Scotland Scottish Property in a Spin!
Being asked to provide an overview of the Scottish commercial property market at present feels akin to sitting in a laundrette looking at bank of spinning washing machines. On a point of sartorial and climatic order, clearly the 501s remain firmly buttoned and belted, given the first frosts have appeared north of the Border. Reports Jonathan C Sutton BSc MRICS of Lewis Sutton Edinburgh
It is evident in some sectors the cycle is strong, others look OK but maybe need a second rinse in 2025 for a clearer market to emerge with others on a permanent slow-spin programme with plenty of creases to iron-out when the door pops open. Much of it feels at half-speed with true news of volume being transacted or big development starts (as opposed to LinkedIn braggadocio) still being whispered rather than heard loud and clear on the grapevine.
Of the nation’s four principal cities, locationally, Edinburgh and Glasgow have taken further prominence over Aberdeen and Dundee in terms of attracting external investment. The Starmer administration’s attempt to spread the love by headquartering, quite correctly in my view, GB Energy in Scotland’s best-in-class Energy sector heartland, in and between the latter two cities inter-connecting coastal strip, provides the sector the fillip it deserves. The attempted battering under the disbanded SNP/Green zero growth, sorry net zero, coalition failed to recognise its importance to the UK and local economy. Hopefully Mr Miliband’s proposed parsimonious use of “existing Government buildings” will see a spill-out into purpose- built space to add further recovery to pertinent local property markets post-Oil, and indeed perhaps post-Jute crises, respectively.
Best in class retail assets, whether regionally important or super-prime high street, continue to see strong occupier and investor demand. Arterial, chi-chi suburban and tourist retail locations are strong with rental growth evident in the re-based cycle and owner-occupier, tenant and investor demand robust and competitive. On the flip side, secondary-tertiary towns and pitches probably face a soapier outlook before alternative use or widespread regeneration initiatives kick in.
Leisure, whatever your interpretation of the sector, remains challenging. Less disposable income, staffing difficulties and energy costs multiplied by a factor compared to pre-pandemic levels means regular weekly forays to eat out, watch a movie or visit an attraction have moved increasingly into the bi-monthly event/special occasion column for many households.
Office demand for stock adapted or designed to take advantage of 60% attendance at best is good with townhouse space selling/leasing well to the downsizers in Glasgow and Edinburgh. Local and International investors are keen and will pay well for the right trophy stock. That said, the cycle looks less rosy for tired or dated holdings in the retail, office and indeed some industrial sectors. For those a drying out period is required with recycling the likely option where rents, yields and appraisal margins permit.
Environmental considerations, build costs and conversion difficulties do however make twist or stick decisions on refurbishment or wholesale redevelopment tricky. Further complexity beckons in the redevelopment cycle with banking rates and margins over Sonia at new levels (well, er, not actually new if you are over 40 years old). Muddy the water with the lottery of a planning application in the Capital that can now be decided on the flip of a coin and the dynamics stretch beyond anything envisaged in Modern Methods of Valuation. Google “Edinburgh/planning decision/toss of coin” if you don’t believe me and are reading this south of Hadrian’s Wall. On a
positive note, sites under expected uses in the established urban grain are happily seeing industrial, office, storage and indeed PFS stock re-used and spun into the Alternatives sector. Hotel markets are good in Edinburgh, OK elsewhere with construction, refurb costs and lending requiring “a view” to be taken on pricing aspirations and margins in a number of situations.
PBSA remains strong in multi-institutional and Russell Group cities with decent AY 24/25 rental growth and robust investor sentiment. With an eye to projected pipeline, some micro-markets perhaps have a danger of over- bedding or fringe schemes failing to fully lease in year one but we are seeing locations previously considered academic accommodation boondocks (less than 10 minutes sleep-walk to lectures) some 5 years ago now becoming established PBSA clusters. This added student footfall is bringing regenerative trade and buzz to their respective locales. The socio-economic benefits of less houses or flats under student HMOs is definitely coming out in the wash.
Negatively, and specific to Edinburgh and its very own self-proclaimed housing crisis, the planning police have deigned to dramatically minimise the number of studios in any given PBSA scheme as of summer 2024. Many a robust oven-ready appraisal has been thoroughly spatchcocked. Ignoring PBSA studio use as first rate summertime tourist accommodation, throw into the mix draconian anti-Airbnb legislation and a preference against budget hotel applications one wonders where everyone is to stay when visiting a European capital, UNESCO World Heritage Site, hosting the world’s largest arts festival, second only to the Olympics as the world’s biggest ticketed event……just sayin’…..
On the flip-side, the residential market remains generally buoyant but there is a definite concern over the institutional investability of the affordable and rented quotient of projects given rent control legislation whilst NPF4 is indeed also special rinse all of its own. Combined they are affecting new starts, particularly on larger, master-planned schemes. As ever, the free market has spoken (despite attempts to bend it to its will by the Scottish Government) with private sector rents rising due to the cost of running a rental portfolio, increased regulation, rent control and investor flight. With no sign of this lifting anytime soon given the red hue to any projected political climate one chooses to pick in Scotland this is sadly an element of the market stuck on rinse and repeat.
Looking forward to 2025, as ever, we rely somewhat on a Letter from America.
With a US General Election in November we will see further turbulence around the Fed’s projected behaviour no matter whether Harris or Trump are elected leader of the free world. This will undoubtedly influence macro-economic policy and what the Bank of England does next with rates;”pricing-in” is beginning to look a skinny concept. This will affect consumer, developer and investor confidence on a UK-wide scale. More locally concerns over tax rises, austerity cuts and the minutiae of increased train fares, ULEZ in Edinburgh and Glasgow and revised and expensive car park charging regimes all put added pressure on the urban environment.
That said, the principal markets Scotland have proven time and again they are adept at reinvention and realignment. With some potential stability around borrowing costs projected into 2025 and construction pricing finding a “new normal” it is to be hoped some of the encouraging signs in the prime markets can spread into those more secondary sectors and kick-start further improvement and regeneration.
COMMERCIAL PROPERTY MONTHLY 2024
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