2018, and at last a few reasons to be cheerful in Scotland’s commercial property market

What a difference a year makes. The emerging stability of the early part of 2017 was rudely interrupted by the General Election in June, which put all the chips back on the table, as well as ordering another dry Martini.

But, curiously, once the indecisive result emerged, the property sector allowed itself something of a sigh of relief, and confidence slowly started to return to businesses which had been battered by uncertainty over the preceding two years.

People in the wider UK who had been shying away from the market started to sniff out the opportunities in Scotland, which was increasingly seen from the viewpoint of south of the border as the cheap and attractive neighbour.

The negative effect of a languishing market in Scotland started to work in its favour as values in England – as far north as the depressed Border counties – rocketed. Scotland began to look like the land of opportunity.

The secondary market in particular – properties in the range between £500,000 and £2.5 million – were offering outside investors as well as local property entrepreneurs yields of up to 9% and 10%.

There are few other asset classes which can match these sort of returns and premiums began to rise as the search for quality stock intensified. Scarcity of supply was exacerbated by the reluctance of investors who were obtaining healthy returns, refusing to divest themselves in a low interest climate just as things were starting to turn upwards.

In the wider commercial market, the drive to prioritise social and affordable housing has seen Housing Associations emerging as unexpected and unlikely competitors to private sector organisations in the rush to acquire up developable land.

The land rush – underpinned by both UK and Scottish Government commitments to affordable housing targets – has attracted national housing associations such as Link, Sanctuary and the Wheatley Group.

But generation of activity on available sites has fallen to private sector shortages such as CCG, Cruden and Robertson Homes who have actually put spades in the ground by working in tandem with Housing Associations.

On a more general basis, one has to wonder how many yards of foundations would have been laid in the absence of generous national government encouragement in the form of Help to Buy schemes, which are seen as a catalyst to propping up the private housebuilding sector at the expense of the second hand market.
Unsurprisingly, developers have also homed in on the student housing market, which has transformed student accommodation from insalubrious private digs to hotel-style accommodation in blocks which have taken over some sections of Scotland’s cities, most notably Glasgow’s West End.

But, arguably like Bitcoin, this would appear to be a bubble which has to burst sooner rather than later as saturation point approaches and rental incomes from oversupplied accommodations start to be driven down.

Elsewhere the reverberations of the recent rating revaluation continue to be felt. The normal quinquennial revaluation due in 2015 was delayed by the Scottish Government till 2017 and this has impacted adversely on a number of sectors, most notably hospitality.

This should not blind us, however, to the beneficial effects of the exercise in other areas, particularly smaller towns such as Ayr and Kilmarnock, where valuations have been reduced by up to one third and which has at least partially offset the significant falls in value and vacancy levels in these towns.

If Mary Portas is still looking for further ammunition to save the High Street then this is perhaps a pointer.

In the industrial sector, there are grounds for cautious optimism, although this enthusiasm is emerging from a low base. Decent rises in rental income for quality development mean that the game can once more be worth the candle. The imposition by Scottish Government of vacant rates liability has however been unhelpful to certain sections of the market.

As predicted here and elsewhere, empty property burdens have led to a winnowing out of the commercial estate – not in the least to demolition of unprofitable and unlettable industrial units – but now demand is back and remaining properties are increasingly attractive.

The prospects for 2018 have to be seen as much more positive than in recent years. There are fewer insolvencies, the appetite of lenders is undiminished and, assuming that interest rates do not fluctuate too much as a result of external factors, there is much about which to be cheerful.

Graeme Todd is a partner in the Glasgow North office of DM Hall Chartered Surveyors.

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