Scottish property market still seen as a good investment despite tax changes

The Scottish property market is still adjusting to political and taxation changes but overall remains an attractive place to invest in real estate, according to a new analysis report.

Scotland remains comparatively good value for money, and this is the key driver in the majority of buying decisions but the introduction of Land and Buildings Transaction Tax (LBTT ) in April has had an impact.

It has contributed to the growth of Scotland’s mainstream residential market, but delayed the recovery of the prime sector in the medium term, says the report from real estate firm Savills.

However, Edinburgh is the exception to the rule, where the prime market is attracting buyers from London and overseas who remain cautious about investing outside the capital and the report says that one year on from the Referendum on Scottish Independence, there has been a notable transfer in balance within the residential property market north of the border, with a shift to bottom up growth.

The report explains that during the summer of 2014, the Scottish property market was recovering from the economic downturn. The prime residential market was leading the way in the resurgence, with a growing demand for properties above £400,000, particularly in key property hotspots. Consumer confidence was beginning to ripple out, both to other locations and to lower price bands.

However, the Referendum raised a number of difficult questions, and the resulting uncertainty stalled the property market. ‘This was felt acutely at the top end, the bracket that had long been boosted by the prevalence of London buyers. A year on, this key target group remains anxious about LBTT and the forthcoming Scottish Rate of Income Tax,’ said Faisal Choudhry, director of Scottish residential research at Savills.

‘In addition, both UK and Scottish Governments have introduced initiatives to support the lower value sector of the market in an attempt to revive both the house building industry and buyers on the early steps of the property ladder,’ he said.

‘Buyers of homes below £400,000 are now receiving further assistance in the form of favourable rates of LBTT. Meanwhile, buyers of more expensive homes are taking on the burden of the new progressive taxation in Scotland,’ he added.

The report says that Scotland’s million pound market has felt the biggest brunt of the new taxation changes. The vast majority of sales in this bracket completed prior to 01 April, before LBTT was introduced. While there has been a slight uplift in activity in recent weeks, sales have mostly been focussed on the core locations of Edinburgh, East Lothian, East Renfrewshire and East Dunbartonshire and also in Aberdeen, which saw the most expensive sale since April this year at £2.78 million.

‘As the economy improves, and buyers from both sides of the border adjust to the new taxation structure, we expect this upward trend to continue. While the million pound market is beginning to recover in Scotland’s capital, buyer activity in more provincial locations remains subdued,’ said Choudhry.

‘Even taking into account the additional burden of LBTT, Scotland remains excellent value for money compared with other parts of the UK,’ he added.

The report shows that there were 15 sales at £1 million and above in Scotland registered between May and July 2015, compared with 42 in the same period last year, representing a 64% annual drop. Only 11 sales completed from the period April to July this year. Two of these came from outside Scotland, including one from England.

There were 639 prime sales which registered in Scotland at £400,000 or above between May and July this year. This compares to 925 sales in the same period last year, representing a drop of 31%. Edinburgh remains the hub of Scotland’s prime market, accounting for 37% of sales between May and July this year.

A closer look at different price bands within the prime market shows varying levels of performance. The overall 31% drop in prime Scottish sales was mainly due to a sharp fall in activity above £750,000. The number of sales in this price band fell from 117 between May and July last year to just 46 over the same period this year, representing a 61% drop. Edinburgh accounted for 13 sales above £750,000.

The level of LBTT for sales between £750,000 and £1 million in Scotland is on average 84% higher compared to the current Stamp Duty Tax applicable across the rest of the UK and 80% higher than the previous structure operating before December 2014.

‘In the longer term we expect prime regional activity to remain limited, unless there is a significant downward shift in values in country locations, in order to match the level at which buyers are willing to transact, bearing in mind the additional burden of LBTT. This may go some way towards jumpstarting the residential market in rural locations, allowing both downsizers to move, and younger people to upsize,’ Choudhry said.

He pointed out that international buyers have not been put off by the changing political climate and continue to see Scotland as an investment opportunity. ‘The proportion of such buyers has remained stable compared to last year. The majority of international sales of residential properties are concentrated in Edinburgh, key country hotspots like St Andrews, driven by the allure of the Open Golf, and the country estate market,’ he said.

‘Buyers are investing in Scotland from a wide range of international locations including the US, Australia, China, France, India, Ireland and Italy. It would appear that for them the changes to LBTT and the political environment are inconsequential,’ he added.

In addition to favourable rates of LBTT and in contrast to the current challenges facing the prime market in Scotland, there is a more positive picture across the bulk of the market, priced at below £400,000, the report also shows.

Indeed, this market saw an 8% uplift in sales activity between May and July 2015 compared to the same period last year, with locations that were previously lagging, now showing strong levels of growth.

These include Glasgow City, Dumfries and Galloway, Ayrshire, Lanarkshire and West Dunbartonshire. Further growth has also taken place in commuter locations, like Tayside, Falkirk, West Lothian and the Borders. Many of these areas were supported by increased new build activity and attainable prices, the report explains.

Traditional hotspots such as East Renfrewshire and Stirling have also enjoyed a strong market this summer, supported by good schools, excellent transport links and high levels of affluence.

The report also points out that while lending criteria remains strict, there has been an increase in the level of mortgages granted, with the best rates restricted to those with higher levels of equity. Furthermore, various Help to Buy schemes and the gently improving economy, leading to increased consumer confidence, are all combining to support this market.

‘Whereas the prime market, particularly in rural locations, tends to be discretionary with buyers motivated by lifestyle choices rather than necessity, the bulk of the market below £400,000 is made up of buyers moving within Scotland, driven by the need to be near schools, work or changes in household structures. It is less dependent on buyers moving from the south or overseas for a change of lifestyle,’ said Choudhry.

‘In the longer term, we expect improved sales activity across this market to fuel a prime recovery, particularly in country locations. This will be particularly effective if there is a simultaneous readjustment in prime values outside the core hubs,’ he concluded.