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1
MORTON FRASER COMMERCIAL REAL ESTATE
June 2016
Scottish property investment sentiment
2
FOREWORD What is the prevailing sentiment of property investors for
investing in Scotland and what is currently driving that
sentiment? What are the main criteria that can make or break a
decision to invest in property north of the border?
As commercial property lawyers, it is important that we
properly understand the markets that we operate within - we
can't give proper commercial advice without maintaining that
understanding. Many of us will have heard talk that some
property investors are turning away from London and looking at
other cities and regions to invest, or that political uncertainty in
Scotland acts as a drag on property investment, but what do
the investors themselves have to say? In order to maintain our
market knowledge, we thought that we would put that to the
test.
Morton Fraser undertook this research to develop a stronger understanding of sentiment amongst
British property investors towards investing in the Scottish property market. The process involved
using an independent research company to survey over 300 property investors, with all surveys
completed during April 2016.
As well as gauging sentiment and reasons behind investing or not, we also wanted to see how
Scottish cities fared against others in Britain in terms of their attractiveness for investment.
In the lead up to the Scottish Independence Referendum in 2014, and similarly now running up to the
vote on whether the UK should remain as part of the EU, investment in property, both domestically
and internationally, is often used for arguments on both sides of the debate. A lot has been made, for
example, about international businesses delaying investment in the UK property market thanks to EU
uncertainty. But what about British property investors? We were eager to gauge just how important
not only general political stability was, but how individual political campaigns or decisions impact
sentiment and interest in investing in the Scottish property market.
The survey results sometimes reaffirmed the position we have often heard repeated by professionals
in the market and sometimes challenged perceived "norms". In this report, we have analysed the
findings to help paint a picture of the clear drivers and barriers to investment in the Scottish property
market.
David Stewart Partner, Morton Fraser LLP 0131 247 1176 [email protected]
3
EXECUTIVE SUMMARY � One in four property investors in Britain are open to investing in Scotland, with one in 10 actively
monitoring or pursuing opportunities at the moment
� Although 70% of respondents indicated that they are not planning to invest in Scotland, given the
British audience of the survey, this compares well to Scotland's share of the UK Commercial Real Estate market (c.8.9%*) and Scotland's share of the UK's population (c.8.3%)
� Rental yield is the number one criteria for investing in Scotland
� This is closely followed by capital growth and a stable tax and regulatory environment
� 15% of property investors are less likely to invest in Scotland if it gained independence from the UK – double those who are less likely to invest in Scotland in the case of a Brexit (7%)
� However, in most cases the political status of a nation is not a key driver, and investors are more
attracted by rental yield and capital growth
� Over one in three property investors say that a yield premium would persuade them to invest in Scotland
� Of those who would be more likely to invest in Scotland if the yield premium was higher, almost 2
in 5 would expect that premium to be over 3%, and up to 5%
� A further 31% of all respondents suggest a premium over 5% is needed to convince them investing in Scotland was worth it
* based on 2015 figures posted by CoStar and the Scottish IPF
4
CHART DIRECTORY Chart no. Chart Title Page No.
1.1 Current appetite for investing in the Scottish property market 5
1.2 Overall sentiment: interested vs. not interested 5
1.3 Important criteria for investing in the Scottish property market 5
2.1 Likelihood of investing in Scottish property if Britain left the EU 7
2.2 Likelihood of investing in Scottish property if Scotland gained independence 7
3.1 Importance of yield premium of decision to invest in property in Scotland 9
3.2 Level of yield premium that would encourage investment 9
5
11%
70%
19%
1.2 Overall sentiment: interested vs. not interested
Interested/planning to invest
Not interested/not planning to invest
Ambivalent/Don't know
56%
14%
14%
9%
2%
5%
0% 20% 40% 60%
Unfavourable
Weak
Ambivalent
Interested
Active
Don't know
1.1 Current appetite for investing in the Scottish property market
INVESTMENT SENTIMENT Appetite for investing in Scottish property is strong with one in four property investors in Britain
surveyed open to investing in Scotland. Just over one in 10 (11%) are actively monitor or currently
pursuing opportunities. When viewed in a UK-wide context, this compares favourably to Scotland's
8.9% share of the UK commercial real estate market.
What is the most important criteria for investing in the property market in Scotland? Those surveyed
indicated that rental yield is their number one criteria, followed by capital growth and then a stable tax
and regulatory environment. Despite regular market chatter about the drag on investment in Scotland
caused by political uncertainty, investors themselves appear to be saying that there is a price point at
which investing in the Scottish market overcomes any perceived drag. More on that later.
Although issues surrounding Scottish independence were raised by 21% of the respondents, the
topical Brexit question attracts much less interest amongst investors at 15%. None of this is to say
that Scottish independence or Brexit will not cause a period of uncertainty with investment decisions
being postponed, but it does suggest that in the longer term, those who wish to invest in the UK
and/or Scotland will continue to find a way to do so.
46%
31% 30%
26%
23% 23%21%
19%
15%
7% 7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Rental yield None of these Capital growth A stable and
predictable
tax/ regulatory
framework
Political
stability
Earnings
growth
Scottish
independence
Availability of
properties
located in city
centre
locations
If Britain leaves
the EU
Scottish gross
domestic
product (GDP)
figures
Don't know
1.3 Important criteria for investing in the Scottish property market
6
7%
85%
7%
1%
2.1 Liklihood of investing in Scottish property if UK left the EU
Less likely No impact More likely Don't know
15%
79%
5%
1%
2.2 Liklihood of investing in Scottish property if Scotland gained independence from the UK
Less likely No impact More likely Don't know
POLITICAL IMPACT: BREXIT AND SCOTTISH
INDEPENDENCE In 2014 Scotland voted to remain part of the UK, following a passionate independence referendum.
Despite this result, question marks remain over Scotland’s place in the UK. Following its success in
the recent Holyrood elections, First Minister Nicola Sturgeon’s Scottish National Party (SNP) has
reaffirmed its desire to recommence a discussion on Scottish independence in the summer of 2016.
But how does Scotland’s potential to become independent from the UK impact on the likelihood of
property investment?
Results (2.1) shows that Brexit remains a
largely neutral issue for property investors -
there is an even split amongst those less
and more likely to invest if the UK left the
EU and the vast majority (85%) deciding it
has no impact at all. This may simply be a
reflection of the respondents being most
comfortable with investing in the UK; a
similar poll of mobile overseas investors,
less fixed on the UK market could produce
a different outcome.
That said, many see an increased likelihood of Scottish independence as a direct consequence of the
UK voting to leave the EU, and it is notable that 15% of property investors would be less likely to
invest in Scotland if it gained independence from the UK – that is double those less likely to invest in
Scotland in the case of a Brexit (7%). It is not surprising to see greater competition within the
constituent parts of the UK for property investment vs competition between the UK and the rest of
Europe.
As the graphs 2.1 and 2.2 show, the
political status of a nation is generally not a
key driver for investors, who are, in the
main, more attracted by rental yield and
capital growth.
This response may be driven by those
seeking to take advantage of any short term
volatility in the market.
7
29%
2%
54%
7%0%
10%
20%
30%
40%
50%
60%
More likely Less likely No difference Don't know
3.1 Importance of yield premium of decision to invest in property in Scotland
5%
16%
39%
31%
9%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Up to 1%
More than 1%, up to 3%
More than 3%, up to 5%
More than 5%
Don't know
3.2 Level of yield premium that would encourage investment
SCOTLAND'S YIELD PREMIUM The survey respondents identified yield to be the singular most important criterion in determining
property investors’ appetite to invest in Scotland. Given some of the barriers to investment, however,
what kind of a return would investors be looking for? A total of 37% said they would be more likely to
invest if the yield was higher in Scotland versus an equivalent property located in England and Wales.
However, more than half (54%) said that it would make no difference to their decision to invest in the
Scottish property market.
If yield is an important criteria, what would make the real difference to actively encourage investors to
look to Scotland? How can yield help investors to overcome political uncertainty or concerns over
capital growth? The benchmark seems to be a premium of 3% or higher. When those who said they
would be more likely to invest in Scotland if there was a higher yield premium were asked to think
about future investment in Scotland, and comparing it with other regional cities located in England and
Wales, 70% of property investors said a yield premium over 3% would most likely encourage
investment. Anything less than this, and the commercial opportunity is a harder balancing act.
These results include those who are fundamentally "cold" on Scotland (70% of respondents), so they
do show that if the numbers stack up, many investors are prepared to overlook ideological or
secondary issues to run the rule over Scottish property investments. It is also worth noting that the
"yield gap" between Scotland and other regional cities in the rest of the UK will vary depending on the
quality of the property in question - general themes can be drawn, but quality stock will always stand
on its own merits.
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SUMMARY
Viewed in context, Scotland represents c.8.3% of the population of the UK and c.8.9% of the UK
commercial real estate market. As such, results showing 25% of respondents leaving the door open
to investing in Scotland and 10% actively pursuing investment opportunities is much more positive
than it can appear at first blush. There will always be a need for investors to select where to focus
their interest and with 12 major trading regions in the UK (including London), Scotland is still holding
its own.
Brexit could well have an impact, at least in the short term -- our research does not seek to identify
whether investment decisions might be delayed in the event of Brexit; we think that would inevitably
happen -- although most respondents appeared to take a more measured approach in the medium to
longer term as the "political risk" questions provoked less of a reaction than might have been
expected.
Echoing the general sentiment felt in the industry, the impact in Scotland is likely to be increased by a
vote to exit the EU bringing to the fore increased discussion of another independence referendum,
which in turn is likely to bring with it a period of uncertainty in the market while the pluses and
minuses of independence are debated once again. Some investors are, however, clearly very
interested in Scotland, and a few see positives flowing from independence. That may be due to
regional patriotism or a desire to take advantage of any temporary dip in the market as unconvinced
buyers seek their exit.
Aside from the Brexit and independence issues, politics do not directly feature in any significant way
in the decision whether to invest in Scottish property, but of course politics do influence economic
decisions and when those decisions impact on rental yield and capital growth, the market reacts. So
long as the price is right and the market conditions in Scotland are favourable or at least on a par with
other regional areas across the UK, the Scottish real estate market should continue to attract
investment. Investors therefore seem willing to set aside ancillary concerns and follow the returns.
The property correction in 2008/2009 saw a huge adjustment in rents and capital values right across
the regions, and Scotland was no exception. Indeed the market for non-prime property in Scotland
outside of Glasgow and Edinburgh remains some distance away from the 2007/early 2008 highs.
Progress is being made on that front, however. Although our research does not attempt to predict the
scale of any further adjustment which may be required by a Brexit or another Scottish Independence
referendum (or indeed whether such an adjustment is inevitable), it does show that despite the
potential for ripples around and flowing from these important issues, investor appetite remains.
That gives us optimism for the future of the Scottish real estate industry.
9
METHODOLOGY All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 311 British property
investors. Fieldwork was undertaken between 5th and 11th April 2016. The survey was carried out
online.
MEDIA CONTACT
For all media enquiries, copies of charts or image requests, please contact Grayling:
[email protected] or call 0131 226 2363.
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