Scotsman legal review: Real estate

Tax and legislative changes undermine strong foundations of Scottish real estate market

Speculative office space like Quartermile in Edinburgh is proving attractive
Speculative office space like Quartermile in Edinburgh is proving attractive

The last 12 months have been an incredibly busy period for the property sector in Scotland. Transactions and volumes of sales have increased and activity levels have been buoyant.

There are some questions however, in the sector, not least because of the legislative and tax changes afoot. Some changes have already happened, some are at the consultation stage and others will be determined by political means.

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According to Alan Stewart, a property partner at Maclay, Murray & Spens, the next 12 months could see challenges. “The uncertainty about the Euro vote and the Scottish election in May 2016 are both factors which could constrain transaction volumes.”

He says that the last 18 months have been about the bounce back from the recession. Investment activity is particularly significant, with large shopping centre acquisitions and cross-border UK portfolio deals driven by US equity.

“Edinburgh has seen some very good news stories with robust occupier demand for new Grade A office space in particular driving investment and high profile companies such as Skyscanner moving in to Quartermile.”

Meanwhile, Aberdeen has seen volumes of deals constrained by the fall in oil prices.

“It is going through a period where there is less development and companies, instead of taking more space, are sitting tight. It is a market that is led by the gas and oil industry so when oil prices are low there isn’t optimism,” says Stewart.

Nick Scott, head of real estate at Brodies, agrees that the commercial property market recovered from the recession relatively quickly, although he says the make-up of investors has changed.

“It is more international funds, US money from private equity investors than the traditional pension funds.”

At the occupier end of the market he sees more activity, with companies investing in new premises as the economy gets better and although he says some of this will be the market catching up after the lull – there has been little movement in the past few years – activity is growing.

“Businesses are investing in new premises and companies are expanding,” Scott says.

In Glasgow, three large office schemes have been speculatively built in the last year and are finding occupiers. There are also good signs in that incentives for would-be lease holders are being reduced compared to two years ago, showing the rising competition.

Scott says that the Atria development in Edinburgh will be a good bellwether for the health of the market when it goes to a closing date later this year.

“The sale of the Scottish Widows HQ at Christmas attracted a dozen bids from Korea, Singapore, the US and Germany despite being worth over £100 million. It was eventually bought with finance from Hong Kong.”

He also points to a growing appetite for refurbishments of 1980s and 1990s buildings due to the inflation in construction costs.

According to Scott, in the residential markets the big builders such as Taylor Wimpey, Cala, Barratt and Persimmon are opening up sites as land prices have stabilised.

But they are looking at the range of properties they are building as the land and buildings transaction tax (LBTT) is affecting the top end of the market.

Iain Doran of CMS agrees that LBTT, which came into effect in April as the first new Scottish tax for 300 years, has had little effect on the commercial market but that is not the case for residential property.

“After the flurry of sales of homes going through before the deadline there has been a definite effect. Sales of homes at the top end – above £1m – are steady but below that, from £750,000 upwards, buyers have stayed put rather than move and pay the extra tax.”

This has a knock-on effect with developers, he says. “While all will have to build into their calculations the extra tax on land, high-end developers who would normally build homes in that price range may change their plans, and use the land to build more properties which can be sold at a lower price.” All of which adds up to a growing need for the government to look at rates of LBTT as they seem to be raising less tax at the current rates.

Ewan MacLeod, partner at Shepherd & Wedderburn, wonders whether the Scottish Government’s proposals for further reform of the planning system are truly necessary. “The goal of having a planning system that will ‘increase delivery of high quality housing developments’ is great but the existing legal framework could deliver that if there was a political will to see it happen.

“Housing requirements are not being met in Scotland but many local authorities are unwilling to accept that and to take decisions in the national interest.

“Scottish ministers already have the powers to intervene in decision making and to drive the planning process. What we need is more vigorous intervention.”

Michael Henderson, partner at Shepherd & Wedderburn, says another big change to the property market is the rise of the private rented sector (PRS): “There is a growing demand for high quality rented properties from increasingly mobile young professionals whose careers take them round the UK and overseas – they do not wish to be tied by buying property and would prefer to rent. There has been a rise in institutional capital flowing into the PRS, we have been involved in several purpose-built high quality schemes, some of them student accommodation, but others addressing the demand from mobile young professionals and the growing number of families locked out of home ownership by lack of mortgage funding given and the need for high deposits.”

Henderson says there is already a lot of institutional capital invested in this market in England and Wales, but it is now increasing in Scotland with schemes such as LaSalle Investment Management and Dandara in Aberdeen, EDI and Grosvenor in Fountainbridge and Whiteburn in Dundee.

“The investors in such schemes tend to be in it for the long term and so changes to legislation such as the private tenancy bill shouldn’t mean they are less attractive.

“That said, Scotland’s cities need to compete with other regional cities such as Birmingham and Manchester, so the Scottish Government needs to make sure they are equally attractive as investments.”

Last year’s referendum did curb the real estate and commercial markets for a brief time, but Scott Ritchie, partner at Shepherd & Wedderburn says that there are areas of commercial property that are particularly resistant to discussions about independence.

“Hotel and leisure deals and student accommodation are two areas that carry on apace no matter what.

“It seems that Scotland will attract people to visit and to study regardless of the political or constitutional situation.”

Elsewhere, Ritchie thinks recovery figures are slightly skewed by a few large transactions such as the sales of Scottish Widows headquarters or indeed the Centre shopping complex in Livingston which changed hands for £220 million at the end of 2014.

“There are fewer transactions in the mid price range.” And although he agrees that the Aberdeen market has cooled because of the oil price, his firm was involved in this summer’s £585m purchase of the St Fergus Gas Terminal for a US investor.

• The Scotsman’s annual review of the legal world looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of the more than 11,000 practicing solicitors and 463 practicing advocates.