KNOWLEDGE

How can the real estate market bounce back from the Covid-19 damage in the midst of constitutional uncertainty?

Morton Fraser Partner Jonathan Seddon
Author
Jonathan Seddon
Partner
PUBLISHED:
23 November 2020
Audience:
source:
Estates Gazette
category:
Article

Figures from the Registers of Scotland for Q2 (April-June) 2020 suggest that the volume of investment sales in Scotland on a year by year basis fell over 54%. While that fall is undoubtedly linked to the immediate fallout from Covid-19 and working restrictions it might also reflect a growing concern amongst UK and overseas funds that further constitutional uncertainly in Scotland is almost inevitable.

Brexit and Scottish independence

We are increasingly being presented with the prospect of a hard Brexit at the end of this calendar year and while the economic damage to the whole of the UK from that fallout is as yet unquantified in a local context, we also need to layer on top of it the forthcoming Scottish parliamentary elections in May 2021. 

The re-emergence of further debate on the constitutional future of Scotland when layered onto a potentially hard Brexit and a continuing worldwide public health crisis is a significant challenge for the Scottish real estate investment market. Volumes of investment activity have remained low into Q3, however there have been one or two notable investment transactions at the start of Q4 that show that interest is holding up in the right stock.

As the rhetoric around Indy Ref 2 escalates and opinions become ever more polarised, it is increasingly likely that cautious and risk averse institutional property funds might seek to deploy their capital in safer and less risky international markets where they may well have more visibility on value and likely returns.  The Scottish investment market isn’t broad or deep enough in terms of available high quality product to be able to ride out a constitutional storm at this point in time, and in such a small market the effects of constitutional uncertainty are likely to have a significant impact on sentiment and volumes.

Opportunities abound

There is however the opportunity to create the local conditions in Scotland that give us the best opportunity to create a strong and diverse real estate industry delivering the developments and projects that sustain our economic development, but which can also attract international interest and investment. That will require the Scottish and UK Governments to invest heavily in shovel ready infrastructure projects that can enable and stimulate broader economic growth. With the costs of public borrowing at historically low levels, now could be the opportunity for bold and imaginative investments into rail, roads, schools/universities, and other public/private partnerships delivering on regeneration in some of our deprived communities.

Prioritising our investment in a digital and data driven economy along with a skills agenda to address productivity issues will go some way to stimulating an economic revival on which the general health of the real estate industry in Scotland is predicated.

In addition to the economic stimulus given by unprecedented infrastructure spending, there is also an opportunity for the Scottish Parliament to utilise its significant legislative powers to create the conditions that will allow Scotland to compete for investment in a post Brexit world and irrespective of whether we embrace Indy Ref 2 or not. To that end, in addition to the infrastructure spending required, the Scottish Parliament might also embrace a  bolder legislative programme to look at reforms in LBTT, in the PRS sector to remove restrictions which hinder investment, in the planning sector to speed up decision making and increase transparency within the system, and in the regeneration sector to create new funding models available for local authorities  to assist with the funding of development which may not secure full funding from the private sector.

Covid-19 trends

All of this opportunity and change will however continue to be framed against the ongoing Covid-19 crisis. Clearly, a big game changer would be the emergence of a vaccine for Covid-19 and so the front page news of the last couple of days has offered a rare glimmer of hope in  an otherwise relatively bleak year. Whether or not the vaccine is successful and is ultimately rolled out, it is likely that we will continue to see an acceleration of interest in urban logistics and multi let industrial driven by the growth of internet shopping and the consequent logistics requirements. While this will drive investment sentiment, we will also see an uptick in local development activity partly driven by demand but also by issues with the poor quality industrial stock available on the supply side.

Even if a vaccine is rolled out, it is likely that the size of the retail and hospitality industry in Scotland will continue to shrink as human behaviour remains cautious and the furlough scheme comes to an end. We may still see many corporate failures in the hospitality, retail, and leisure sectors along with a shrinkage in the bricks and mortar requirements of national brands. That will continue to contribute to the decline of smaller local shopping centres and the economic activity in city centres, albeit I would expect retail parks and dominant regional shopping centres to remain more resilient.

The contraction in the oil and gas sector in Scotland will continue to have an adverse impact on our public finances generally and specifically in the Aberdeen market, where we will see an increasing focus in that market on the diversification of an economy that is overly reliant on one sector. In the capital markets across Scotland, we will unquestionably see a flight to quality. Investors will seek protection in longer term income and better quality tenants, but the reality is that we don’t have enough of that product locally to allow us to compete internationally and we may see a tailing off in interest from overseas investors as the economic situation in the UK unwinds.

There are opportunities for Scottish real estate, but at present there are still more questions than answers.

Jonathan Seddon is partner and head of the commercial real estate team at Morton Fraser

 

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