What Next for the UK Economy?

Economic

Summary:

In this Interview, our Deputy Director for Macroeconomics, Stephen Millard, talks to Senior Economist Max Mosley about the outlook for GDP, the budget and where the government should now direct its focus.

GDP growth was strong at the start of the year but seems to have slowed down of late. Why is this?

The overall UK economy had a strong start to 2024, recording substantial GDP growth of 0.7 per cent and 0.5 per cent in the first two quarters, respectively, but growth has fallen in the second half of this year.

While part of the initial rise reflects a bounce-back recovery from a technical recession at the end of 2023, it was driven by strong consumer sentiment on the demand side and was helped by construction and production firms on the supply side. Most of the strong start however came from the services sector, which we estimated to have driven the majority of the growth in the first quarter and almost all of the growth in the second quarter.

Since then, consumer sentiment has fallen sharply, with the GFK consumer confidence index, which had been slowly increasing from the pandemic, falling back from -13 in August to -21 in October. This led to a modest fall in per person spending and a rise in household savings. On the supply side, we estimate that service-sector growth fell from 0.6 per cent in the second quarter of 2024 to 0.2 per cent in the third quarter, resulting in a fall in aggregate GDP growth. Moving forward, we expect growth to rise to its annual trend rate of 1.2 per cent.

Will the budget improve UK growth?

While the OBR was positive about the budget’s impact on short-term growth, it was fairly pessimistic about the impact on by the end of their five-year forecast. Some may be surprised by this given the central role accorded to long-term economic growth by the Chancellor in this particularly expansive . While the significant injection of demand will boost growth in the near term, the OBR projects that it will have little impact on GDP five years out.

There are potentially a few reasons for this:

While this is an expansionary budget, the increase in investment is not that large, just keeping public investment as a percentage of GDP flat over this parliament, as opposed to the falling profile for this ratio the government had inherited. It may be that this first increase in investment is not sufficient as yet to start to influence the wider economy. But it is quite likely that this is just the beginning of the government’s ambitions for investment and more will be coming.

Part of this may be down to the horizon we’re considering here, as most investment projects will struggle to deliver returns within a five-year horizon.

The OBR recognise that public investment will lead to higher growth outside the five-year forecast period but this will not influence the short-run forecast given that they do not anticipate a supply-side effect within that timeframe.The OBR also suggest that, because the economy is close to full employment, the effect of an expansive investment package like this can actually crowd out private investment, given shortages in the supply of available workers.

There has been much discussion amongst economists about how the OBR calculate ‘multipliers’ from investment projects which drive the strength of assumed returns from investment. Before the budget the OBR produced a timely document that outlined how they assumed investment influences the wider economy in their forecasts. It was clear that while investment increases future GDP in their forecasts, it does so by less than some other forecasts assume. In particular, the IMF assume much greater investment multipliers than the OBR.

Previous NIESR research has argued that the OBR paper does not sufficiently account for ‘second round’ effects, which are the responses from firms and households to increased public investment. For example, there could be increased business investment as a result of improved infrastructure, or labour supply from households if commuting times are . On the other hand, recent NIESR research has found multipliers broadly in line with the OBR.

What do you make of the change of debt target from ‘Public Sector Net Debt excluding the Bank of England’ to ‘Public Sector Net Liabilities’?

Before we get into the detail of what these changes mean (and don’t mean), let’s put this particularly technical change into the wider economic context.

Growth in UK productivity (what we produce with what we have) has been weak since 2008, much weaker than the OECD average, which has suppressed economic growth and has meant that real wages remain at a similar level today to where they were before the financial crisis. One of the potential drivers behind this is low public investment, which both contributes to growth itself and can also crowd in business investment.

While this has been a long-term challenge, one of the reasons for low public investment over the past few years is how we deal with debt in the . To ensure sustainable public finances, previous governments have imposed on themselves fiscal rules that mean debt to GDP has to be falling within a five-year window. The amount by which debt will fall at the end of this window defines how much spare borrowing/spending power the government has. This has disincentivised public investment which doesn’t enhance GDP in that timeframe, while adding to debt.

NIESR has strongly advocated changing these rules to ensure investment isn’t constrained in this way. Before the election, the then Shadow Chancellor said she would make a small tweak to these rules, but this simply made it easier to borrow to invest, it didn’t change the fact that borrowing to finance this investment was still constrained if it did not deliver unrealistically quick returns.

The Chancellor decided to make further changes at the budget, likely due to the challenging state of public finances and the need for further investment. In particular, she changed the definition of debt in the rule. This increased the amount the Chancellor could borrow without falling foul of the new rule by nearly £50 billion, enabling the expansion in public investment.

While this is welcome, we should keep in mind that the new definition allows the government to ‘net off’ only financial assets from its debt rather than non-financial assets (for example, infrastructure), which are the most growth enhancing. This may result in the government being placed back into the situation where needed investment is constrained by spending rules in the near future, as the newly generated headroom has already been used up, and the new rules will then constrain infrastructure investment given they do not allow for the government to net out the benefits.

And finally, with the Budget out of the way, what do you think the government should focus on now?

It is understandable that the budget focussed more on stabilising public finances with changes to spending rules and tax rises and growing the economy with investment. One question remains that remains is this: what should future budgets focus on, and what should the government do now?

With reformed fiscal rules, notwithstanding the above critique, it is likely that the government will turn its attention to another factor constraining the UK economy, which is planning. There are growing calls for more liberalised local planning regulations from both housing experts who point to these regulations as a source of constrained housing supply and economists who attribute some of the weakness in productivity growth to over-burdensome planning constraints.

One example of this is the planning documents for the Lower Thames crossing tunnel project costing more than twice what it cost the Norwegian government to actually build the longest road tunnel. What is typically a local issue is becoming more of a concern to central government, so it is likely that lifting of the onshore wind ban is just the start of a set of reforms to planning rules.

I also think the government needs to turn its attention to the welfare system. We have explored this through our UKRI funded Living Standards Review project. Without giving too many spoilers away, a key theme that has emerged is how effective removing the two-child benefit cap could be at raising incomes and reducing poverty while costing a fraction of similarly effective social policies. I would be very surprised if this change isn’t made at some point over the next parliament.

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ING

Economic

Bond

ESG issuance falls short to last year

For the first time in a decade, the supply of EUR sustainable bank bonds will not surpass the previous year’s volumes. With lending growth stagnating and overall supply activity by banks slowing down, ESG bond issuance by banks in 2024 is likely to end the year close to €75bn.

Banks globally have issued €70bn in EUR-denominated ESG bonds so far this year, down from €74bn last year. Covered bonds and preferred senior unsecured bonds represent 27% and 26% of the year-to-date ESG print, respectively, while bail-in senior issuance makes up 40% of the green and social use of proceeds supply. Subordinated bonds and RMBS have a modest share of 5% and 2%, respectively, in the 2024 ESG print of banks.

Lower issuance by banks will coincide with less ESG supply in 2025

Less Sustainable Issuance By Banks In 2025_1

Source: ING, *) Only bonds included with a minimum size of €250m

The slower ESG issuance by banks this year has been well spread across the different use of proceeds categories, with green, social and sustainability issuance all three slightly below last year’s YTD print. Green issuance still represents the bulk of the ESG supply with a share of 79%, followed by social issuance with 18%. Sustainability (i.e. a combined green and social use of proceeds) only made up 2% of the ESG issuance.

This shows that social bond issuance continues to struggle to gain momentum following the surge after the Covid-19 pandemic. Part of the reason is the stronger regulatory emphasis on green bonds, as outlined in the EU taxonomy regulation and the EU green bond standard.

In the unsecured segment, the proceeds use remains predominantly green. However, in covered bonds, social issuance is keeping better pace with green issuance. For example, social and sustainable covered bond issuance has reached nearly €8bn YTD, surpassing the €6.5bn in unsecured social and sustainable issuance. In contrast, the €11bn in green-covered bond issuance is only a quarter of the unsecured green supply.

Green will remain the dominant use of proceeds type

Less Sustainable Issuance By Banks In 2025_2

Source: ING, *) Only bonds included with a minimum size of €250m

The 2025 ESG print by banks will fall to €70bn

We anticipate a slight decrease in ESG supply by banks in 2025 compared to the previous year, with expected ESG issuance around €70bn. Of this, 80% is projected to be in green format. Banks are expected to issue €20bn less in total (including both vanilla and ESG bonds), and lending growth is forecasted to increase only gradually next year. Hence, sustainable loan portfolios will see modest growth.

Banks may find opportunities to further grow their sustainable assets through the criteria set in the EU Taxonomy’s environmental delegated act (e.g. to support the circular economy), but climate change mitigation will remain the key driver of green supply.

ESG redemption payments will rise from €15bn to €34bn. This will also free up sustainable assets for new ESG supply, but probably not for the full amount due to the changes made to some of the green bond eligibility criteria since the bonds were issued.

Banks will repay €34bn in sustainable bank bonds in 2025

Less Sustainable Issuance By Banks In 2025_3

Source: ING, *) Only bonds included with a minimum size of €250m

Limited issuance expected under the EU green bond standard

As of next year, banks can also opt to issue their green bonds under the EU green bond standard. Considering the low first green asset ratio (GAR) disclosures by banks this year, we doubt we will see a lot of bank bond supply under this standard. Based upon the Pillar 3 disclosures of a selection of 45 banks, the average Taxonomy alignment of bank balance sheets per country varies in a low range of 1% to 8%.

Green asset ratio disclosures point to low Taxonomy alignment

Less Sustainable Issuance By Banks In 2025_4

Source: Issuer Pillar 3 disclosures of 45 banks (1H ’24), ING

Given the low reported EU Taxonomy alignment of banks’ mortgage lending books, many banks may struggle to assemble a sufficiently large portfolio of Taxonomy-aligned assets to support green issuance under the EU GBS format. This is unless they are confident in the growth prospects of their Taxonomy-aligned assets within five years of issuance, particularly for standalone deals where a portfolio approach is not used.

Loans to households have a low Taxonomy alignment

Banks have few renovation loans outstanding and they are almost 0% taxonomy aligned

Less Sustainable Issuance By Banks In 2025_5

Source: Issuer Pillar 3 disclosures of 45 banks (1H ’24), ING

Regulatory initiatives, such as the Energy Performance of Buildings Directive (EPBD), promoting the renovations of buildings within the EU, should in time see the portfolios of Taxonomy-aligned assets grow. Given the timelines set, this will not be a major support in 2025.

To encourage banks to provide lending for the renovation of the worst-performing buildings, the European Commission is working on a separate delegated act for a comprehensive portfolio framework for voluntary use. The response period for the European Commission's call for evidence on the portfolio framework ended on 5 November, with the Commission now aiming to launch a public consultation on this topic before year-end.

Timelines under the Energy Performance of Buildings Directive

Less Sustainable Issuance By Banks In 2025_6

Source: European Commission, ING

Banks with a more balance sheet size and the ability to select enough Taxonomy-aligned assets for a benchmark-sized deal are likely to be among the first to test the waters by issuing bonds under the EU Green Bond Standard.

For the issuance of bonds with a longer maturity, banks may wish to finance a distinct set of Taxonomy-aligned assets rather than allocate their bond proceeds to a portfolio used for multiple European green bonds (ie portfolio approach). If the EU Taxonomy technical screening criteria are amended, assets not meeting the amended criteria can stay part of the green portfolio for seven years at most. Instead, standalone deals will in principle keep their EU green bond status based on the old technical screening criteria if these are amended before the bond's maturity.

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Risk Warnings and Disclaimers

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UBS

Economic

With a strong long-term growth potential and a distinct social angle, the life sciences sector is developing at a fast pace. Forward-thinking investors are looking for ways to enter this growing niche sector. But access is selective, and industry expertise isn’t enough to be successful. What does it take?

UBS Asset Management, Real Estate & Private Markets (REPM) life sciences experts Gijsbert van Riemsdijk, Ellie Junod, Olafur Margeirsson and Alice Bennett-Morris discuss the sector’s dynamics and give an outlook into what the next few years might look like.

What are the main macro-drivers behind the life sciences sector’s growth in Europe?

Olafur Margeirsson:

The COVID-19 pandemic undoubtedly focused attention on the life sciences sector in Europe and made clear that it is of “geostrategic importance”. Besides providing necessities (medicines), the sector accounts for more than 5% of value added in the EU economy and is behind 11% of all exports. Over the last two decades, exports of pharmaceuticals from the EU have grown by 8% p.a. Nearly a million people are directly employed by the sector and it is in the top quantile amongst all industries in terms of long-term employment growth in the EU.

By 2050, 16% of the world’s population will be over 65, versus 10% in 2022, creating a larger patient base for chronic diseases. Growth in disposable incomes in emerging markets is also contributing to a larger global healthcare market, as more of the population can afford increased spending on health.

Underpinning these demographic trends is a sharp increase in R&D (research & development) spending within the industry. This drives employment in R&D, which is accelerating: employment in pharmaceutical R&D in Europe grew by 1.6% p.a. for the first two decades of this century but has accelerated since to 2.2% p.a.

In summary, the sector is of geostrategic importance for Europe, it’s long-term growth potential is driven by strong demographics and its growth momentum is positive.

Where do European markets sit compared to other global life sciences markets?

Olafur Margeirsson:

The global pharmaceutical industry is the fourth largest market in the world in terms of net sales, with ~15% of sales in Europe, ~65% in the US and the rest of the world accounting for ~20%. The market as a whole is expected to grow by 8% p.a. in the 5-year period ending in 2027 and to continue growing on the back of demographic tailwinds after that. Around 20%, ca. EUR 47 billion in 2022, of global R&D in pharmaceuticals takes place in Europe. Within Europe, Germany and Switzerland contribute ~20% of R&D in the sector with the UK delivering ~15%.

Importantly, it is worth remembering that the European life sciences market, including its R&D activities, is fragmented. One reason is the lack of common regulation, an issue less known in e.g. the US or the UK which applies a single national regulation of the industry. The problem is well known and the European Commission has started a reform of the EU pharmaceutical legislation. For example, one of the aims is to “continue to offer an attractive and innovation-friendly environment for research, development, and production of medicines in Europe.”

What makes this an attractive real estate asset class to invest in today?

Gijsbert van Riemsdijk:

There are several factors which make this niche area worth exploring in today’s market. Across Europe, the clear mismatch between supply and demand of space makes investing attractive. In our view, risk-adjusted returns can be strong, as the rental growth potential given by occupational demand is expected to outweigh supply in the near future. It’s also worth noting that with the recent macro shocks to the market and the subsequent impact on the traditional real estate sectors, we see life sciences as more defensive because of this rental growth potential and supportive market dynamics. At the same time, the structural drivers discussed previously by Olaf, along with being more defensive with regard to the lifestyle changes caused by COVID-19 to other sectors and the social impact angles, all add to the attractiveness of the asset class.

With many schemes now being marketed with a life sciences angle, do you believe there is an oversupply risk?

Olafur Margeirsson:

Europe has not seen the same boom-bust dynamic as the US, where life sciences vacancy rates are around 16.7%, has. The construction pipeline in the US is larger than in Europe despite the high vacancy rates (speaking volumes about the confidence in the long-term growth of demand). European leasing demand was also more resilient but the contraction in venture capital funding hit the sector hard in the US: net absorption turned negative. Consequently, while the US have seen double-digit vacancy rates in multiple markets (nearly 40% in Chicago), European markets have seen nothing like that, seeing vacancy rates usually around 5% or less.

Companies’ space requirements are also generally not being met in Europe. As an example, around middle of 2023, at the low point of VC funding in Europe, the active requirements of companies searching for space in the Golden Triangle was around 30% of existing stock. This requirement was not being met due to shortage of space. We therefore conclude that there is plenty of room for the supply side to grow before oversupply becomes a problem especially since the supply pipeline contracted between 2022 and 2023. The vast remainder of the pipeline is delayed due a challenging planning environment, build cost inflation and the price of debt.

What has happened to VC funding in 2024 and how has it affected tenant demand?

Olafur Margeirsson:

Venture capital funding for life sciences in Europe reached approx. EUR 10 billion in 2021, a record year. It dropped to EUR 6.8 billion in 2022 as interest rates hit and startups, and other companies, went through repricing. It marginally grew again YoY in 2023 by 2%. As of middle of October 2024, it stands at EUR 6.3 billion and may reach ca. EUR 7.7 billion by end of the year, a potential expansion of ~10% YoY. Annual growth in VC funding since 2013 is now 15% p.a.

The VC funding cycle is therefore starting to support the leasing market dynamics. We see this in key leasing markets where rents are flat, despite the drop in VC funding, and vacancy rates remain low. We also believe that there is pent-up demand in place from previous funding rounds where companies have not managed to find the appropriate space due to shortage.

Finally, it is important to remember that VC funding is not everything. Public institutions (e.g., hospitals and universities) and large corporations still need life sciences real estate to conduct their research, regardless of what is happening in the VC space. After all, the approx. EUR 47 billion that went into R&D in pharmaceuticals in 2022 was not only financed with VC funding.

As a niche and new sector, what is the best way for investors to access the market?

Ellie Junod:

Access to this market isn’t easy, as the current available supply is quite limited and often controlled by institutions which are selective in terms of who they want to partner with or sell to. As an investor, it’s crucial to show reliability, ability to deploy capital, a relevant track record, and an ability to support the wider cluster. We also feel that due to the limited amount of fit-for-purpose existing stock available today across Europe, a development-led approach is the best way to access the market. As there have been limited options available, companies and occupiers have been forced to retrofit older buildings or take sub-optimal space in order to continue their operations. Assets like these have the potential to become obsolete as the market evolves. We think there is a real opportunity to develop ground up, to create future-proofed smart buildings that offer occupiers what they need both today and in the future.

What sets UBS’s expertise apart from other competitors in this space?

Gijsbert van Riemsdijk:

Being part of the wider UBS Group gives us access to significant breadth and depth of life sciences expertise not typically available to real estate managers. Our Investment Bank has extensive research capabilities in the space, as well as being a market leader on the banking side, advising healthcare companies across IPOs, M&A, debt advisory and more.

This allows us to enhance our understanding of the complexities in the space, as well as understand what drives these companies and how to analyze industry trends and growth. We also have teams focused on healthcare venture capital and private equity investing within our own REPM business, who support our team on the sector head and tail winds, and keep us informed of the funding landscape – a crucial leading indicator for the real estate market.

We’ve made progress to provide a proof of concept, de-risking our UK portfolio from planning risk and delivering our first Good Manufacturing Practice (GMP) facility. Going forwards, our European focused strategy aims to continue the consistency, quality of design and delivery of our successful UK strategy, whilst also partnering with local specialist developers.

Labs and manufacturing facilities demand higher energy usage than typical office or retail buildings. Can they be environmentally friendly?

Alice Bennett-Morris:

It’s true that these facilities are energy intensive, and it’s also true that the specification and construction techniques for these facilities are rapidly evolving. When initially moving into this space, it was really important to UBS to make sure the facilities we constructed could still meet key environmental standards. We have found that it’s certainly possible to enable these buildings to be both constructed and operated in an energy efficient manner.

A few examples include our GMP facilities having no gas boilers and instead using heat pumps, furthermore we would aim to have a significant amount of photovoltaics on the sites. The strategy will target high environmental credentials, such as EPC A or equivalent and BREEAM ‘Excellent’ as well as developing space that is net-zero enabled. What’s important to note is that as a landlord, we can enable the buildings to be energy efficient, but ultimately the tenant is in control of the operation, and hence tenant engagement remains key to keeping these buildings green. In line with this, the strategy has developed an occupiers framework which will be referenced in all new leases signed across the portfolio. This ensures that ESG factors are considered and implemented during the operation of facilities.

What are the social benefits to investing in life sciences real estate?

Alice Bennett-Morris:

The life sciences sector exemplifies the mutually beneficial relationship between social responsibility and commercial success. The improvement of society is inherent to the life sciences sector’s pursuit of developing treatments that extend and enhance human lives. Thus, real estate has a key role to play to help facilitate the growth and expansion of the sector by providing buildings to allow research, development, and manufacturing to take place that are fit-for-purpose, well located and environmentally friendly. Follow-on social benefits include the potential for facilities constructed to significantly reduce the costs of goods for occupiers, passing on savings to end users and patients, and making new and curative therapies more affordable in the market, supporting their viability.

Furthermore, by creating this space, we are supporting growth in skilled employment opportunities for the local and national economies. As these facilities scale up, they require more people to operate them and to be trained across a number of skilled roles in the industry. We have worked to provide data looking to quantify the social characteristics and provide that to investors throughout the year, such as the number of skilled jobs created or the percentage of space let to SMEs. Indeed, in line with our commitment to Article 8 of the EU Taxonomy, we have a particular focus on delivering social outcomes.

How do you see life sciences real estate evolving in five years-time and what developments can we expect within the sector?

Ellie Junod:

Over the next five years we see the European life sciences real estate market moving closer to the more mature markets in the sense that it will become an established sub-sector within its own right. But as with the US, the market will remain relatively niche – the very specialist nature of life sciences work will constrain it to the key cluster locations. So it won’t become a mainstream asset class in the sense of retail, office or logistics space.

Also following the model of the US market, we expect several key developers to emerge, who have forged strong relationships with the key occupiers and institutions in the main markets, and can be relied upon to deliver the time-critical space to enable further expansion within the sector. In this regard, the market may consolidate from where it is today, in order to meet the needs of occupiers.

And we expect with further growth in the supply of life sciences real estate, that Europe will enhance its credentials as a life sciences market globally. We also believe that GMP will be an increasingly important component of the market, as the companies receiving VC funding today get closer to commercialization and will need to have manufacturing facilities in place to progress through the clinical trials and into commercialization. Moreover, with increasingly personalized treatments and the growth of Advanced Therapy Medicinal Products such as Cell and Gene Therapy, we expect this to drive further demand for GMP facilities.

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Brookings Institution

Economic

Energy

Home to the world’s first ever 3D-printed school, Africa is a hotspot for digital transformation in the construction industry. For example, 14Trees, an Africa-founded joint venture between Holcim and British International Investment, is revolutionizing the construction industry through 3D printing technology. The company printed the walls to build new schools in Malawi and Madagascar in 18 hours and continues to scale into more construction markets, including building a 52-house complex in Kenya. It is estimated that using conventional methods, it would take 70 years to build the number of classrooms UNICEF estimates are needed to meet the current classroom shortage in Malawi, but 14Trees says that with its technology, that gap could be bridged in just 10 years.

As I describe in my book, Africa’s Fourth Industrial Revolution, such African-led innovation is the result of unique dynamics on the continent that make Africa a potential leader in the construction industry. Advanced technologies are radically changing the construction industry landscape on the continent, which is particularly timely given that 1,000 large building construction projects worth $812 billion are scheduled or ongoing as of 2024. These major undertakings include housing, business parks, data centers, healthcare infrastructure, and ICT projects.

Growth in African infrastructure demand

The African infrastructure and construction sector is rapidly expanding to meet the demands of a growing population, which is expected to reach 2.4 billion by 2050. In addition, Africa is rapidly urbanizing, with African cities growing by more than 160 million inhabitants between 2015 and 2023 and urbanization rates expected to reach 60% by 2050. This rising demand brings challenges: According to the African Development Bank, the financing gap for infrastructure development requires a mobilization of $100 billion per year.

Digitization of the construction industry

Advanced technologies are changing the way new infrastructure and construction projects are implemented, boosting productivity and reducing costs. Between 2020 and 2022, investors poured $50 billion into the global construction technology market, signaling increasing trust in advanced technologies to deliver solutions across the industry.

Augmented reality helps with urban planning, while 3D printing, AI, and blockchain help streamline construction contracting and overall building design. IoT and sensor technologies track energy usage and make it possible to build energy-efficient buildings, and IoT and AI together can help improve economies through long-term cost savings, improve health through better air quality and lighting, reduce environmental impacts by lowering energy consumption, and improve urban development through more efficient land use.

As an example, Botswana has integrated the use of drones, 3D printing, and green technologies to make water, energy, and resource infrastructure more efficient, primarily in private sector-funded smaller projects that tend to be more labor-intensive.

Green building technologies

Africa’s construction industry has the potential to act as a powerful example of the green building revolution, particularly since 70% of Africa’s 2040 building stock has yet to be built. Widespread pressure is currently being put on the industry to reduce both waste and carbon emissions, given that the global construction industry is responsible for 40-50% of global emissions.

Africa can chart its own path within green construction by integrating new green techniques into its construction industry from the beginning, rather than following the path of the Global North. By leveraging its large youth population and the natural resource endowments that span the continent, Africa can use cutting-edge technologies to green the building sector. 3D printing, for example, has been found to reduce the carbon footprint of building a house in Africa by 48% and to reduce construction time by 70%.

South Africa’s construction market, valued at $25.5 billion as of 2024, is an example of a lucrative target for green building technologies. According to the International Trade Administration, South Africa already has a higher growth rate of green buildings compared to other regions such as Europe, the United States, Australia, Singapore, and Brazil.

Strategies and looking ahead

The construction industry has historically been slow to adapt to new technologies, but Africa’s growing demand will require accelerated adoption. This means African countries should commit to long-term strategies to integrate Fourth Industrial Revolution (4IR) technologies, systematically assess which technologies best suit their specific national context, and maximize technology transfer opportunities.

First, African governments need to focus on creating and committing to long-term strategies to leverage 4IR technologies within the infrastructure and construction industries, rather than relying on electoral politics to spur change. 19 African countries have held or are expected to hold presidential or general elections in 2024, two-thirds of which are scheduled for the last quarter of the year. National elections have typically led to an increase in government spending on infrastructure projects, which can drive up demand for construction.1 While investment is critical, elections are also a good time for leaders and civil society to frame the conversation beyond just infrastructure building and to focus more on policies for modernizing, digitalizing, and greening infrastructure and construction. Given the long-term nature of infrastructure projects, they require a commitment that lasts beyond an election cycle and is embedded within a country’s long-term strategy.

Second, as part of such long-term commitments, African countries should systematically explore and assess which technologies best fit within their specific construction industries. Each country’s unique position, from its endowments in natural resources to its tech hubs, will imply different strategies for tapping into the most effective 4IR green technologies.

For example, certain African countries might find it most advantageous to invest in localizing materials for 3D printing through financial incentives and policies aimed at supporting local manufacturing. The development of geomaterials and local bio-based or recycled materials that can be used for 3D printing can significantly decrease costs, which is often cited as one of the main challenges to expanding 3D printing within the African construction industry. Technologies that produce local materials for 3D printing such as green cement now represent an important market in Africa as countries seek to reduce their dependence on imports from firms in Europe and North America. Replacing conventional cement with new materials such as geopolymers further reduces greenhouse gas emissions from 3D printing houses by up to 80%.

Third, as Africa continues to partner with other regions, African countries must strategize to maximize technology transfer opportunities. For example, African countries partner extensively with developed economies such as the United States and China, which use advanced construction technology. Expertise from such economies could be better leveraged by African countries through technology spillovers and university-industry linkage structures.

Good governance, investment protection laws, and effective regulatory systems will also be key for African governments to find niches within the 4IR that can serve as entry points for domestic and international companies within the construction industry. With a strategic, long-term vision for a green, 4IR-driven construction industry, African countries can bridge critical gaps in infrastructure. From homes and schools to roads and bridges, Africa is poised to move the continent toward becoming a global leader in the implementation of high-impact construction technologies.

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Bruegel

Economic

One might expect the president of the European Commission, Ursula von der Leyen, when instructing the European Union’s incoming competition commissioner, to take a stand on whether competition enforcement should be weakened in order to grow large European firms, or whether that goal is best achieved by maintaining vigorous competition enforcement (as concluded by former European Central Bank president Mario Draghi in his September report to von der Leyen; Draghi, 2024) . But von der Leyen equivocates and does neither, leaving the commissioner-designate, Teresa Ribera, great latitude in her policy choices.

In her mission letter to Ribera , von der Leyen begins with “Europe needs a new approach to competition policy – one that is more supportive of companies scaling up in global markets, allows European businesses and consumers to reap all the benefits of effective competition and is better geared to our common goals, including decarbonisation and a just transition”. This is a sentence of two clashing parts.

In noting that competition policy should help companies scale up, von der Leyen seems to advocate a significant departure from past practice and favour more state intervention in markets. This could be read as support for industrial policy that allows anticompetitive mergers though, as a formal matter, there is no need to weaken competition enforcement to support European companies that want to grow abroad. Many policies, from setting industry standards to encouraging foreign joint ventures to R&D subsidies, will help companies grow. More importantly, coddling a domestic firm at home by protecting it from competition is unlikely to help it achieve success when it meets rivals abroad.

Von der Leyen then takes a more pro-competitive direction in calling for effective competition that “…allows European businesses and consumers to reap all the benefits of effective competition and is better geared to our common goals.” Here we see the correct understanding that a weakening of competition enforcement would harm European consumers. Vigorous competition helps consumers and local businesses by generating lower prices and more innovation and quality. This latter part of the sentence implies that Ribera should not weaken competition enforcement. The very end of this interesting sentence – “including decarbonisation and a just transition” – goes further and suggests competition enforcement should be used not only for the traditional reasons but also to help with a fair green transition.

Industrial policy

Once the green transition is part of the instruction, the role of competition policy broadens beyond competition enforcement. Competition enforcement is one of the three parts of competition policy, the others being regulation and industrial policy. Enforcement is the most prominent segment of competition policy because it governs mergers, antitrust cases and cartels. Regulation of digital monopolies is already assigned to the Commission’s competition directorate-general through the Digital Markets Act (DMA, Regulation (EU) 2022/1925). In addition, it may be a good idea to give the competition commissioner more oversight of industrial policy.

Traditional state aid is an anticompetitive form of industrial policy because it involves one EU country giving money to a local firm so that it can obtain market share in unfair competition against firms from other EU countries; for this reason, such aid breaches European competition law.

But competition policy also includes pro-competitive efforts by governments to fix markets that are broken – which is useful industrial policy (Scott Morton, 2024). Broken markets can be made more competitive through lower entry barriers, better public goods or more efficient workers, among other policies, and these improvements often require government action. By flagging the need for Europe to use the principles of competition to help with the green transition, the mission letter endorses this form of pro-competitive European-wide public aid. Ribera may want to take advantage of this opportunity to rebrand EU-wide industrial policy that increases competition with a different, catchy name, and reserve ‘state aid’ for member state subsidies that distort competition.

The letter asks for adoption of many of the novel ideas in the competition chapter of the Draghi report (Draghi, 2024). These actions are likely to strengthen competition enforcement. Finding ways to enforce against killer acquisitions and strengthen and speed-up enforcement would be excellent steps. Likewise, enforcing the EU Foreign Subsidies Regulation (Regulation (EU) 2022/2560) to ensure competition is fair will be difficult but critical.

Tough tasks

One of the most challenging tasks assigned to the incoming commissioner will be coordinating with global authorities in the enforcement of the DMA. Sophisticated global digital platforms are likely to play off jurisdictions against each other, as each attempts to impose different regulations and remedies with different timelines. Ensuring that Europe comes out ahead in that game should be a top priority for Ribera.

Von der Leyen also issues an instruction to review the Horizontal Merger Control Guidelines 3 , which, she says “should give adequate weight to the European economy’s more acute needs in respect of resilience, efficiency and innovation, the time horizons and investment intensity of competition in certain strategic sectors, and the changed defence and security environment.” This could be problematic.

The concerns about economic resilience, efficiency and innovation are consistent with current analytical approaches in horizontal mergers and require no substantive reform to be taken account of correctly. However, consideration of “investment intensity of competition in certain strategic sectors” is a deviation from past practices in merger review. A serious merger review process protects consumers across all sectors and does not exempt some sectors from rigorous scrutiny. Identifying a ‘strategic sector’ is also outside the remit of a competition specialist and belongs with a foreign or defence authority.

Commissioner-designate Ribera may want to request other parts of the European Commission to take responsibility for defining strategic sectors so that, if she is asked to weaken competition enforcement in those places and consumers are hurt, it is clear that the outcome is not her fault.

European productivity may rise if new (and expensive) industrial policy is directed by a staff enthusiastic about and skilled in making markets more competitive, while at the same time traditional competition enforcement is made broader and quicker. Alternatively, if Ribera interprets the letter as an instruction to deploy industrial policy to distort or weaken competition enforcement, that would be harmful to consumers in Europe. She therefore has a great deal of latitude as to whether she improves European competitiveness or not.

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Buffett’s Portfolio Strategy Shows a Cautious Tone

Berkshire Hathaway’s Q3 filing reveals continued recalibration, marked by strategic reductions in some of Buffett’s largest and most iconic holdings. This sustained selling trend hints at Buffett’s careful approach to maintaining portfolio balance amid market uncertainties.

Scaling Back Giants: Apple and Bank of America

One of the most significant shifts this quarter was Buffett’s additional cut to Berkshire’s Apple (AAPL)stake, which was reduced from 400 million shares to 300 million shares. This is now over two-thirds less than its size since 2023, suggesting a cautious tone toward the tech giant’s valuation. Similarly, Buffett trimmed back Berkshire’s position in Bank of America (BAC) by 23%, reflecting a potential reassessment of the banking sector. Buffett's move could also be a reflection of the bank facing some serious challenges in its bond portfolio, which have resulted in massive unrealized losses and write-offs.

Ulta Beauty’s Short-Lived Spotlight

An unexpected move this quarter was Buffett’s swift exit from Ulta Beauty (ULTA). After only one quarter, he sold nearly all his shares in the cosmetics chain—a departure from his typical long-term investment approach. This rare short-term exit may reflect a reassessment of the company’s growth outlook or an adjustment based on Berkshire’s evolving sector strategy.

Betting Bigger, Selectively

In addition to the reductions and exits, Berkshire Hathaway showed continued commitment to some of its core holdings by modestly increasing stakes in Sirius XM Holdings (SIRI) and Heico Corp (HEI). Buffett added 3.77 million shares of Sirius XM, raising his total stake to over 105 million shares—a 3.72% increase. This suggests Buffett’s confidence in Sirius XM’s strong market positioning and reliable cash flows, which fit well with his preference for stable businesses.

Additionally, Berkshire increased its position in Heico Corp by 5,445 shares, bringing the total to nearly 1.05 million shares. This incremental boost indicates Buffett's growing interest in the aerospace and defense technology space, where Heico has maintained a resilient foothold.

New Faces: Domino’s Pizza and Pool Corp

While Buffett trimmed several holdings, he also added a few fresh positions. Berkshire’s investment in Domino’s Pizza (DPZ), with a 1.28 million-share purchase, showcases Buffett’s interest in consumer-facing companies with strong brand recognition and cash flow. In a surprising addition, he also took a stake in Pool Corp (POOL), acquiring 404,057 shares. This move into the pool equipment sector highlights Buffett’s search for unique investment opportunities with niche market potential.

A Big Quarter for Selling

According to its 10-Q report, Berkshire continued to sell more than it bought in Q3, with net stock sales amounting to approximately $36 billion against $1.5 billion in purchases. This consistent trend of heavy selling aligns with Buffett’s comments about tax considerations and portfolio rebalancing, though it has fueled speculation about his broader market outlook.

Notable Reductions and Exits

Several other holdings saw significant cuts:

Charter Communications (CHTR): Berkshire reduced its position, selling one million shares and ending the quarter with 2.8 million.

Nu Holdings (NU): Buffett reduced his stake in this Brazilian financial firm by 20.7 million shares, retaining 86.4 million shares.

Capital One Financial (COF): Berkshire trimmed this position by 719,000 shares, leaving it with 9.1 million shares.

Berkshire also fully exited its position in Floor & Decor (FND), a flooring retailer, selling off all four million shares—a move that reflects Buffett’s decisive adjustment in the consumer discretionary sector.

Warren Buffett’s Portfolio Shifts: Strategic Cuts, Modest New Additions, and a Cautious Outlook_1

Understanding Buffett’s Evolving Investment Strategy

Buffett’s portfolio adjustments illustrate his classic value investing principles with a renewed focus on balancing risk and opportunity:

Selective Diversification: While Berkshire continues to hold iconic names like Coca-Cola, American Express, and Moody’s, Buffett’s adjustments show selectivity in reducing overexposure to individual sectors.

Opportunistic Adjustments: The addition of consumer-oriented stocks like Domino’s Pizza and Pool Corp underscores Buffett’s strategy of focusing on resilient businesses, even while shedding higher-risk or fully valued positions.

Risk Management and Patience: Buffett’s steady reductions in high-exposure holdings reveal his discipline in preserving capital and managing concentration risks, aligning with his longstanding commitment to prudent, long-term investment.

As investors analyze these moves, Buffett’s actions provide valuable insights into the mindset of one of the world’s most respected investors during a period of market flux.

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Economic

Listed REIT prices declined sharply two years ago, as the market anticipated and priced in the forthcoming drop in property prices, moving lower ahead of the broader commercial real estate market. However, following a prolonged period of weakness for listed real estate, we are now seeing a beacon of optimism for the asset class. A recent resurgence in transaction volumes suggests that the bulk of the private market has now absorbed necessary write-downs, instilling confidence that private market values are stabilizing. Consequently, we believe the stage is set for real estate investment trust (REIT) investors to look forward with a renewed sense of optimism and potentially benefit from the pricing in of potential growth in earnings and assets values.

Early signs of a recovery

In the third quarter of 2024, for the first time in over two years, US real estate transaction volumes look to have increased as reported by CBRE, the world’s largest property brokerage ─ a bellwether for the corporate real estate sector. This is very welcome news for property investors following a painful period of higher borrowing costs, economic uncertainty, and declining asset values. All told, these factors contributed to transaction levels that collapsed nearly 70% from peak levels in 2021. With large gaps between buyer and seller pricing expectations, liquidity was not available at private real estate’s reported valuations. Non-traded (private) REITs’ gated investor funds, queues of unmet redemption requests in core property funds formed, and eventually losses for investors and lenders slowly crystalized through the private markets’ gradual adjustments to reported values. With reported real estate prices now starting to reflect their underlying asset values, supported by central banks beginning to lower interest rates, investor optimism has grown alongside improving real estate debt markets, fostering a recovery in real estate transactions.

CBRE advisory sales (year-on-year % change)

CBRE also reported a 20% revenue increase from US investment sales (also known as advisory sales – ie. buy/sell transactions) in the third quarter. According to its CEO, “Capital markets transaction activity has passed an inflection point and is in early stages of recovery.” Management further noted, “We think buyers and sellers have largely come together for most asset classes or are very close to having come together…there is debt available now…there’s increased interest in multi-family. We’ve seen a little bit of cap rate (rate of return) compression in multi-family and industrial.”

CBRE’s commercial mortgage originations advanced over 50% over the same quarter, signaling burgeoning strength in real estate lending as well. We see conditions as being ripe for increased lending as the transaction market recovers and evidence of stronger asset pricing surfaces and becomes better appreciated by the market.

Mounting evidence for a revival

Elsewhere, there are notable recent transactions illustrating healthy asset pricing and attractive lending, supporting our team’s view that real estate pricing has bottomed and a new cycle is beginning:

KKR/Lennar: In June this year (2024), private equity company KKR acquired 5,200 apartment units from home construction company Lennar’s multifamily division for US$2.1bn, representing an estimated 15-20% premium to asset value for the listed residential REITs.

Brookfield/DRA: In May, investment firm Brookfield acquired a 14.6m square foot portfolio of industrial warehouses from real estate investment adviser DRA for US$1.3bn. The deal encompasses 128 properties across 20 markets and is 98% leased.

Tishman Speyer/Rockefeller Center: In October, diversified real estate firm Tishman Speyer completed a US$3.5bn refinancing of NYC’s Rockefeller Center in the CMBS market for a 6.5% interest rate. For much of the past two years, office transactions remained dormant and plagued by distressed lending conditions. This refinancing marks the largest single-asset office debt deal in history and was significantly oversubscribed by debt investors.

What does the transactions recovery mean for REITs?

Within real estate, REITs are enviably positioned, with 30% loan-to-value ratios (compared to 60% for private real estate), have cheaper cost of funds, and can issue equity in public markets to grow, thereby taking advantage of the resurgent liquidity to buy assets. However, for the past two years, REITs have been stymied in their acquisition pursuits by lack of deal-flow and wide bid-ask spreads. As transactions pick up and pricing improves, REITs across sub-sectors are increasingly deploying capital for acquisitions or development projects, which we believe will advance earnings growth. Furthermore, many REITs have joint ventures or fund management platforms capable of delivering additional returns when assets are sold. These profits have largely diminished over the prior two-year standstill in the transaction market; but as deal volumes recover, REITs are likely to once again be positioned to harvest gains from these vehicles, bolstering profits.

The recovery in transactions, therefore, highlights multiple avenues for REITs to boost earnings growth, strengthening the outlook for asset values, and ultimately, the potential for higher share prices and growing dividends in a new cycle.

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What Next for the UK Economy?

GDP growth was strong at the start of the year but seems to have slowed down of late. Why is this?

Will the budget improve UK growth?

What do you make of the change of debt target from ‘Public Sector Net Debt excluding the Bank of England’ to ‘Public Sector Net Liabilities’?

And finally, with the Budget out of the way, what do you think the government should focus on now?

Less Sustainable Issuance By Banks In 2025

ESG issuance falls short to last year

Lower issuance by banks will coincide with less ESG supply in 2025

Source: ING, *) Only bonds included with a minimum size of €250m

Green will remain the dominant use of proceeds type

Source: ING, *) Only bonds included with a minimum size of €250m

The 2025 ESG print by banks will fall to €70bn

Banks will repay €34bn in sustainable bank bonds in 2025

Source: ING, *) Only bonds included with a minimum size of €250m

Limited issuance expected under the EU green bond standard

Green asset ratio disclosures point to low Taxonomy alignment

Source: Issuer Pillar 3 disclosures of 45 banks (1H ’24), ING

Loans to households have a low Taxonomy alignment

Banks have few renovation loans outstanding and they are almost 0% taxonomy aligned

Source: Issuer Pillar 3 disclosures of 45 banks (1H ’24), ING

Timelines under the Energy Performance of Buildings Directive

Source: European Commission, ING

Breaking New Ground

What are the main macro-drivers behind the life sciences sector’s growth in Europe?

Where do European markets sit compared to other global life sciences markets?

What makes this an attractive real estate asset class to invest in today?

With many schemes now being marketed with a life sciences angle, do you believe there is an oversupply risk?

What has happened to VC funding in 2024 and how has it affected tenant demand?

As a niche and new sector, what is the best way for investors to access the market?

What sets UBS’s expertise apart from other competitors in this space?

Labs and manufacturing facilities demand higher energy usage than typical office or retail buildings. Can they be environmentally friendly?

What are the social benefits to investing in life sciences real estate?

How do you see life sciences real estate evolving in five years-time and what developments can we expect within the sector?

Greening Infrastructure in Africa through Digital Transformation

Growth in African infrastructure demand

Digitization of the construction industry

Green building technologies

Strategies and looking ahead

A Fork in the Road for EU Competition Policy

Industrial policy

Tough tasks

Warren Buffett’s Portfolio Shifts: Strategic Cuts, Modest New Additions, and a Cautious Outlook

Buffett’s Portfolio Strategy Shows a Cautious Tone

Scaling Back Giants: Apple and Bank of America

Ulta Beauty’s Short-Lived Spotlight

Betting Bigger, Selectively

New Faces: Domino’s Pizza and Pool Corp

A Big Quarter for Selling

Notable Reductions and Exits

Understanding Buffett’s Evolving Investment Strategy

Rising Transactions Signaling A Recovery for Listed Real Estate

Early signs of a recovery

CBRE advisory sales (year-on-year % change)

Mounting evidence for a revival

What does the transactions recovery mean for REITs?

Risk Disclosure