The political instability that has plagued Scotland for the last few years was ramped up last month when Scottish MPs backed first minister of Scotland Nicola Sturgeon’s call for a second independence referendum.
Westminster is determined to delay as long as possible - but that doesn’t mean the property market will be immune to the uncertainty the move creates.
Property Week asked six experts how they think the threat of another referendum will affect Scottish real estate.
The next two months will be an important guide to market activity and pricing levels, as a large number of deals are currently under offer. As one head of a global fund manager said, “uncertainty is the new certainty”, and with Article 50 being triggered, Donald Trump’s US presidential win and elections in Holland, France and Germany, it seems that Scottish politics is far less of a concern than it was in 2013-14.
Looking to the months ahead, it is inevitable that there will be an increase in the number of sellers, particularly from the smaller funds and investors who fear the ups and downs that Scotland faces. At the same time, however, it looks as though there will continue to be a strong pool of buyers for good-quality investments available at a discount to the rest of the UK and Europe.
Despite this political turmoil, Scotland’s investment market has shown signs of strength in the first quarter of 2017. We’ve seen several investments that did not sell in 2016 going under offer or completing in the last three months, including the recent Redevco purchase of the Nike store on Buchanan Street for at least £29m.
This indicates that debates swirling at Scottish, UK and European levels are unlikely to cause a meaningful change in the property markets in Scotland in the short-to-medium term.
Also, given that no one has a clear idea what the outcome will be of the major constitutional debates being played out, a case could be made that investing in Scotland is a risk diversifier.
As questions remain about passport rights and regulations around the UK’s terms when exiting the EU, investors may view Scotland as an opportunity to spread the risk of any poor Brexit deal [assuming it also results in the break-up of the UK]. If businesses still require a base within the EU post Brexit, why not Scotland?
With indyref2, there are two general schools of thought: one is that political uncertainty is now the norm and the market will simply adapt and move on. The second is that this further uncertainty, which is already having an impact on the market, will continue until there is a decision. On the developer side, DWF has large-scale developer clients who are apprehensive of the potential effect of independence on funding markets, which is causing a drag on their committing to projects with a multi-year pipeline.
In the investment market, the most striking trend has been the number of private overseas buyers entering the market. In 2016, overseas investment accounted for more than two thirds of investment in Scottish commercial property generally and for more than 80% of the Edinburgh market.
It’s fair to assume that whatever happens, Scotland will remain a politically stable country with a strong rule of law and a transparent market and will therefore remain attractive.
If the last referendum taught commercial property anything, it’s that the prospect of Scotland going its own way mattered more to one group of investors than any other: UK institutions. In the past decade, their investment peaked at just under £1.3bn in 2014, but dropped to around £110m last year - just 6% of total investment. Scotland might not be within its remit in the event of a ‘yes’ vote.
Regardless, there was a solid level of activity around the last referendum and overseas investors have filled the void. After major political events, there tends to be a pause for thought and that might slow things down in the short term. But the market will bounce back - particularly if we can get some clarity from government about how the next few years are likely to pan out.
In Scotland, we have been living with the highly likely prospect of a second referendum ever since the UK voted to leave the EU. The risk of independence is already factored into pricing and has been for some time. Those who don’t want to invest in Scotland or who want to sell up made that decision months ago. Those who see Scotland as an attractive investment opportunity have already made that decision and are active.
So, in a strange way, the extreme uncertainty has resulted in a relatively stable and straightforward market. There’s very little tyre kicking. And nobody has been saying: “I was mad keen on investing in Scottish real estate but that SNP announcement about another independence referendum has put me right off.”
The big potential game-changer in tackling residential supply pressures is the build-to-rent market. However, to date there is only one such scheme operating in Scotland and political risk is cited as the most common reason for the lack of development.
The prospect of a second referendum has reduced the appetite of UK funds in particular for investing in Scotland. Scotland offers a political risk not present in some regional English cities.
Nevertheless, there are further schemes in the pipeline and the fundamental market driver of excess demand for rental product in Scotland is likely to stay with us for some time, regardless of the political environment, and this will drive opportunities.
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