While most impartial observers would agree that it is too early yet to prophesise a quick and startling recovery, there has been a growing sense of optimism in the Scottish commercial property market during the last six months. There is increased interest generally around the country in every sector.
The general consensus seems to be that property is a strong investment and it is significant that institutional investors, such as the large pension funds, which have been wary about this sector for the last couple of years, are now coming back into the picture. As activity has shifted up a gear, certain other trends have become evident, not least the attention being paid to Scotland by foreign investors generally – and the Irish in particular.
The mass of inward investment from Ireland and other European countries to date has been predominantly in the £20m and below band – and it has been more significant than many may realise. It is estimated that Irish investors ploughed approximately €2bn (£1.35bn) into the UK market, compared with €750m (£506m) in Irish property last year. And while initial interest was targeted towards the London office and retail markets, Irish appetites were soon whetted to what was becoming available in Scotland.
Adding to the interest has been the diversity of these new players. For example, Ryanair boss Michael O’Leary joins some of Scotland’s own list of high-flyers, such as David Murray and Tom Farmer, who are also finding property a lucrative investment. What was less predictable has been the sizeable proportion of deals being instigated by groups of professionals such as doctors, dentists and lawyers, who are looking to buy property across all sectors because they see it as the sensible place to put their money under the current economic conditions. It may seem ironic, but a number of these syndicates – varying in size from as few as two or three people to a couple of dozen – are actually being formed with the help of Irish lenders, as well as syndicate specialists such as Matrix and Tritax Assets.
So, why are the Irish investing so much abroad? And why is Scotland a favoured target?
Many of Ireland’s lending institutions have blamed last year’s 3 per cent hike on stamp duty – which now stands at 9 per cent – for constraining lending profits in the commercial property sector and spurring investors to look away from home and towards such countries as the UK and Germany, where transaction overheads are lower and yields are higher. With Ireland bearing the second-highest level of stamp duty in Europe after Belgium, the UK’s 4 per cent levy must appear very attractive indeed. On top of the difference in costs, the Irish will view Scotland as somewhere that offers a much wider selection of deals to be done. The fact that the Scottish market is seen as less mature than that of England could be an additional pull.
Whatever their reasons for coming to these shores, the presence of foreign investors does add to the colour of the picture. It has been reported that private investors now account for around 75 per cent of the deals being done in Edinburgh, with the Irish being the most active. Edinburgh’s prime retail properties in Princes Street and George Street look set to continue being major attractions, with the high levels of foreign money bringing an international flavour to the marketplace, particularly in George Street, where the New Town buildings demand exceptionally rewarding rents. At the same time, international property investment company Redevco is backing the £30m project to build a nine-storey retail and office development on the Princes Street site formerly occupied by Burberry and C&A.
Also in the capital, Edinburgh Quay, the joint venture between Miller Developments and British Waterways, is due to complete this summer: it will provide 11,000 square metres of ‘grade A’ office accommodation, 3,145 square metres of leisure premises and 62 residential apartments. We can also expect considerable speculation over what will become of Scottish & Newcastle’s neighbouring site.
Alongside these major projects, a good number of traditional deals are also being done, such as the new City of Edinburgh Council offices at Waverley.
To the south of the city, steady progress is being made on the creation of a brand new community – with all the necessary associated infrastructure – on a significant area of the Edinburgh Green Belt, which extends well over the city boundary into Midlothian. Identified in the 1994 Lothian Structure Plan as a growth area for the city, the South East Wedge is a joint venture by the City of Edinburgh and Midlothian Councils and Miller Ventures.
It is unrecorded whether or not O’Leary viewed his St Vincent Street property from the skies before landing himself a sound purchase, but he is not the only Irish investor in the Glasgow office market. The city’s commercial property sector may not have had the easiest of rides, and progress has been slow, but the momentum is still there. Work is progressing – for example at the International Financial Services District, which is now taking shape and which is due for completion next year.
Elsewhere, Aberdeen remains a worthwhile prospect for investors from home and abroad. Union Square Developments, the joint venture by Stannifer and Hammerson in the centre of the Granite City, is moving ahead nicely and, at 51,095 square metres, is the largest retail and leisure development of its type underway in Scotland. Private Irish investors, meanwhile, are also very active in the north east.
As the market continues to pick up, we can only speculate on what future contributions will be made by foreign investors. While it would be safe to predict they will maintain a presence, they may find it much more difficult to continue to find the same level of bargains they have enjoyed until now. Many others who have pursued pastures new over the last couple of years can be expected to return to the market as it becomes an increasingly desirable option. As a result, the newcomers may find themselves in competition with many of the more traditional players, and therefore will find it necessary to widen their nets, looking, for example, towards residential property.
Robin Garrett is a partner specialising in property with Maclay Murray & Spens