Business activity involves the combination of land, labour and capital to create value which translates to turnover at a company level through to overall gross domestic product. The term land now includes buildings and physical places where economic activity is undertaken by individuals in a workforce and where capital, meaning money, is used for financing.
We continue to operate in a post 2008/9 climate, in the wake of a global property crash that starved land and buildings of capital and, today, we are still struggling to build sufficient homes for the workforce to live in and to create flexible workplaces for SMEs and larger enterprises alike. The digital and data revolutions, emerging gig economy, and dominance of relatively new global businesses with capital rich balance sheets begs the question: “How can the property supply and redevelopment industries adapt to these rapid changes in the economic environment?”
Scotland gave the world the Enlightenment and had competitive banking well established between Bank of Scotland (established in 1695) and Royal Bank Of Scotland (established in 1727). It is reported that the first business overdraft was granted by RBS to high street merchant, William Hogg, who in turn provided short term credit to his customers so they could buy and sell goods.
In May 2023, Scotland will celebrate the 300th anniversary of Adam Smith’s birth and, in order to do justice to his memory, there’s a strong argument to say we should use the next five years to formulate new approaches to providing property for businesses, workers and their families.
The way capital is applied to property has still not found its equilibrium ten years on from the property crash. The prospect of higher global interest rates stemming from the Federal Reserves’s stated increase in interest rates policy has brought volatility to the markets and this sits badly with property assets that work through cycles of three, five and ten years, in a similar way to SMEs trying grow their business.
As my property funding principal at Full Circle Partners, Mike Welch, recently observed: “With bank lending starting to tighten up a little bit, and interest rates starting to rise, specialist funds now play the role of the bank, but in a much more flexible way.”
In Edinburgh, we have a good number of entrepreneurs harnessing their business skills and capital to act as a catalyst for both property business projects and business growth opportunities enabled by property solutions. FCP Property Development Fund is following an entrepreneurial approach to property which has been re‑established since the high-profile troubles of Scotland’s two principal business lending institutions, RBS and HBOS, almost a decade ago.
Private capital can sit comfortably with current bank funding criteria for business and property projects. Professionals in the property and banking industries must continue to work to provide innovative capital to support business activity in Scotland. We have had strong growth in property values in recent years, but we need capital structures that can supply funding that will withstand stable prices and rising interest rates.
The private rented residential sector is growing south of the border, with pension funds and institutions providing long-term capital to allow householders to rent from well funded and well managed landlords. Householders benefit from low-cost, long-term capital provided by the pension funds into which they can also invest.
This degree of mutuality between funders and householders was largely lost with the privatisation of building societies and mutual insurance companies in the decades leading up to 2008. It is to be hoped that Scottish Government and our local authorities will encourage this form of ownership in Scotland.
l Matthew Edgar, partner, FCP Property Development Fund, Full Circle Partners