Anna Dove reports on a buoyant year in Scotland’s commercial property market
Heightened political uncertainty after the Brexit vote last summer and the corresponding pause in the commercial property market gave way to an active year for lawyers operating in the sector.
Investment has been particularly buoyant, with stand-out projects including the ScottishPower headquarters in Glasgow which opened in July and which was a £113 million forward-sold investment, and the Marischal Square development in Aberdeen which is nearing completion.
“After the initial shock of Brexit last June, from the autumn onwards we had a very busy time all over Scotland,” says Douglas Lamb, partner in real estate at MacRoberts, which has offices in Edinburgh, Glasgow and Dundee.
“We sold a portfolio of properties in central Scotland for £15m last year and this year we are in the process of dealing with an office investment acquisition in Glasgow for about £46m. That’s just a range of the large and small projects we work on.”
Lamb also highlights a scheme at the former John Brown shipyard in Clydebank where there is a partnership arrangement to regenerate run-down industrial land.
“They hope to build 1,200 housing units plus commercial development and there are proposals for Scotland’s largest district heating system,” he adds.
The feeling that the traditional UK investor, post-Brexit, has not been as active seems to be unanimous, with international investors driving more of the activity.
“There are signs that perhaps overseas investors are quite attracted by the state of the pound and are not getting value in London so they are perhaps investing in the regions, including Scotland,” says Lamb. “For example, investors from the Far East have been pretty active.
“In terms of investment, it tends to be the prime locations in Edinburgh and Glasgow that are really seeing the most activity. I think investors at the moment are trying to choose the prime product.”
The UK’s departure from the European Union and the possibility of a second referendum on Scottish independence are both risk factors that are weighing on investors’ minds.
“I have seen concerns expressed in the press about the property market softening and the political scenario effectively overhanging everything,” says Lamb. “It does weigh on investors. They want certainty and it looks like we are not going to have that for some time.
“It’s a question of whether people are brave enough to jump off the fence or whether they are going to delay their decisions.”
Much of the inward investment Scotland is experiencing is in the hotel market, which has been hailed as a stand-out sector in commercial property. Buyers from the US, China and, increasingly, South Africa are making their interest in expanding their portfolios in Scotland known.
For the most part, Edinburgh is the object of their attention, which is perhaps unsurprising considering the capital’s hotels had 23 per cent year-on-year growth in their revenue per average room figure in the second quarter of 2017.
“We’re seeing an increasing number of acquisitions, refurbs and rebrandings of existing hotels,” says Darina Kerr, partner in commercial real estate with international law firm CMS.
“The relaunch of the Edinburgh Roxburghe as the Principal Edinburgh Charlotte Square and the Edinburgh Collection’s acquisition of the Tune Hotel in Haymarket (now the Haymarket Hub Hotel) are great examples.
“We’re also seeing an increasing focus on redeveloping existing properties, such as Chris Stewart Group’s recently opened Courtyard by Marriott near the Edinburgh Playhouse and the proposed redevelopment of the old IBM offices on St Andrew Square as a luxury hotel.”
The west of Scotland should not be overlooked, however, and Kerr says investors are also willing to look at the Glasgow hotels sector, which she describes as “witnessing solid, if less spectacular, growth, driven in part by the continuing success of the SSE Hydro.
“It is widely recognised that the Hydro – which hosts music, political and sporting events – brings millions of pounds to the city’s economy.
“The surrounding Finnieston area has benefited from the ‘Hydro halo’ effect, making it a truly vibrant destination.”
Regeneration is also in the pipeline for George Square in Glasgow. “Until now, George Square has been a rather problematic area because to the east of Queen Street Station we currently have no real cohesion in terms of building types or uses and the area lacks a sense of place,” explains Kerr.
“There are a lot of moves afoot to improve this with a proposed new development called the George Square Complex.”
Inverness, too, presents an opportunity for investors and hotel chains to steal a march on competitors by establishing hotels in the city. Kerr says its lower land prices and good visitor figures driven by the North Coast 500 tourism initiative could enable profitable investment.
“Where sometimes hotels would be on the market for a while, it’s now not uncommon to go to a closing date situation, which is great for sellers,” she adds.
Student accommodation continues to be a growth sector, despite some people in the market wondering if it’s an area where Scotland has reached saturation point. “I think it’s a trend that’s set to continue,” says Kerr. “Universities and colleges are, to some extent, a captive market.
“They will always need accommodation for their students, and many students now are increasingly keen to live away from home and more demanding when it comes to the quality of the accommodation they are prepared to live in.
“They want fast wi-fi, en-suite bathrooms and shared hub space for collaborative working.” A lot of developers and funders are still keen to get into, or do more in, the student accommodation market.
“In our experience, it’s not hard for private student accommodation providers to either find students (to whom they lease rooms direct) or find a university or college keen to block book a number of rooms which they then sub-lease to their own students,” says Kerr.
“The latter is great from a financial strength point of view as educational institutions are viewed as highly stable and low risk by investors.”
A look at commercial property activity in Scotland wouldn’t be complete without mentioning the fast-paced £1 billion, retail-led transformation of Edinburgh St James, which Kerr says epitomises the global trend of place-making through regeneration.
The project has involved significant demolition in a bid to create a world-class destination incorporating shops, entertainment facilities, homes and a hotel.
“CMS have been working with TH Real Estate for a decade on the project, the future of which depends on the diverse interests of a number of stakeholders being successfully aligned,” explains Kerr.
The place-making involves four floors of shopping, dining, leisure and entertainment, car parking, 150 residential apartments, a cinema, a five-star W Hotel and a Roomzzz aparthotel.
“At a time of great global instability, the fact that construction has now started on the transformational Edinburgh St James redevelopment is a sign of immense confidence in TH Real Estate and in Scotland as a stand-out retail and leisure destination,” says Kerr.
“This project will help move Edinburgh up the UK retail rankings, boosting it from 13th to eighth place.”
She cites collaboration between public and private sectors as a key element of the development, and says this is evidence of a growing market trend which is apparent across the property world.
“The aim is for stakeholders to work together to create new destinations that people will choose to visit rather than simply pass through.
“That requires a great deal of collaboration between developers, funders, local councils and occupiers but, when done well, the results can be transformational.”
In terms of hospitality and leisure, Gary Donaldson, head of product and innovation at Millar & Bryce, says there has been a lot of investment in portfolios rather than in individual sites.
“We are seeing transfers of ownership of pubs, hotels, garden centres, retail parks or general financial restructuring of these types of sites,” says Donaldson.
“With these types of properties, it does tend to be portfolios. We provide a bespoke service where we manage all of the legal information that’s required as part of that due diligence to support the transaction.”
Another area that Donaldson emphasises as particularly active is infrastructure, where there is a good deal of activity in Scotland in the road, rail and energy power line sectors.
“We are seeing a lot of overhead improvements to railways, new roads being built, roads being extended and putting in new power lines,” he says.
“We are doing a lot of work on the electrification of the Edinburgh to Glasgow rail line and the redevelopment of Queen Street Station to accommodate the longer platforms.”
Millar & Bryce’s involvement in these projects is often as a vital source of information. The firm can advise developers on who owns a piece of land and produce reports to support the due diligence when it comes to acquiring property.
Refinancing has reared its head over the last 12 months, which Donaldson believes is reflecting the fact that Scotland is attracting inward investment.
“It has been a fairly lumpy year for Scottish commercial property and refinancing is a positive sign that there is still a confidence in that market,” he says.
“While we have seen a decline in transactions, we have seen an increase in refinancing, which is a different type of confidence in the market.”
Voluntary land registration remains a hot topic, in line with the Scottish Government’s drive to have all property in Scotland on the Land Register by 2024, and Donaldson says he and his colleagues at Millar & Bryce are increasingly coming across large estates that have a vested interest in registering their boundaries.
“The estate owners want to get in there and make sure they have their definitive title registered,” he says. “Once that title is registered, it’s a much more simple legal process if they decide to do anything with the land.
“A lot of estates have realised that having a land-registered title will make things easier in the future.”
Looking to the year ahead, Donaldson expects to see more of the same.
“Undoubtedly there are going to be more challenges in the commercial property market with the current economic and political situation but Scotland has been very resilient and I expect that the market will continue to grow.
“While there are challenges, I think there’s a very positive outlook.”
He points to the city deal proposals as something which will have a big impact on commercial property and wider investment.
“I expect we will see some positive outcomes from those proposals,” he says. “We are watching that agenda with interest to see exactly how it will impact on our business.”
Briefing: Plans reports, by Gary Donaldson
Two in five property searches are affected by unforeseen issues, so it is important that both buyers and developers avoid land registration issues in the future.
If you’re involved in conveyancing, you’ll know the crucial role that plans reports play in flagging up any potential issues with a plan or description before it’s submitted to the Land Register.
You will also know that a key feature of the Land Registration etc (Scotland) Act 2012 is that there can be no registration without mapping.
Fortunately, innovation in technology allows Millar & Bryce, Scotland’s land and property search expert, to combine advanced geographic information software with good old-fashioned experience and skills to produce quicker, simpler and robust plans reports. However, not all plans reports are the same and Millar & Bryce takes an open and honest approach, with a team spanning some 40 years’ sasine search experience, as well as 30 years’ Land Register experience.
By using a proactive approach that finds a workable solution to any issues, the company can keep the land registration process moving for conveyancing solicitors and their clients, even when unforeseen issues arise.
Gary Donaldson is head of product and innovation at Millar & Bryce
Briefing: Developments, by Steve Dougherty
Developments across Scotland have faced numerous challenges this year with political and economic uncertainties causing hesitation from international investors.
On a practical level, difficult and complex planning processes cause extensive delays and often consents are granted in unattractive locations, impacting residential developments particularly.
However Scotland’s leisure market has seen a significant boost over the last decade resulting in the growing demand for large city centre schemes that include retail and leisure facilities along with high-end residential developments.
Such mixed-use schemes include Edinburgh’s St James development in which Shoosmiths has acted for hotel chain Roomzzz and a 500-bed student accommodation development at St Leonards that encompasses a significant ground-floor retail element.
This year has also seen a stagnation in industrial developments, a long-term knock on effect of the downturn of the Aberdeen market, while short supply of office space causing rental prices to spiral has further encouraged businesses to take up agile working practices.
Scotland’s strong support for the technology and scientific sectors and investment in startups has seen a positive impact on the private rental sector with a close correlation between UK tech trends and investors paying regard to which cities are driving activity in the tech sector.
Steve Dougherty is head of real estate with Shoosmiths, Edinburgh
Briefing: Construction, by Shona Frame
While there are some bright spots in the Scottish construction sector, there is much uncertainty in the market, contributing to its current sluggish state of health.
On a more positive note, housebuilders are generally performing well, buoyed by additional political support to increase provision, particularly for affordable housing.
The projected fall in house prices does, however, present a threat.
Meanwhile Brexit and other economic and political uncertainties are adversely influencing or delaying funding decisions on many construction projects, while a number of large infrastructure projects have reached completion.
The prospect of further inflation along with the weakened pound, which drives up the cost of imported goods, and the potential for Brexit-related skills shortages to start taking effect are also significant concerns.
Given these challenges facing one of the UK’s most important industry sectors, it is vital that the government continues to focus on measures which are aimed at boosting construction and infrastructure developments.
While a steady pipeline of large projects would be welcomed, it is important to balance this with the need for projects which are suitable for the many smaller construction businesses that may not always directly benefit from major development initiatives.
Shona Frame is a partner at CMS
This article appeared in the Scotsman’s annual legal review 2017
The Scotsman’s annual legal review 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 more than 11,000 practising solicitors and over 460 practising advocates.