital available for stabilised assets and funding for schemes still carrying planning, viability and construction risk.

And this is the structural point the Budget debate tends to miss. The Government’s housing ambitions depend on the very schemes institutional capital is least keen to fund: those yet to secure planning, those where viability is marginal and those still to be built. Capital is abundant at the far end of an asset’s life and scarce at the start.

A tax regime that raises holding costs makes stabilised income look relatively more attractive still. The effect is to pull more money towards the end of the market that needs it least. Forward funding, forward purchase and public co-investment can all bridge into development risk. The question for 28 October is whether the Budget uses them for that purpose or adds more money to the queue for completed stock.

Distress is a timing problem first

We are seeing more distressed real estate situations. That is less alarming than it sounds. Distress describes a position under strain, and many positions under strain have a solution: an extension, a recapitalisation, a partial disposal or a refinancing into a different lender or structure.

What decides the outcome is time. A borrower who engages with a lender six months before a covenant breach has options. One who engages after it has fewer, and most of them belong to the lender. Early engagement is the most valuable thing an owner under pressure can do this winter, and the Budget is a natural prompt to start that conversation.

What the capital stack has to do now

“For developers, the ability to structure the right combination of senior debt, mezzanine, preferred equity and public-sector support will become increasingly critical to getting schemes delivered.”

In practice that comes down to four disciplines.

• Build the stack around where the risk sits. Senior lenders will price construction and sales risk conservatively until the rate path is clearer. Mezzanine and preferred equity can carry the layer senior debt will not, at a cost that has to be tested against the scheme’s real margin.
• Treat public support as part of the capital structure. Buyer equity loans, infrastructure funding and public co-investment change absorption assumptions, which in turn changes what a senior lender will advance.
• Stress test against two rate paths. The one the market is pricing and the one the inflation evidence points to. A structure that only works under one of them is fragile.
• Move before the market resets. Credit committees will recalibrate appetite in the weeks after 28 October. The first schemes through the door with a coherent structure will set the terms for those that follow.

What to watch on 28 October

• Capital gains tax. Any change to rates or to the treatment of gains on death, and whether transitional rules trigger a wave of disposals.
• Your First Home. The income and price caps, and the size of the developer contribution.
• Supply. Any funding for construction skills, site assembly or infrastructure tied directly to housing delivery.
• Institutional capital. Whether measures to attract pension and long term money reach development risk or stop at stabilised assets.

Seeing it differently

Most pre-Budget commentary will grade the statement as good or bad for property. The more useful test is where it moves capital, however. We expect money to keep flowing to stabilised, income-producing living assets and to keep hesitating at the start of the development cycle. Schemes that bridge that gap will need a structure built for it, and the intelligence to know which capital will take which risk.

That is where our real estate team is spending its time. If the Budget changes the numbers on a scheme or a refinancing you are working on, talk to us before the market settles on its view.

Reference: 

• Bank of England MPC decision via MoneySavingExpert
• Your First Home via LBC 
• HomeOwners Alliance