UK property and building firms to cash in on rise in defence spending

While the government tears itself apart over the defence budget, the UK’s property and construction companies are preparing to cash in on the extra spending, as weapons manufacturers, defence logistics companies and others scramble for new warehouse and office space.

It was reported this week that Keir Starmer had asked ministers to make departmental budget cuts to provide an additional £15bn for the defence investment plan (Dip), which is expected to be unveiled in the coming weeks.

Nato members, including the UK, are targeting defence spending of 3.5% of GDP by 2035, with another 1.5% to be spent on related tasks such as safeguarding critical infrastructure and fostering innovation.

All of that will require physical space. Analysis by Savills and CoStar shows that defence manufacturers and their supply chains accounted for 8.5%, or 3.8m sq ft, of the UK’s industrial and logistics space last year, more than twice the figure for any of the previous 15 years.

If the UK hits its Nato defence spending target by 2035, demand for related manufacturing and logistics space will surge – rising to 32m sq ft, Savills has predicted. Robert Pearson, a director at Savills, said this figure is “broadly comparable to the annual warehouse demand generated by high street retailers”.

“Most of the large construction groups, including Balfour Beatty, Costain, Kier and Galliford Try, have been ramping up their activities in defence,” said Alastair Stewart, property and construction analyst at Progressive Equity Research. “Most of these and some large family-owned companies, such as Wates Group and Sir Robert McAlpine, benefited strongly from work in the Second World War, such as building floating Mulberry Harbours for D-day.”

The increase in defence spending could not have come at a better time for construction companies, which are battling rising costs and a slump in housebuilding. Investors have noticed the opportunity: shares in FTSE 250-listed Galliford Try, one of the key players in the government’s £5.1bn Defence Estate Optimisation programme, have almost doubled in the past year, while shares in Balfour Beatty, another FTSE 250-listed construction company, have risen more than 13% since the beginning of the year. It doubled down on plans to focus on defence in its end-of-year results in March.

The business park operator Sirius Real Estate has announced its intention to invest €1bn (£862.5m) in defence-driven properties in the UK and Germany. But in an interview last week chief executive Andrew Coombs, a former Grenadier Guard, said political uncertainty had caused him to slow investments in the UK.

“Who will be the prime minister this time next year? I don’t know,” he said. “What will be the strategy of this government in a year’s time? I don’t know.”

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