Real estate transaction volumes suggest that 2018 will be one of the decade’s strongest in terms of overall levels of investment in Scottish commercial property.
Darina Kerr, real estate partner with CMS reports: “Total 2018 expenditure in Scotland is expected to exceed £2 billion across the range of asset classes.
“This year also marks the return for domestic UK investors who have accounted for almost 90 per cent of trade.
“This is in contrast to 2017 where overseas investment accounted for over one half of transaction volumes.”
Strong performers include offices, retail warehousing, hotels and industrial properties but results do vary across locations and sectors.
Kerr says one shift is in the office market in Glasgow: “Historically, Glasgow has to some extent been perceived as the poor relation in the office market in comparison to Edinburgh.
“The traditional view was that Edinburgh had more obvious kerb appeal, as many organisations require headquarters and strong presence in the capital city, so demand from occupiers would always be guaranteed to be high.
“This led to investors considering Edinburgh low risk, and many are willing to pay a premium to secure office properties in the capital.”
However, she believes this is beginning to change. “Glasgow has one of the lowest rental levels of the Big Six UK regional cities, which suggests room for growth, headline rents are on the up and landlords are no longer having to offer as generous incentive packages to secure tenants as was the case a few years ago.
“Crucially, it is also cheaper to buy office properties in Glasgow than in Edinburgh, so investors can get more for their money.”
Indeed, developers who are able to create new office space in Glasgow within the next few years are likely to have a range of potential occupiers interested in committing to leases, rather than speculative developments.
Kerr says: “Pre-lets are always more attractive to funders, as these can provide a virtually guaranteed rental income stream before development. Pre-lets to government organisations are particularly sought after, given the unrivalled covenant strength of these tenants.
“The Government Property Unit 187,205sq ft pre-let agreement at Atlantic Square, a joint venture development between BAM Properties and Taylor Clark Properties, is a great example of the trend for government agencies to take new hub-type space.”
The announcement by Barclays Bank of the acquisition of 470,000sq ft of Grade-A office space within the new Buchanan Wharf development to be constructed on the banks of the River Clyde will increase the Barclays’ workforce in the city by some 2,500 heads, making it one of Glasgow’s biggest employers.
Kerr believes that one reason why the office market is so strong in Scotland is the drive towards a better work/life balance.
He says: “Organisations know they need to provide flexible, modern working environments if they are to attract and retain the best staff.”
Of the three major Scottish cities, Aberdeen is perhaps lagging somewhat in terms of commercial property activity.
John Strachan, partner at Burness Paull, says: “Aberdeen is still recovering from the oil price slump, it was hardest hit by the changes in rateable values because these were set when the market was at its height and are being applied now that the market is at a completely different level so that is causing real stress to many businesses.
“Licensed trade operators across the board are facing headwinds because of the change in drink driving laws, and just a shift in culture away from drinking by younger generations.”
This year Edinburgh saw the biggest hotel deal in the UK, with the sale of the Waldorf Astoria Caledonian Hotel to Abu Dhabi investors for £85 million.
Overall, figures released by Savills in August confirmed that investment into Scottish hotels in the first six months of 2018 reached £389.67m – double the total annual investment volume recorded the previous year.
Glasgow’s hotels sector derives a lot of custom from the city’s conference calendar, plus the SSE Hydro provides a reliable source of business for the city’s hotels.
PwC’s Glasgow Hotels Forecast, issued in September, showed that the hotel sector is growing at eight times the UK average.
In Edinburgh, TH Real Estate’s £1bn St James redevelopment is set to feature 85 retail units, including John Lewis’ Scottish flagship store, and more than 30 food and beverage units, a luxury hotel and an aparthotel, a cinema plus 150 residential apartments being delivered in partnership with developer Native Land.
The project will help move Edinburgh up the UK retail rankings, boosting it from 13th to 8th place.
Kerr says: “Placemaking is now a global trend, and this new place at the centre of the Capital will have far-reaching benefits for the wider community in terms of new jobs and homes, as well as delivering a world-class retail destination.”
Strachan says: “Retail is perhaps in the greatest flux going through a period of structural change, affected by habits of consumers who are increasingly looking for a retail experience. 2018 was definitely the year of the CVA [company voluntary arrangement] and some of the high-profile cases were House of Fraser, New Look and Poundworld.
“But we are seeing that landlords aren’t prepared to take these CVAs lying down and are minded to challenge the proposals.”
Strachan believes that the retailers who are going to thrive are the ones who can renovate and move towards an enhanced leisure offering, embrace digital applications, augmented reality and interaction with technology.
In terms of points of interest for potential investors, changes to the planning laws with regard to third- party rights could impact the market, according to Mark McMurray, senior associate at CMS. He says: “At the moment, if you are the planning applicant, only you have the right to appeal a local planning authority decision, but the proposed amendments give third parties the right to do so. Anything which potentially adds uncertainty to the planning process could lead to a more cautious approach from potential investors and I expect we will see the impact of this in early 2019.”
Strachan points to the impact of Brexit on the market. He says: “You can’t discuss anything without it being an influence, but so far there is relatively little direct impact on the property industry.
“Investor confidence is the one area that it may hit, although so far we have not seen that – perhaps surprisingly.
“It might be a case of business as usual but the weakness of the pound has almost balanced out any effects because investors are seeing good value in Scottish assets.
“Particularly after last year’s election we saw a bounce in Scotland because although it created instability in the UK market, the chances of Indyref 2 receded.
“Nor have we seen Brexit clauses in contracts yet although we have seen some conditionality on funding which may be connected.”
He believes that as the 29th of March 2019 Brexit deadline approaches it may become easier for companies to delay investment decisions if there a clear picture does not emerge. “We may see a slowdown in the first three months of next year unless there is a deal done. It is stability and certainty that investors are looking for.”
Brexit does have a direct impact in a couple of areas, according to Strachan. “Agriculture and estates which have a reliance on EU labour, and similarly the restaurant and licensed trade, may be adversely affected,” he says.
He adds that overseas investment in property in Scotland could be impacted by other legislative changes. “The UK government is mooting the idea of a stamp duty land tax supplement on overseas buyers of UK property.
“While it wouldn’t automatically apply to Scotland, the Scottish Government may follow suit and that has the potential to send out the wrong message if you are looking for inward investment.”
Both the Scottish and UK governments are bringing in new moves to publicise who owns areas of land and who is the controlling influence on the title holder.
The UK legislation puts the onus on only overseas owners, while the Scottish system requires all owners to register. Strachan says: “Possibly this might discourage overseas investors who want to remain anonymous.”
Gary Donaldson of Millar and Bryce, sees the advantages to companies of land registration. “We are seeing a lot of activity from organisations who want to get their assets on to the land register, to provide surety of their boundaries.
“Once it is registered, an asset is much easier to transact against so organisations are thinking that if they are going to be doing something in the future, such as selling or using the asset to raise funds, a nice clean title is a definite advantage.”
He says that in commercial property, most companies have bought into the process and see the advantages without being compelled to register by law.
“While the deadline of 2024 may not be hit, 100 per cent registration is absolutely achievable within the next few years.”
This article appeared in the Scottish Legal Review. A digital edition can be found here.